T-3652-80
E. F. Anthony Merchant (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Reed J.—Regina, March 26;
Toronto, March 30, 1984.
Income tax — Income calculation — Deductions — Cam
paign expenses incurred to become leader of Saskatchewan
Liberal Party not deductible as business expenses — Deducti-
bility of business expenses depending upon nature and extent
of business — Expenses incurred before commencement of
business of being leader — Distinction between start-up costs
of business and campaign expenses where lack of continuity
between running for leader and acting as leader — Lack of
control over result of campaign significant — Monies paid to
leader determined after consideration of numerous factors,
therefore not income from office as not 'fixed or ascertain
able" stipend required by definition of "office" in s. 248(1)
"Ascertainable" meaning capable of being made certain or of
being determined — Income Tax Act, S.C. 1970-71-72, c. 63,
ss. 3, 18(1)(a), 248(1) (as am. by S.C. 1979, c. 5, s. 66(3)).
Appeal from a decision of the Tax Review Board. The
plaintiff contends that campaign expenses incurred to become
leader of the Saskatchewan Liberal Party were incurred for the
purpose of producing business income. The elected leader is
paid an amount to be determined upon consideration of a
number of factors. The plaintiff argues that because the monies
paid to the leader are taxable they must be income from an
office, employment, business or property pursuant to section 3
of the Income Tax Act. He submits that it is not employment
income since the leader is not an employee as he is not under
the control of an employer, and that it is not income from
property. It is contended that it is not income from an office
because subsection 248(1) describes such income as being of a
fixed or ascertainable nature. Therefore, he argues, the income
must be from a business and since start-up costs are deductible
as a business expense, campaign expenses incurred in attempt
ing to get into the business of being Party leader should
likewise be deductible. The defendant argues that the campaign
expenses are not deductible because they were incurred before
the business of being leader commenced, they were not directly
attributable to the operation of the business, and they were not
related to the earning of business income.
Held, the appeal should be dismissed. Clearly the income in
question is neither employment nor property income. According
to the ordinary English meaning the income should be classified
as income from the holding of an "office". However, the
opening words of the definition of "office" in subsection 248(1)
are mandatory. In order to qualify as income from an office the
remuneration must be "fixed or ascertainable". "Ascertain-
able" means that the amount to be paid is capable of being
made certain or of being determined, but not that a definite
sum be known by the office-holder at the commencement of
holding office. A per diem rate or specified amount per sitting
renders the income sufficiently ascertainable. Assuming that
the amount received by the leader was not ascertainable, then it
was not income from an office. The definition of "business" in
subsection 248(1) is broad enough to include both employment
and the holding of an office since both are expressly excluded
from the definition. What is a deductible business expense will
differ depending upon the nature and extent of the undertaking.
It is difficult to draw a parallel between cases dealing with the
"start-up costs" of a business and one such as this where the
ultimate income is closer to that received by an employee or an
office-holder than it is to a business operation. The expenses
incurred are closer to those incurred by someone seeking
employment or seeking to purchase a law practice than they are
to start-up costs. The expenses incurred are anterior to the
commencement of the business with respect to which they are
claimed. Unlike the start-up costs of a business, there is a lack
of continuity between the activity of running for the leadership
and acting as leader. It is also significant that it is not within
the control of the leadership candidate to determine whether he
will ever get into the business of being leader.
CASES JUDICIALLY CONSIDERED
APPLIED:
Moldowan v. The Queen, [ 1978] 1 S.C.R. 480.
NOT FOLLOWED:
MacKeen v. Minister of National Revenue (1967), 67
DTC 281 (Tax App. Bd.).
DISTINGUISHED:
Guérin v. Minister of National Revenue (1952), 52 DTC
118 (Tax App. Bd.); Minister of National Revenue v.
Freud, [1969] S.C.R. 75; Tobias v. Her Majesty The
Queen (1978), 78 DTC 6028 (F.C.T.D.); M. P. Drilling
Ltd. (formerly Mountain Pacific Pipelines Ltd.) v. Min
ister of National Revenue (1974), 74 DTC 6343
(F.C.T.D.).
CONSIDERED:
Decelles v. The Minister of National Revenue (1977), 78
DTC 1019 (Tax Rev. Bd.); Daley v. The Minister of
National Revenue, [1950] Ex.C.R. 516; 50 DTC 877.
REFERRED TO:
The Royal Trust Company v. The Minister of National
Revenue, [1956-60] Ex.C.R. 70; (1957), 57 DTC 1055;
Randall v. Minister of National Revenue, [1967] S.C.R.
484; 67 DTC 5151; Lalande v. The Minister of National
Revenue (1980), 80 DTC 1862 (Tax Rev. Bd.); Frappier
v. The Queen, [1976] 2 F.C. 231; 76 DTC 6066 (T.D.).
COUNSEL:
Gregory A. Swanson for plaintiff.
John H. Kennedy for defendant.
SOLICITORS:
Pederson, Norman, McLeod & Todd, Regina,
for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
REED J.: This is an appeal from a decision of the
Tax Review Board dated April 3, 1980. The gist of
the appeal is whether or not monies expended by
the plaintiff taxpayer, in 1976, for the purpose of
seeking the leadership of the Saskatchewan Liber
al Party should be treated as a deduction for
income tax purposes.
The main contention is that the expenditure of
$24,000 ($10,550 of which is attributable to the
1976 taxation year) was incurred for the purpose
of producing business income. The monies were
expended for items such as: travelling incurred in
the course of campaigning; production of pam
phlets, policy and position papers; the production
of a promotional film and posters; provision of a
hospitality room at the leadership convention;
office and telephone costs attributable to the lead
ership campaign.
Evidence was given that the leader was chosen
by vote of the delegates present at the convention.
One half of these delegates attended because of
the position they held in the Liberal party (e.g.
members of the provincial executive, Senators,
members of Parliament and the provincial legisla
ture); the other half was chosen by the riding
associations as representatives of those associa
tions.
Evidence was given that the leader of the Liber
al party could expect to receive between $20,000
to $40,000 per year from the party regardless of
whether he was elected as a member of the provin
cial legislature or not. According to Mr. Merchant
these payments were not regular or periodic in
nature but would have been made over the course
of the year somewhat sporadically. As to the exact
amount the leader would receive, according to Mr.
Merchant this was variable depending upon the
previous lifestyle of the leader. It would also
appear to depend upon the financial health of the
party and presumably on the extent to which a
leader might be independently wealthy. Evidence
as to exactly how the amount to be paid is settled
upon was somewhat unsatisfactory. Mr. Merchant
stated that usually the Treasurer made a recom
mendation to a committee of which the leader
would be a member but that the amount to be paid
was not a subject of negotiation.
The plaintiffs argument proceeds as follows: (1)
the monies paid by the party to the leader are
taxable, therefore they must fall within one of the
categories of income set out in section 3 of the
Income Tax Act [S.C. 1970-71-72, c. 63] (employ-
ment, property, office or business); (2) the income
is not earned as an employee since the leader is not
under the control of an employer; (3) the income is
not from property; (4) the income is not from an
office because subsection 248(1) of the Income
Tax Act describes such income as being of a
"fixed or ascertainable nature"; (5) therefore, the
income must be from a business; (6) start-up costs
are validly deductible as a business expense and
similarly the campaign expenses incurred in
attempting to get into the business of being leader
of the Liberal Party of Saskatchewan should be
deductible from the taxpayer's income.
Counsel for the defendant had some difficulty
classifying the income in the hands of the leader of
a political party as income flowing from either the
holding of an office or the conducting of a busi
ness; he noted that the description of income in
section 3 is not an exhaustive one and that Division
D of the Act deals with income outside the four
categories specifically enumerated in section 3.
3. The income of a taxpayer for a taxation year ... is his
income for the year...
(a) ... including, ... his income for the year from each
office, employment, business and property. [Underlining
added.]
In any event, counsel for the defendant argued
that however the income in the hands of the leader
should be categorized, the campaign expenses
could not be classified as deductible expenses
because they were incurred before the business of
being leader ever commenced; they were not
directly attributable to the operation of that busi
ness; they were not directly related to the earning
of business income as that concept has been
defined in The Royal Trust Company v. The
Minister of National Revenue, [1956-60] Ex.C.R.
70; (1957), 57 DTC 1055.
It is clear that the income in the hands of the
leader is neither employment nor property income.
Relying on the ordinary sense of English words
would dictate that the remuneration should be
classified as income from the holding of an office.
But subsection 248 (1) provides that for the pur
pose of the Income Tax Act:
248.(1)...
"office" means the position of an individual entitling him to a
fixed or ascertainable stipend or remuneration and includes a
judicial office, the office of a Minister of the Crown, the
office of a member of the Senate or House of Commons of
Canada, a member of the legislative assembly or a member
of a legislative or executive council and any other office, the
incumbent of which is elected by popular vote or is elected or
appointed in a representative capacity and also includes the
position of a corporation director.... [Underlining added.]
I agree with the argument of counsel for the
defendant that the list of enumerated sources is
not an exhaustive one. It is prefaced by the word
"includes". I also agree that the office of the
leader of a political party is of the same genus as
those specifically listed even though he is not
elected by popular vote and is probably not elected
in a representative capacity. On this latter point,
while the leader undoubtedly represents the party
in a number of ways he will, as leader, determine
policy and "lead" rather than being answerable to
the party as someone in a representative capacity.
That having been said, however, the position of a
leader of a political party is clearly of a kind
similar to those specifically enumerated.
The opening words of the definition of "office"
in subsection 248(1), however, are not inclusive in
nature; they impart a mandatory aspect to the
definition. In order to be classified as income from
an office the remuneration must be fixed and
ascertainable.
I was referred to the decision of the Tax Appeal
Board in MacKeen v. Minister of National Reve
nue (1967), 67 DTC 281 in which it was held that
a person appointed to a Royal Commission was not
an office-holder for income tax purposes. The
terms of his appointment were that he would be
paid $100 per day as well as $20 per day while
absent from his home and his actual out-of-pocket
transportation costs. The Tax Appeal Board held
that the income he received was business income
and not attributable to the holding of an office.
This decision was reached for a number of reasons
(e.g. the position of commissioner was not a per
manent one and the taxpayer had agreed, at the
time of his appointment, to the travel expense
amounts provided for by the government). Accord
ingly, I do not place too much emphasis on that
part of the judgment which held the taxpayer's
income not to be ascertainable. Indeed, I think
such income is ascertainable. I take that word to
mean that the amount to be paid is capable of
being made certain, or capable of being deter
mined but not that a definite sum be known by the
office-holder at the commencement of holding
office. The word has to have some meaning beyond
"fixed" or else it is completely redundant.
The decision in Guérin v. Minister of National
Revenue (1952), 52 DTC 118, by the Tax Appeal
Board, was also cited to me. In that case, income
received by a judge who temporarily ceased acting
in a judicial capacity and took up sitting as a
chairman of various arbitration boards was not
held to be income from an office. In that case, the
taxpayer was paid a stipulated amount for each
sitting but there was no way of knowing the
number of sittings any given board would have nor
the number of boards on which the appellant
would sit. The Tax Appeal Board held that as long
as the number of sittings was indeterminate, the
remuneration for the office could not be said to be
ascertainable and therefore the income must be
treated as business income, at page 121:
By "position entitling one to a fixed or ascertainable stipend
or remuneration" parliament, in my opinion, meant a position
carrying such a remuneration that when accepting it a person
knows exactly how much he will receive for the services he is
called upon to render.
I am not convinced that at the time of taking
office the taxpayer must know how much he will
receive. It seems to me a per diem rate, or a
specified amount per sitting renders the income
sufficiently ascertainable to meet the definition in
subsection 248(1). However, there are other fac
tors in the Guérin case which make the income
unascertainable and in my view should have served
as the focus of that decision [at page 122]:
It has been established that the appellant must himself pay for
the services of a part time secretary and that he must also pay
for the stationary he needs, for the use of a typewriter and all
other supplies.... It has been further established that the
appellant is often called upon to pay the transportation of his
secretary and other persons acting as advisers and that often
times he has to pay for the meals of his assistants and advisers.
These it seems to me are the crucial factors in
making the remuneration received, as a result of
holding the position of arbitrator, not ascertain
able.
From the evidence given in the present case it is
hard to determine whether the sums paid to the
leader are ascertainable as that term is used in
subsection 248(1). They would appear to be deter
mined annually as some sort of fixed figure. There
is no evidence given that the leader has variable
expenses to pay out of that income for the pur
poses of earning it as was the case in the Guérin
decision. Yet, from the evidence given, it cannot be
said that the leader knows before taking office,
with any degree of certainty, what the amount will
be. It may very well be that each occasion is
different, depending upon the leader and the cir
cumstances in question. It may be that the evi
dence is so unsatisfactory here because Mr. Mer
chant is talking about a situation which he
expected he would be in but which never material
ized. Evidence from the person who actually
became leader as to how his stipend was actually
arrived at would have been helpful.
In any event, on the basis of the evidence before
me, I will proceed on the assumption that if Mr.
Merchant had won his leadership campaign the
amount he would have received would not have
been ascertainable as that term is used in subsec
tion 248(1).
I agree with counsel for the plaintiff that if the
income in the hands of the party leader is not
classified as income from an office, it probably
falls under the heading of business income. I note
that the definition of business in subsection 248(1)
[as am. by S.C. 1979, c. 5, s. 66(3)] is broad
enough to include both employment and the hold
ing of an office. This seems to follow from the fact
that these two sources of income have been
expressly excluded from the definitions of business
in the Income Tax Act.
248.(1)...
"business" includes a profession, calling, trade, manufacture or
undertaking of any kind whatever and, except for the pur
poses of paragraph 18(2)(c), an adventure or concern in the
nature of trade but does not include an office or employment;
[Underlining added.]
Counsel for the plaintiff then argues that while
the campaign expenses would not have been
deductible had the ultimate income payable to a
leader been income from an office, they are
deductible since that income is income from a
business. This is the interpretation he would put,
for instance, on Decelles v. The Minister of Na
tional Revenue (1977), 78 DTC 1019 where the
Tax Review Board held that expenses incurred by
a city councillor in running for election were not
deductible. The Board, at page 1020, held that:
... the said expenses were not incurred for the purpose of
gaining or producing income from a business or property by
virtue of Subsection 8(2) of the Act, and I quote:
Except as permitted by this section, no deductions shall be
made in computing a taxpayer's income for a taxation year
from an office or employment.
According to the evidence adduced, there is no way that the
activities of the taxpayer can be considered as a business before
his election as councillor. Consequently, the appellant cannot
be allowed to deduct from his salary the expenses incurred in a
municipal election in order to become a city councillor.
In addition it is clear that expenses are deduct
ible even if no income is ever earned. In M. P.
Drilling Ltd. (formerly Mountain Pacific Pipe
lines Ltd.) v. Minister of National Revenue
(1974), 74 DTC 6343 (F.C.T.D.) it was held that
expenses incurred in constructing facilities and
conducting negotiations for the purpose of getting
into the business of marketing liquid petroleum
were deductible even though the business never got
off the ground. Equally, in Minister of National
Revenue v. Freud, [1969] S.C.R. 75 the Supreme
Court of Canada allowed the deduction of
expenses incurred in developing a prototype sports
car even though marketing the car or selling rights
to the prototype were never successful. More
speculative still, in Tobias v. Her Majesty The
Queen (1978), 78 DTC 6028 (F.C.T.D.) a taxpay
er was allowed to deduct expenses he incurred in
searching for treasure on Oak Island, Nova Scotia.
The search was, of course, unsuccessful but the
Court held that had it been otherwise, the profit
made would have been taxable; thus, the expenses
incurred in the unsuccessful search were held to be
equally deductible.
Lastly, the plaintiff argues that an analogy
should be drawn to those cases which have allowed
the deduction of start-up costs of a business. He
referred to M. P. Drilling Ltd. v. Minister of
National Revenue (supra) and to Interpretation
Bulletin IT-41R issued by the Department which
provides:
Pre-production or start up costs of a new business, to the extent
they are not capital outlays, must be claimed in the year in
which they are incurred.
Counsel for the defendant's main argument was
that even if the amounts paid to a party leader
were characterized as business income, leadership
campaign expenses were simply too remote to be
deductible. His argument was that they were
expenses incurred before the operation of the busi
ness began, citing in support of that contention the
Decelles case (supra) and Daley v. The Minister
of National Revenue, [ 1950] Ex.C.R. 516; 50
DTC 877. In the Daley case, fees paid by a lawyer
in order to obtain a call and admission to the
Ontario bar were disallowed as business expenses.
In coming to this decision President Thorson said
at page 880 [page 522 Ex.C.R.]:
... the fee of $1,500 which he paid for his call to the Bar and
admission as a solicitor in Ontario was an expenditure that was
anterior to his right to practice law in Ontario and earn an
income therefrom. Except that it was nearer in point of time it
was no more related to the operations, transactions or services
from which he earned his income in 1946, or in any year, than
the cost of his legal education would have been or, for that
matter, the cost of his general education or any cost or expense
involved in bringing him to the threshold of his right to
practice. ... It seems clear that a disbursement or expense such
as this which is laid out or expended not in the course of the
operations, transactions or services from which the taxpayer
earned his income but at a time anterior to their commence
ment and by way of qualification or preparation for them is not
the kind disbursement or expense that could be properly
deducted in the ascertainment or estimation of his `annual net
profit or gain'. In my view, no accountant or business man
could so regard it.
Since the Daley decision in 1950, as counsel
pointed out, the scope of what is admissible as a
legitimate business expense has been enlarged. No
longer is it necessary to prove that the expense was
"wholly, exclusively and necessarily laid out or
expended for the purpose of earning the income"
as was the case pursuant to section 6 of the Income
War Tax Act [R.S.C. 1927, c. 97]. The relevant
section, paragraph 18(1)(a) of the Income Tax
Act now provides:
18. (1) In computing the income of a taxpayer from a
business ... no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of gaining
or producing income from the business ...
This enlarged scope of deductible expenses is
demonstrated in The Royal Trust Company v. The
Minister of National Revenue, [ 1956 - 60] Ex.C.R.
70; (1957), 57 DTC 1055, where club dues for
executives and senior personnel of the appellant
company were held to be deductible business
expenses. The purpose of the expenses was to
increase the appellant's business through personal
contacts. See also Randall v. Minister of National
Revenue, [1967] S.C.R. 484; 67 DTC 5151; M. P.
Drilling Ltd. v. Minister of National Revenue
(supra); Lalonde v. The Minister of National
Revenue (1980), 80 DTC 1862 (Tax Rev. Bd.);
and Frappier v. The Queen, [ 1976] 2 F.C. 231; 76
DTC 6066 (T.D.).
If the income received by a leader of a political
party from that party is business income and not
income from an office, then, it seems to me that
the starting point must be similar to that found in
Moldowan v. The Queen, [1978] 1 S.C.R. 480 at
page 486 where the Supreme Court in listing the
criteria to be used for determining whether "a
reasonable expectation of profit" existed stated:
The factors will differ with the nature and extent of the
undertaking: The Queen v. Matthews ((1974), 74 DTC 6193).
One would not expect a farmer who purchased a productive
going operation to suffer the same start-up losses as the man
who begins a tree farm on raw land.
Similarly, I think what is a deductible business
expense will differ depending upon the nature and
extent of the undertaking. I do not find it easy to
draw a parallel between those cases which have
dealt with the "start-up costs" of a business such
as a petroleum-marketing enterprise or a sports
car producing enterprise and one such as the
present where the ultimate income is closer in
character to that received by an employee or an
office-holder than it is a business operation. A
business operation usually has offsetting income
and expense accounts.
More importantly, the expenses incurred by the
taxpayer in this case are closer to those incurred
by someone seeking employment (e.g. travelling
expenses for the purpose of meeting prospective
employers) or a newly qualified lawyer seeking to
purchase an ongoing law practice (expenses
incurred in travelling, meeting and negotiating for
that purpose) than they are to the start-up costs in
the cases cited. In addition it could seem anoma
lous for someone who obtains income from holding
an office comparable to that of a leader of a
political party (e.g. those enumerated in the defini
tion of office in subsection 248(1)) not to be able
to deduct his campaign expenses while a party
leader because his remuneration was unascertain-
able (if this is really the case) could do so.
In my view, even though the scope of deductible
expenses has been broadened since the Daley deci
sion (supra), I think the expenses incurred by the
taxpayer in this case are appropriately character
ized as being anterior to the commencement of the
business with respect to which they are claimed.
Unlike the situation which exists in the case of
start-up costs of a business, there is a lack of
continuity between the activity of running for the
leadership and operating as leader. Also significant
is the fact that it is not in the hands of the
leadership candidate to determine whether he will
ever get into the business of being leader or not. In
the Tobias case (supra) the decision to discontinue
or continue treasure hunting was in the hands of
the taxpayer. Similarly in M. P. Drilling Ltd.
(supra) and Minister of National Revenue v.
Freud (supra) the continuation or not of the busi
ness activity was a matter within the control of the
taxpayer. But the position of candidate for leader
ship of a political party is vastly different. He is
seeking election to a position; his campaign activi
ties are clearly anterior to and separate from any
business of leadership he might eventually get into
should he win the election.
Accordingly the appeal will be dismissed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.