Date: 19991022
Dockets: 97-239-UI; 97-240-UI
BETWEEN:
VILLE DE BEAUPORT,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Dussault, J.T.C.C.
[1] Appeal No. 97-239(UI) is from an assessment respecting employer's unemployment insurance premiums for six employees who received a travel allowance paid by the appellant during the 1995 taxation year. In making this assessment, the Minister of National Revenue considered that the allowance received by each employee constituted a taxable benefit and that the appellant consequently had to pay employer's unemployment insurance premiums in respect thereof.
[2] Appeal No. 97-240(UI) raises the same question in relation to another employee of the appellant.
[3] Paragraph 3(1)(d) of the Unemployment Insurance (Collection of Premiums) Regulations reads as follows:
3.(1) For the purposes of this Part, a person's earnings from insurable employment means any remuneration, whether wholly or partly pecuniary, received or enjoyed by him, paid to him by his employer in respect of insurable employment except
. . .
any amount excluded as income pursuant to paragraph 6(1)(a) or (b) or subsection 6(6) or (16) of the Income Tax Act.
[4] Paragraph 6(1)(b) of the Income Tax Act requires all amounts received by a taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose to be included in computing the taxpayer's income from an office or employment, except for the allowances referred to in subparagraphs 6(1)(b)(i) to (ix).
[5] Subparagraph 6(1)(b)(vii.1) states one of the exceptions and reads as follows:
reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment.
[6] The provisions of the Act which follows clause 6(1)(b)(ix)(B) read follows:
and, for the purposes of subparagraphs (v), (vi) and (vii.1), an allowance received in a taxation year by a taxpayer for the use of a motor vehicle in connection with or in the course of the taxpayer's office or employment shall be deemed not to be a reasonable allowance
where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, or
(not applicable).
[7] First, the Act does not specify what constitutes a reasonable allowance for the purposes of subparagraph 6(1)(b)(vii.1). Second, and subject to the presumption applying to the situations provided for in subparagraphs 6(1)(b)(x) and (xi), no test is given for determining what constitutes a reasonable allowance or what factors should be considered in establishing such an allowance or to what extent they should be taken into account. For example, one might think it possible to determine a number of rates, a schedule or a scale or rates per kilometre based on the number of kilometres travelled.
[8] One might also think that the allowance should be based on both fixed and variable costs and on the fact that those costs can differ from one city to another, from one region to the next or from province to province. This is true in particular of insurance and gasoline prices. Of course the type or class of vehicle could also be a relevant factor, as well as the type of travel required in the performance of one's duties. One does not travel in northern or remote regions as one would do in Beauport, Québec or Montréal. I do not pretend to be exhaustive here. I simply want to emphasize that setting a rate or rather an amount per kilometre may depend on many factors and it will have to be determined whether the amount established per kilometre is reasonable in the circumstances. Nor is there any prohibition against estimating costs based on those established for a representative vehicle. I believe there is a certain amount of flexibility in the relevant factors to be considered and in establishing or estimating costs in order to arrive at a rate or an amount per kilometre that is "reasonable". Subsequently, however, each allowance must be fixed on the basis of the use of a specific vehicle and can only be so fixed with reference to use based on the number of kilometres travelled by a given employee in the performance of his duties. This is where the presumption introduced in the passage following clause 6(1)(b)(ix)(B) and in subparagraph 6(1)(b)(x) of the Act comes into play.
[9] First, I would point out that the use of the terms "shall be deemed not to be" creates an absolute, irrebuttable presumption. It has been held a number of times that the use of similar terms in paragraph 251(1)(a) of the Income Tax Act creates this type of irrebuttable presumption. Reference might be made in this regard to my decision in Mona Al-Mosawer v. The Minister of National Revenue,[1998] T.C.J. No. 549 (QL) and the decisions therein referred to on this point.
[10] Counsel for the parties had the opportunity to present argument on the interpretation of this presumption and on the reasonableness of the allowance in the instant cases.
[11] In my opinion, the matter can be summarized as follows: in reality, for an allowance not to be subject to the presumption, the stated condition must be met, that is to say that the measurement of the use of the vehicle for the purpose of the allowance must be based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment.
[12] It is therefore clear at the outset that only the use of the vehicle is important for the purposes of the presumption. It will be readily understood that the fact that an employee makes a vehicle belonging to him available for the purposes of performing the duties of his office or employment for a certain number of days, for example, is not a factor related to the use of the vehicle. Since the measurement of the use of the vehicle must be based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, it will just as readily be understood here that the use of the vehicle cannot be measured based on the number of days for which it was used in connection with or in the course of the office or employment. But what is more, the condition as stated appears to be very clear: what counts is the number of kilometres for which the vehicle is used in the performance of duties. This means kilometres actually travelled. Approximations or estimates have no place here. One must be rigorously accurate and keep appropriate records.
[13] In fact, the expression "based solely on the number of kilometres for which the vehicle is used" leaves very little room for interpretation. It must be presumed that Parliament used the words "solely" and "kilometres for which the vehicle is used" for a reason. Thus, extrapolating the number of kilometres for which a vehicle is used by an employee in connection with or in the course of an office or employment during an entire year based on the number of kilometres for which the vehicle is actually used during a reference period of a week, a month or even three months may or may not be a valid method for making a realistic estimate, depending on the specific circumstances such as the number of regular or overtime hours worked, travel required given the nature of the work, seasonal work, emergencies, and so on. In any case, the result is still an estimate which may or may not be realistic on account of numerous factors that may affect both the reference period and the period for which the extrapolation is made. If everyone could simply make an estimate based on a reference period of his own choosing, one wonders how it would be possible to check with any precision at all the accuracy of such an estimate.
[14] I do not believe that this is what Parliament intended. On the contrary, the wording is clear. It requires that the measurement of the use of the vehicle be based on the number of kilometres for which the vehicle is used, nothing else. An annual estimate, even one based on the number of kilometres for which the vehicle is used in a three-month reference period, does not meet this condition.
[15] In the instant cases, the evidence adduced concerning the appellant's motor vehicle allowance scheme shows that that scheme fails in two respects to meet the condition stated in subparagraph 6(1)(b)(x) of the Income Tax Act. Those failings were moreover noted by counsel for the respondent.
[16] For a description of the scheme adopted by the appellant, I refer to the testimony of Louis-Philippe Hébert, assistant general manager and director of personnel and communications with the Ville de Beauport, and to the documents filed in evidence, more particularly the town's general motor vehicle allowance policy No. PG-45j, which came into effect on December 31, 1987 and bears the date of March 16, 1992 (Exhibit I-1).
[17] In the early 1980s, the Ville de Beauport decided to dispose of its fleet of some 40 vehicles which were considered too costly and to introduce a policy under which employees concerned would be asked to provide, in exchange for an allowance, their own motor vehicles for the purpose of performing their duties. The general motor vehicle allowance policy referred to above apparently dates from that period and has since undergone only minor amendments. The allowances paid to the appellant's employees in 1995, which are the subject of the instant cases, were so paid in accordance with the provisions set out in that general policy.
[18] It should be noted first that article 1 of the policy concerns employees who only occasionally use their own motor vehicles in the performance of their duties. These are employees who use their vehicles to travel 1,600 kilometres or less per year. Such employees receive an allowance of $0.30 per kilometre travelled with a minimum of $2.75 for each day the vehicle is used. The allowance paid to these employees is not the subject of the instant cases.
[19] These appeals concern certain employees who are considered as usually using their vehicles, that is to say, as stated in article 2.02, those whose employment requires them to travel more than 1,600 kilometres a year.
[20] Article 2.03 states that [TRANSLATION] "employees whose work, in the employer's estimation, requires them to use their vehicles regularly receive the allowances set out in Schedule A for one of the 12 existing classes."
[21] For 1995, Schedule A provided for an annual allowance of a predetermined amount for each of the 12 classes. The classes are established on the basis of ranges of kilometrage, as follows:
[TRANSLATION]
SCHEDULE A
Amount of
allowance
from 95-01-01 Monthly
Class Annual kilometrage to 95-12-31 amount
1 from 1,600 to 2,140 $1,438.94 $119.91
2 from 2,141 to 2,680 $1,926.27 $160.52
3 from 2,681 to 3,220 $2,474.50 $206.21
4 from 3,221 to 4,800 $3,216.30 $268.03
5 from 4,801 to 6,400 $3,717.16 $309.76
6 from 6,401 to 8,000 $4,224.78 $352.06
7 from 8,001 to 9,600 $4,732.41 $394.37
8 from 9,601 to 11,200 $5,240.03 $436.67
9 from 11,201 to 12,800 $5,750.36 $479.20
10 from 12,801 to 14,400 $6,253.91 $521.16
11 from 14,401 to 16,000 $6,761.55 $563.46
12 16,001 or more $7,269.17 $605.76
Personnel Department
95-02-06
[22] As may be seen, employees using their vehicles to travel different numbers of kilometres receive the same allowance if the number of kilometres travelled is within the same range or class.
[23] The number of kilometres "for which the vehicle is used" by each employee is in fact the result of an estimate of the number of kilometres travelled based on kilometres actually travelled during a three-month reference period for which actual kilometrage is determined for the working days involved, then projected over the number of working days in the year, less vacation. The annual allowance provided for a given class based on annual kilometrage thus estimated is then paid to the employee monthly. According to article 2.13, employees may continue to receive the allowance for an additional one-month period if they are absent because of illness.
[24] In addition, article 2.08 provides that an employee may request a change of class on conditions which are set out in the following terms:
[TRANSLATION]
Based on actual or presumed changes in the use of an employee's motor vehicle in the performance of his duties, the employer or any beneficiary employee may request a reclassification for purposes of payment of the allowance for one of the 12 existing classes.
In that case, the employee in question shall complete a weekly kilometrage report for a three-month period in order to justify reclassification. Similarly, for audit purposes, the departmental director may ask an employee to complete the weekly kilometrage report for a specific period.
Where reclassification becomes necessary based on the kilometrage report referred to above, such reclassification shall take effect retroactively to the starting date of the kilometrage report.
[25] The base amount of the allowance was determined on the basis of a study by the CAA-Québec on the operating costs of a new mid-size car travelling 20,000 kilometres a year, for which the annual fixed costs were $6,650 in 1995. According to Mr. Hébert, a percentage of this amount, varying between 20 percent and approximately 80 percent, constitutes the base amount for each of the 12 classes, and an amount of approximately $0.087 per kilometre is then added to reflect such variable costs as gasoline, maintenance, and so on. For the purposes of calculating these variable costs, the number of kilometres at the mid-point in each of the classes is simply taken. The annual allowance applicable to each class is the total of the amounts established for fixed costs and variable costs. According to Mr. Hébert, it is appropriate to use the average figures of the CAA-Québec for a mid-size car since that is the type of vehicle that the employees in question of the appellant must generally put at the appellant's disposal for the performance of their duties, as a number of them must transport material or equipment in connection therewith.
[26] Mr. Hébert testified that the determination of the percentage of the base amount represented by fixed costs for each of the classes was the subject of negotiations with the various unions.
[27] Those, in essence, are the characteristics of the motor vehicle allowance scheme used by the appellant to pay the allowances at issue in the instant cases.
[28] As indicated above, the Court notes that the requirement set out in subparagraph 6(1)(b)(x) of the Income Tax Act was not met in at least two respects.
[29] First, the measurement of the use of the vehicle was not based solely on the number of kilometres for which it was used since, for the purpose of the allowance, the appellant takes into account only an estimate of the number of kilometres travelled each year that is based on an extrapolation of the number of kilometres actually travelled during a three-month reference period.
[30] Second, the annual number of kilometres thus estimated for the vehicle used by each employee is placed in one of the 12 classes, so that, for the purpose of fixing the allowance, the use of each of the vehicles is made to correspond with the use determined for an entire class based on the range indicated for that class.
[31] Thus, the use of a vehicle is not measured solely on the basis of the number of kilometres travelled by the individual employee receiving the allowance, but rather on a collective basis through use of the 12 classes created.
[32] There is no greater merit in establishing 12 classes rather than two or three. A scheme under which all employees who have used their vehicles in connection with their employment and have travelled 5,000 kilometres or less will receive a $2,000 allowance while those travelling more than 5,000 kilometres will receive $4,000 is no more in compliance with the requirement of the Act than is the system established by the appellant. In both cases, the use of the vehicle is not measured on an individual basis solely according to the number of kilometres travelled by a given employee in connection with his employment. Such a system is very different from another which would provide for an amount of $0.40 per kilometre for the first 5,000 kilometres and $0.35 per kilometre for kilometres in excess of that number. Under such a scheme one would have to determine the allowance of each employee based on the number of kilometres actually travelled by that employee in connection with his employment. Such a system would likely meet the requirements of the Act and could even be refined further, as indicated above. Payments would be made as an allowance whose characteristics would be respected and which would have to be distinguished from either a mere reimbursement of actual expenses incurred or an advance paid for that purpose.
[33] In my view, the two irregularities noted are sufficient for me to find that the allowance paid by the appellant during the 1995 taxation year to each of the employees concerned by the instant appeals does not meet the requirement of subparagraph 6(1)(b)(x) of the Income Tax Act, and there is no need to extend the analysis to the other characteristics of this allowance. Accordingly, the presumption established in the passage following clause 6(1)(b)(ix)(B) is applicable and as a consequence the allowance is deemed not to be reasonable for the purposes of subparagraph 6(1)(b)(vii.1). This being the case, the allowance here was not excluded from the taxpayer's income under paragraph 6(1)(b) of the Income Tax Act. The appellant thus was required to pay employer's contributions in respect of the allowance for each of the employees concerned as provided for in section 3 of the Unemployment Insurance (Collection of Premiums) Regulations.
[34] As a consequence of the above, the appeals are dismissed and the respondent's assessments are confirmed.
Signed at Ottawa, Canada, this 22nd day of October 1999.
"P.R. Dussault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 31st day of July 2000.
Erich Klein, Revisor