Income Tax #25

By Gerry Neely
B.A. LL.B.

One of the results of the reduction in residential sales has been an increase in the number of trades of residential properties between people who can't find a satisfactory cash buyer. For any one entitled to deduct moving expenses under Section 62 of the Income Tax Act, the question of how the obligation for commission is dealt with, can become important. This was evident in a case which came before the Tax Review Board on January 15, 1982, where a deduction from the taxpayer's income of a real estate commission was disallowed.¹

The essence of Section 62 is that if a taxpayer ceases to carry on business or to be employed at a particular location and moves more than twenty-five miles to carry on a business or to be employed at another location in Canada, then the taxpayer may be entitled to deduct the moving expenses defined by Section 62(3). (These provisions apply equally to a student who commences or ceases to be a student in full-time attendance at an educational institution providing courses at a post-secondary school level.) The definition of moving expenses includes any expense incurred as or on account of:

"(e) The selling costs in respect of the sale of his old residence."

The taxpayer listed his home for sale with an agent, and subsequently transferred the home to another company owned by the agent. The agreement of purchase and sale indicated a sale price of $43,000.00, a down payment of $5,000.00 and a balance on closing of $38,000.00. In fact, the only cash that changed hands was the sum of $38,000.00. Although not stated, it would appear that the sale took place as part of a guaranteed purchase arrangement made between the agent and the taxpayer. The taxpayer had been obligated to pay a 5 1/2% commission had the house been sold through the listing agreement, and it was argued on his behalf that the effective sale price was $40,280.00, a figure arrived at by calculating the sale price which would produce a 5 1/2% commission and leave $38,000.00. This argument assumed that there was an obligation for commission which had been discharged by the taxpayer receiving a net figure. As against this argument, the Department of National Revenue referred to a portion of Section 62(1) where it is stated that the taxpayer's entitlements to deduction is governed by the following words:

"There may be deducted amounts paid by him as or on account of moving expenses . . . "

The Tax Review Board accepted the argument of the Minister of National Revenue that since the taxpayer had not paid an amount as real estate commission, he had not incurred an expense on account of the selling costs in respect of the sale of his old residence. The result - deduction disallowed. A different result for the taxpayer would have been achieved if the commission had been settled as a separate part of the guaranteed price arrangement, and cheques had been exchanged.

In another decision of the Tax Review Board,² a real estate salesman appealed a decision by the Minister of National Revenue which disallowed legal costs claimed by the salesman in the defense of an action brought against him. The salesman, together with his employer, were both sued by a purchaser who claimed damages for misrepresentation against both the employer and the salesman. The Minister of National Revenue disallowed the deduction for legal fees paid by the salesman on the grounds that those monies were not expended for the purpose of earning income from employment, within the meaning of Paragraph 8(1) (f) of the Income Tax Act.

The Tax Review Board agreed with the taxpayer that he was an employee, and that there was a master-servant relationship. The obvious purpose of the taxpayer entering into that relationship was to sell real estate thereunder in order to earn commission income. It was within that relationship that the salesman's action resulted in the law suit against him, which necessitated his undertaking the defense which resulted in his incurring legal costs. Result - deduction allowed.

	1.	William J. Stocker (Appellant) v. The Minister of National Revenue (Respondent),82 D.T.C. p. 1078.
	2.	Ernest A. Lavoie (Appellant) v. The Minister of National Revenue (Respondent),82 D.T.C. p. 1291.

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