McCullough, an engineer, works for a subsidiary of an international arms manufacturer. He helps make rifles.
This case is about claims for travel expenses (lodging, meals, travel). Generally, employees aren’t allowed to claim many expenses against taxable employment income. They can claim travel costs, if their employers require them to travel for work away from the employer’s place of business and to pay for their own travel expenses. (ITA s. 8(1)(h).)
McCulloch was only claiming about $24,000 of expenses for one year and about $11,000 for another, whereas his employment income was hundreds of thousands of dollars. So these were not big amounts in the context — something to consider a little later when we ask why CRA pressed the point.
His employer was Savage Canada (a strange name to see used by an arms manufacturer). Savage Canada asked him to help Savage USA, which was having problems prospering in the US market. McCulloch agreed; he signed an amended contract with Savage Canada, requiring him to work 2 to 3 weeks monthly at Savage USA’s office in Westfield Massachusetts. (That draws up some interesting history. Westfield is about 10 miles from Springfield, which was the home of the first US armoury, set up on direction of George Washington in 1776. Smith & Wesson set up their first plant in Springfield in the 1850s. Had they not done so, Clint Eastwood’s Dirty Harry would have been unarmed.)
CRA and the courts have been a bit conflicted over whether a temporary work location, such as a construction site, can constitute an employer’s place of business. It’s well established that a taxpayer can’t claim expenses for travelling from home to work. But things become more difficult when you are travelling from home to a regular worksite. It seems the problem for CRA was that McCulloch was working, whether in Canada or the US, for the same corporate group, and the US work was regular. In that way, it wasn’t like a construction site or work at a third party customer’s offices.
Here’s what we like about the case: First, Justice MacPhee recognized the US affiliate as a separate, irregular worksite, because McCulloch only worked there about 21 months. CRA had tried to treat the US and Canadian affiliates as a single employer. But there was no strict legal basis for that view. McCulloch had no contractual relationship with Savage USA; it didn’t pay him; Savage Canada contractually required him to go there. So, the US office could not be “the employer’s place of business”.
It seems worth noticing that the rule says: “employment away from the employer’s place of business or in different places”. That suggests that even if the employee goes to the employer’s place of business, the deductions are still available if the employer requires the employee to go to “different places”, not just one ordinary place of business.
You can understand why these facts confused CRA. One of the beautiful things about the Agency is that its officers will enforce the law, regardless of the amount at stake. They take the view that they are administrators; they don’t make the law. That said, you very often get quite good discretion exercised by auditors, who choose, in appropriate cases, not to press the law to the strictest detail. And, where CRA has explicit direction to exercise discretion, such as with the interest and penalty taxpayer relief rules, it can be remarkably generous. (So I’m remarking on it here.)
As an agency, CRA has to draw a line. You can’t have people (as tax protesters try to do) claim personal living expenses against employment (or business) income; else you possibly would have no tax revenue at all. But you might ask whether, in the context, the relatively modest travel expenses (which earned McCulloch an extra $100,000 a year) needed to be challenged. His deductions seem far from abusive. The factual context is well contained by the 21 months limited for the contract work. This is not a never-ending expense.
And here’s another thing: if you think about the GST context, we go a bit out of our way to encourage Canadian competitiveness in international commerce. For that reason, we have zero-rating rules for exported services and goods and we don’t charge tax on supplies made outside Canada. So why would we want to discourage Savage Canada from servicing a US affiliate?
It would have been nice to know whether Savage USA paid Savage Canada for this extra service. If it did, that would be a further reason for wanting to encourage Savage Canada and McCullough by allowing the expense deduction. Note that you would wind up with the same issues if Savage Canada gave McCulloch an allowance, instead of requiring him to pay the travel costs on his own. Savage Canada, in that case, would have a business expense to claim against its revenue. McCulloch would have to confront, with CRA, similar issues about the purpose of the travel and whether it was away from the employer’s place of business, but the rules would be in ITA s. 6(1)(b)(vii) & (vii.1).
One interesting difference between ss. 6 and 8, though, would be that the s. 6 income exclusion rules don’t require that the employment contract require the employee to pay for the automobile or travel expenses. You might say that it’s obvious the contract wouldn’t require that because the employer is paying. But the two sections (6 and 8) seem to get at the same thing: that the costs of living and travel are for the benefit of the employer and required by the employer.
That distinction, between expenses primarily for the benefit of the employer or for the benefit of the employee, is a broader principle that the CRA applies to decide whether any particular employment expense is a taxable benefit to the employee. If the expense is more of benefit to the employer, it is not taxed in the hands of the employee.
Second, the judge rejected an affidavit that the appellant sought to enter as evidence in this informal procedure appeal. Although the Tax Court rules allow flexibility in accepting evidence for informal procedure appeals (and the evidentiary rules have become more flexible for all courts now because of the Supreme Court of Canada’s more expansive “principled approach” to the admission of evidence), the judge disliked the fact that the appellant gave the evidence to the Crown shortly before the hearing and did not answer the Crown’s questions about the affidavit. Because the witness did not come to court and the appellant did not answer Crown questions, the Crown didn’t have a fair chance to review and consider the evidence or to get something like cross-examination of what was written in the affidavit. So the judge rejected the affidavit. Of course, this ruling didn’t impair McCulloch’s success.
Third, Justice MacPhee raised a question about whether the travel was incurred “in the course of… employment”. He was surprised that neither CRA nor the appellant discussed that. Probably, it seemed to both parties obvious that the travel was part of employment, once you accept that the travel was required under contract and McCulloch was required to pay the expenses. Justice MacPhee summarizes two lines of cases but, because the parties didn’t dispute the point, accepts that the condition was met.
What makes this question (whether the travel was “in the course of employment”) seem trivial is that the nature of these expenses is necessarily personal: they include lodging and meals after all. When you go to sleep at night, are you sleeping in the course of employment? When you have your dinner, is that in the course of your employment? So the fact that travel, lodging and meals are personal can’t be relevant for deciding if they were incurred in the course of employment. The issue seems to be satisfied just by knowing that the contract required the employee to work elsewhere and to pay the cost of getting there and staying there.McCullough v. The King, 2022 TCC 118, https://canlii.ca/t/jsvcn