Splane v. The Queen, 90 DTC 6442, [1990] 2 CTC 199 (FCTD), briefly aff'd 92 DTC 6021 (FCA)

Cullen, J.: —In these actions, the plaintiff is appealing the reassessments to income tax for each of his 1985, 1986 and 1987 taxation years. The parties agreed to proceed on the basis of an agreed statement of facts and counsel requested that the two actions be heard on common evidence. These cases are therefore joined and dealt with as one action, and this judgment is to apply to both.

The plaintiff was employed by the Government of Canada (the "employer") as a Senior Court Registrar of the Federal Court of Canada, in Ottawa, Ontario. The defendant was at all material times acting through her officer the Minister of National Revenue for Taxation (the "Minister"). In the summer of 1984 the plaintiff was requested by the employer to relocate from the registry office in Ottawa to the registry office in Edmonton. In consequence of this relocation, the claimant and his wife sold their home in Smith Falls for $65,000, and purchased a house in Sherwood Park, near Edmonton for $63,000. To assist in the financing of the new house, the plaintiff obtained a mortgage loan of $57,550.50 at an interest rate of 14.25 per cent. This interest rate was higher than the plaintiff's prior interest rate of 12.5 per cent payable for the mortgage on the Smith Falls home.

The employer's policy was to compensate employees who relocated at the employer's request and incurred additional expenses on the acquisition of a new residence. The policy is described in the employer's “Relocation Directive", and is referred to as a "Mortgage Interest Differential Payment”. Under the employer's policy the plaintiff received the sums of $1,123.98, $856.40 and $545.94 respectively for the 1985, 1986 and 1987 taxation years. This was to reimburse the employee for higher interest charges incurred by the new mortgage loan, compared to the interest rate paid immediately prior to relocation.

The plaintiff then received from his employer T-4A slips for the 1985, 1986 and 1987 taxation years. Each of the slips listed as "other income” the amounts paid to the plaintiff in mortgage interest differential payments. When the plaintiff filed his tax returns for 1985 and 1986, he did not include these amounts in income. Upon filing his 1987 tax return, the plaintiff submitted the three T-4A slips and a letter protesting the treatment of the payments as income.

The mortgage interest differential payments made to the plaintiff were assessed by the Minister, and included as income. The plaintiff objected to these assessments, but the Minister reassessed the plaintiff and confirmed the original assessments. The plaintiff then filed an appeal to this Court. At trial, the plaintiff argued that the Minister erred in assuming the amounts paid under the Federal Government's relocation directive for increased interest expenses were to be included in income. The defendant argued that the amounts received from the employer constituted income from employment, and as such, were to be included in the taxpayer's income.

At trial, it was agreed by the parties that the only issue to be determined was whether the mortgage interest differential payments the plaintiff received were remuneration that was to be included in employment income.

Both the plaintiff and defendant focused on section 6 of the Income Tax Act (the "Act") at trial. In particular, paragraph 6(1)(a) was referred to, which covers income from an office or employment. It is very unfortunate that the Act itself does not define the term “income”. As Mr. Gibson, counsel for the defendant, pointed out, the words used in the legislation are very wide. I think that the legislators deliberately chose to make this section very broad in order to ensure that "perks" or “fringe benefits” received from an employer are swept into the computation of an employee's income. However, the real question at bar is whether the taxpayer has in fact received a “benefit”. As Evans, J.A. pointed out in R. v. Poynton, [1972] 3 O.R. 727; [1972] C.T.C. 411; 72 D.T.C. 6329, the judge must consider whether the facts show that there was a material acquisition conferring an economic benefit on the taxpayer.

In order to determine if this particular taxpayer received an economic benefit, it is helpful to examine the relevant jurisprudence in the area. In the case of Ransom v. M.N.R., [1968] Ex. C.R. 293; [1967] C.T.C. 34667 D.T.C. 5235 (Ex. Ct.) a taxpayer was reimbursed by the employer for the loss incurred on the sale of his house when he was transferred from Sarnia to Montreal. In that case, the Court held that the amount was not taxable. The payment had been made pursuant to a company policy and had nothing to do with the taxpayer's engagement as an employee. The payment was not for services rendered but because the taxpayer had incurred an expense (and in fact a loss) because of his employment. The similarity between the facts of that case and the facts in the case at bar are striking. It appears to me that the rationale employed in Ransom, supra, leads to the conclusion that the payments this plaintiff received for increased interest expenses should not be taxed.

The defendant attempted to distinguish the Ransom case, supra, on several grounds. Mr. Gibson suggested that Ransom, supra, was no longer good law, in view of the Supreme Court Decision of The Queen v. Savage, [1983] C.T.C. 393; D.T.C. 5409. In that case, the taxpayer received $300 award for passing an insurance course, which was held to be a taxable benefit under paragraph 6(1)(a) of the Act. Mr. Gibson submitted that this case supports the conclusion that the Act has chosen very broad language in this regard. I have previously stated my agreement with that proposition and have no difficulty on that point. However, the crucial issue in this case is whether this taxpayer received an economic benefit that is taxable. Ransom, supra, has often been relied upon in the courts since Savage, supra, and generally the case has not been discredited. Even very recent decisions of both the Federal Court-Trial Division and the Federal Court of Appeal have adopted Ransom, supra, as good law in the area of reimbursement.

The defendant also attempted to distinguish Ransom, supra, and several subsequent cases based on the fact that the plaintiff had accepted a voluntary transfer. It is my opinion that nothing turns on whether the employee was required to move, or was requested to move. What is important for taxation purposes is the fact that the expenses were incurred by virtue of the taxpayer's employment.

In Savage, supra, the Supreme Court of Canada adopted the view of Mr. Justice Evans in R. v. Poynton, at page 420 (D.T.C. 6335-36; O.R. 738), where he formulated the test as follows:

If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, eg loan or gift, then it is within the all- embracing definition of section 3. [1]

The defendant, in utilizing Savage to say it cast the net broadly on what constitutes a “benefit” had to deal with this above-cited test. The defendant attempted to distinguish this case on the basis that Poynton, supra, pertained to a criminal prosecution. I do not accept this as a sufficient reason to disregard the Supreme Court of Canada's statement on the requirement that an economic benefit be received by the taxpayer.

Another case discussed at trial was that of McNeill v. The Queen, [1986] 2 C.T.C. 352; 86 D.T.C. 6477 (F.C.T.D.). Here the taxpayer was an air traffic controller who was relocated from Montreal to Ottawa. He received relocation payments totalling $17,727.16 and the issue was whether this amount was to be included in employment income. The Tax Review Board held the relocation allowance was a benefit pursuant to paragraph 6(1)(a) of the Act and therefore to be included in income. On appeal, Rouleau, J. of the Federal Court held that the allowance did not fall within the meaning of the phrase “salary, wages, or other remuneration" in subsection 5(1) of the Act. The allowance did not arise under the contract of employment or in relation to services rendered to the employer by the employee. Further, it was not remuneration under subsection 6(3) of the Act since the money was to compensate for a capital loss brought about by an involuntary transfer. The benefit was not received in respect of, in the course of, or by virtue of the taxpayer's employment. That judgment is of further value in its recognition that that part of the allowance that was not demonstrated as an actual loss was subject to taxation.

The defendant attempted to distinguish the McNeill case on the basis of the political and linguistic tensions underlining the case. I think this factor had no bearing on the final outcome of that case, nor did it affect that case's usefulness for taxation purposes.

Another case cited at trial, Greisinger v. M.N.R., [1986] 2 C.T.C. 2441; 86 D.T.C. 1802 (T.C.C.), involved a taxpayer who was transferred from Calgary to Edmonton and received a $140,000 loan from his employer in order to purchase a new home. The taxpayer was unable to sell his home and thus commuted from Calgary to Edmonton at his own expense. In light of the circumstances, the employer forgave $60,000 of the loan. The Court ultimately held that this reimbursement was not subject to tax. The Court did note however that the taxpayer must establish his actual losses, and any surplus over actual demonstrated loss was a benefit from employment that was subject to taxation. This case again reinforces the idea that actual losses are not taxable, but that which cannot be demonstrated to be an actual expense or loss will be taxed. The case of Sheldon v. M.N.R., [1988] 2 C.T.C. 2039; 88 D.T.C. 1392 (T.C.C.) also illustrates that point, showing that in order to be reimbursed, the taxpayer must suffer a triggering loss. The taxpayer in Sheldon, supra, had no actual loss, and for that reasons the Court held that he could not have been reimbursed, and the amounts he received were therefore subject to tax.

In a more recent decision, Phillips (W.R.) v. M.N.R., [1990]1 C.T.C. 2372; 90 D.T.C. 1274 (T.C.C.) the taxpayer transferred from Moncton to Winnipeg and was given $10,000 by his employer to assist in the purchase of a new home. The Minister taxed the amount as income from employment and the taxpayer appealed to the Tax Court of Canada. The Court allowed the appeal and held that the money was an amount intended to reimburse the taxpayer for the additional housing costs involved in moving from Moncton to Winnipeg. It was not part of his remuneration from employment under subsection 5(1) of the Act, nor was it as benefit or allowance derived from employment under section 6 of the Act. The Court noted that the amount was intended to reimburse the employee for additional housing costs incurred and noted the facts were similar to those in Ransom, supra,. The amount paid to the employee was therefore not subject to tax.

Again, I note the similarities between this case and the case at bar. Mr. Gibson, counsel for the defendant, tried to distinguish this case on the fact that the taxpayer in this instance made a voluntary transfer. I have already dealt with that point and see no need to discuss it further. The defendant also suggested that the Phillips decision is wrong, however, I note that Revenue Canada has not yet launched an appeal of this case.

Based on the preceding comments, it is apparent that these mortgage interest differential payments did not constitute taxable benefits under para- graph 6(1)(a) of the Act. No economic benefit of any significant value was conferred upon this plaintiff. The plaintiff moved at the request of his employer, incurred certain expenses in the move, and suffered a loss. The reimbursement of these expenses cannot be considered as conferring a benefit within the terms of the Act. The plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating to the Edmonton office.

Having determined that these amounts are not taxable under paragraph 6(1)(a) of the Act, I note that counsel for the defendant argued in the alternative that the taxpayer should be taxed under paragraph 6(1)(b) of the Act. This would require treating the amounts paid to the plaintiff as an allowance for personal or living expenses. I cannot accept this alternative argument.

The government's policy refers to the payment as a reimbursement throughout, and is entitled the “Mortgage Interest Differential Payment" (not allowance). In addition, the sums paid out to the taxpayer have none of the qualities of an allowance. The amounts the employee received were not predetermined sums of money paid in advance to allow the recipient to discharge a certain type of expense for which he did not have to account. Instead, reimbursement for the differences in mortgage interest payments was payable only upon the presentation of receipts. The employer's policy recognized that when it needed to relocate employees, it should minimize the financial harm, and reimburse certain expenses incurred as a result of relocation.

The very recent decision of the Federal Court of Appeal in Huffman v. Canada, [1990] 2 C.T.C. 132; 90 D.T.C. 6405 covers this issue very well. In that case, the taxpayer was a plainclothes police officer who was reimbursed for certain clothing expenses. The issue was whether there was a material acquisition conferring an economic benefit on the taxpayer. The Court ultimately held that the taxpayer was simply restored to the economic situation he was in before his employer ordered him to incur the expenses.

The plaintiff submitted that this case contains the general test of reimbursement, and I agree. In interpreting the word “allowance”, Heald, J. referred to the case of The Queen v. Pascoe, [1976] 1 F.C. 372; [1975] C.T.C. 656; 75 D.T.C. 5427 at page 658 (D.T.C. 5428) where the Court stated:

An allowance is in our view, a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expense; its amount is determined in advance and, once paid it is at the complete disposition of the recipient who is not required to account for it. A payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance, it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expense.

In application to this case, it is obvious that the money paid to the plaintiff was not an allowance. The payments were received as reimbursement for actual expenses incurred which could be accounted for by the employee. This relocation policy was not intended for the employee's personal gain, or to underwrite personal extravagances. The concept that the employer "put nothing in the employee's pocket" is basic to Canadian tax law, and was reaffirmed in Huffman, supra. The defendant argued that once the mortgage difference was demonstrated to the employer, the employee received the money to spend as he wished, and this was evidence that the payment was actually an allowance. What the employee did with the money after the fact is of no relevance, for the employee initially paid the expenses out-of-pocket. It was not an allowance to be applied at the taxpayer's discretion, as he had to demonstrate to his employer his actual loss.

The defendant also argued that because, under the policy, only home owners received the payment and non-home owners received no money, the payments were a "perk" received in respect of the employment. If the taxpayer obtained a mortgage at a lower rate, he would receive no compensation. In my mind this actually supports the idea that an actual loss must be incurred. It also illustrates that the government policy was designed only to reimburse a relocated employee, and had safeguards implemented to prevent the economic gain or unjust enrichment of a relocated employee.

In summary, there is no evidence in this case to suggest that the plaintiff received any economic advantage from these payments. The plaintiff was simply reimbursed for losses incurred by reason of his employment and the employer's requested transfer. The amount reimbursed was for an actual loss, in terms of an interest rate increased from 12.5 per cent to 14.25 per cent. The taxpayer gained no extra money in his pocket. Instead the payments only allowed him to maintain the same position as that which he occupied prior to his transfer, and prevented him from having accepted the lateral transfer position at a loss.

The payments at issue in this case were therefore not an allowance. They were reimbursements made after the expenses were actually incurred by the employee, because of the higher interest rates in effect at the time the taxpayer moved.

Finally, I think it is important to refer to Revenue Canada Interpretation Bulletin No. IT-470 (which was in effect at the time of the plaintiff's 1985 and 1986 taxation years). [2] Paragraph 36 (now paragraph 37) of IT-470, concerns amounts not to be included in income, and reads:

36. In ordinary circumstances, if an employer reimburses his employee for a loss suffered by the latter when he sells his house because he has been required by the employer to move to another locality or because he has retired from employment in a remote area, the amount so reimbursed is not income of the employee if it is not greater than the actual loss to the employee, calculated to the amount by which the cost of the house to him exceeds the net selling price he received for it. In similar situations where a guarantee is made whereby the employee is "reimbursed" by the employer for any excess of the fair market value of the house as independently appraised, over the actual selling price obtained the “reimbursement” is not income of the employee. Should the employer buy the house from the employee, no taxable benefit is included in the employee's income if the price paid by the employer does not exceed the greater of the cost of the house to the employee or the current fair market value of comparable houses in the same area.

[Emphasis added.]

While neither counsel referred to this Interpretation Bulletin at trial, I think it is of significant value to the case. This Interpretation Bulletin suggests that if an employer reimburses an employee for loss suffered in selling one's home in transfer, the amount paid for increased interest is not income as long as the amount does not exceed the actual loss. While I recognize that an Interpretation Bulletin has no legal status, it certainly indicates that Revenue Canada favours the taxpayer's position in this case.

In light of the above, in my view, the amounts the plaintiff taxpayer received in the 1985, 1986 and 1987 taxation years as mortgage interest differential payments were a reimbursement of expenses. As such, they were neither a benefit under paragraph 6(1)(a) of the Act, nor an allowance under paragraph 6(1)(b), and therefore the amounts paid should not be subject to tax. Consequently, this appeal by the taxpayer is allowed, and the Minister is ordered to reassess the taxpayer accordingly.

With regard to costs, counsel for the plaintiff sought leave at trial to make submissions regarding costs, if the Court allowed the appeal. Having stated that I would reserve my decision on costs, I invite counsel for each of the parties to make written submissions to the Court on this issue.

Appeal allowed.