McLay v. MNR, 92 DTC 2260, [1992] 2 CTC 2649 (TCC)

Mogan, T.C.C.J.:—At all relevant times, the appellant was employed by the Royal Canadian Mounted Police (R.C.M.P.). In 1985, the appellant was moved from British Columbia to Newfoundland. In connection with that move, he received an amount which is referred to as a "transfer allowance” and he incurred certain expenses and losses. The main issues in this appeal are whether the transfer allowance must be included in computing income and whether the expenses and losses may be deducted in computing income. The appellant also received a “plain clothes allowance” in 1985 and there is a dispute as to whether it must be included in computing income.

In the summer of 1981, the appellant was transferred from Ottawa to Vancouver. In July, 1981, the appellant and his wife purchased a house in Surrey (a suburb of Vancouver) at a cost of $123,000. In December, 1984, the appellant was informed that he had been successful in competing for a commissioned rank in the R.C.M.P. He was prepared to relocate in order to accept his commission. In January 1985, the appellant was appointed officer in charge of the commercial crime section in Newfoundland and he reported in St. John’s on May 5, 1985. It was not practical to rent accommodation for his family in St. John's and so the appellant and his wife had to sell their home in Surrey, British Columbia in order to purchase a home in St. John’s, Newfoundland.

In the period from 1981 to 1985, the housing market in Surrey had gone into a serious decline and, in February 1985, the fair market value of the house in Surrey was appraised at $94,500. The appellant and his wife purchased a house in St. John's on July 16, 1985 for $87,000. They were required to carry mortgages on both houses for the 57-day period from July 16 to September 10. Upon the sale of the Surrey house, they suffered a loss of $36,000 ($123,000 less $87,000) for which they were not reimbursed by the R.C.M.P. When filing his income tax return for 1985, the appellant deducted the amount of $8,810.89 representing the following items:

Upon reassessment, the respondent disallowed the deduction of the amount $8,810.89. There are two other amounts in issue identified as a travel allowance of $4,166.58 and a plain clothes allowance of $363. In the appellant's amended notice of appeal dated June 28, 1991, the appellant claimed the right to exclude from the computation of his 1985 income both the travel allowance and the plain clothes allowance; and he also claimed the right to deduct certain costs and losses as follows:

3. The appellant should be able to deduct the incremental amount of nonreimbursed costs or losses he incurred in disposing of his Surrey residence and relocating from Vancouver to St. John’s that are in excess of the transfer allowance he received pursuant to subsection 62(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

4. In the alternative, if the appellant is required to include the transfer allowance of $4,166.58 into income he should be entitled to deduct the full amount of nonreimbursed costs or losses he incurred in disposing of his Surrey residence and relocating from Vancouver to St. John’s as deductible moving expenses pursuant to subsection 62(1) of the Income Tax Act (Canada).

I will consider first the plain clothes allowance because it is the easiest issue to decide. In Shovellerv. M.N.R., [1984] C.T.C. 2207, 84 D.T.C. 1195 (T.C.C.), the taxpayer was a police officer who received $470.80 to reimburse him for the cost of certain clothing required for his plain clothes duties. The Minister of National Revenue added that amount to his reported income. In allowing the taxpayer's appeal, Rip, J. stated at page 2210 (D.T.C. 1197):

I do not see any difference between an employee being reimbursed by his employer for costs of travel and lodging undertaken at the demand of his em- ployer and being reimbursed for clothing his employer requires him to wear in the performance of his duties. In both cases the employee is compelled during the course of his duties to pay moneys out of his own pocket and is reimbursed in whole or in part by his employer. I fail to see where the employee has received or enjoyed a benefit. He is simply being restored to the economic situation he was before his employer ordered him to incur the expenses.

In Canada v. Huffman, [1990] 2 C.T.C. 132, 90 D.T.C. 6405 (F.C.A.), the taxpayer (a police officer) was paid $500 under the terms of a collective agreement to assist in defraying the costs of purchasing oversized clothing required to conceal his police equipment (revolver, handcuffs, intercom, etc.). The Minister of National Revenue added the $500 to the taxpayer's income whose appeal to the Federal Court-Trial Division was allowed. When dismissing the Crown's appeal, the Federal Court of Appeal (Heald, J.A.) stated at pages 135-36 (D.T.C. 6408):

The Trial Judge found, on the evidence . . . that the reimbursement was increased from $400 to $500 pursuant to the 1979 Collective Agreement. An administrative decision was taken that officers would not be required to submit receipts above $400 even though they would receive reimbursement of $500. The rationale for this decision was said to be the avoidance of extra paperwork. In any event, the Trial Judge said that he accepted the respondents evidence that he spent more than $500. He added. . .:

I therefore find, as a fact, that the plaintiff spent more than $500 in the year in question and was reimbursed for that expenditure the maximum allowance under the contract of employment, $500.

This reimbursement cannot be said to be an allowance as that term is used in paragraph 6(1)(b). In interpreting the use of the word “allowance” in another section of the Income Tax Act this Court said in the case of The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427 at 658 (D.T.C. 5428):

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 discretion 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.

Applying that test to these facts, it is obvious that the $500 here in issue or any part of it cannot be said to be an allowance.

Before his transfer to St. John's, the appellant had occupied a uniform position as a Staff Sergeant in Vancouver but, upon arriving in Newfoundland, he assumed plain clothes duty as head of the Commercial Crime Section. The annual allowance for plain clothes was $540 in 1985 but the appellant received only $363 for the period May 5 to December 31 representing approximately two-thirds of the year. He testified that he purchased four suits in 1985 to wear in connection with his new position. I have no hesitation in applying the decisions in Huffman and Shoveller to exclude from income the $363 clothing allowance because the appellant was reimbursed only for clothing that his employer required him to wear in the performance of his duties.

The second issue is whether the amount of $4,166.58 (referred to as a “transfer allowance”) should be included in the computation of the appellant's income. That amount represents one-twelfth of the appellant's annual salary for 1985 and was paid to him in accordance with R.C.M.P. policy described as follows in part of the Administrative Manual which was entered as Exhibit A-3:

].8. Transfer Allowance

8.a. Entitlement

1. A member, including a re-engaged ex-member, who qualifies under one of the following conditions is entitled to a transfer allowance when relocated under the provisions of App. VI-2-1, excluding local moves and retirement relocation:

1. three years of service in the Force; or

2. upon transfer from the first place of duty following completion of initial training and, for a Cst. or native S/Cst., recruit filed training.

2. Entitlement to the transfer allowance will be effective on the calendar day that the member departs for the new posting or, if the member precedes his/her dependents, on the calendar day that the dependents depart for the new location.

3. The amount is calculated as follows:

1. For a member who moves his/her dependents; an amount equal to one month's salary (1/12 of annual pay) at his/her substantive rate in effect the day before departure. See App. VI- 2-1, subsection 1.4 for explanation of dependent and App. 11-4-16 for a sample memo.

8.c. Payment

1. The transfer allowance is paid through the regular pay system and although it is not superannuable, it is subject to all mandatory deductions.

There was extensive evidence given by Staff Sergeant Keyuk concerning a study conducted by the R.C.M.P. in 1979/80 which laid the groundwork for the travel allowance as later authorized by the Treasury Board. He referred to a list of 42 items which, at that time, were expenses incidental to a transfer for which there was no specific reimbursement. Some of those items were: disconnecting and connecting major appliances; converting certain electrical appliances; connecting telephone, hydro and natural gas; altering drapes and rugs; vacancy insurance for houses left vacant prior to sale; costs of fresh registration of vehicles and drivers; installing block heater for colder climate; taking down and reassembling garden and patio furniture and utility sheds; cleaning older and newer residence. Those items may have been in the 1979/80 study but they now appear to be covered as Miscellaneous Moving Expenses in the R.C.M.P. Relocation Directive entered as Exhibit A-2:

2.13 Incidental Relocation Expenses

2.13.1 Each member who is physically relocated will receive an incidental allowance amounting to $500 for members with dependants or single personnel with in excess of 907 kg of household effects, or $300 for all others. This allowance is intended to provide for expenses incurred in the transfer process which are not subject to reimbursement elsewhere in this directive.

(a) the relocated member will receive a T4A with this payment and will be required to show the allowance as income during the taxation year of the relocation.

(b) the taxation element necessitates the issuance of a certificate as set out in App. "C" which allows the member to deduct the amount noted above as a relocation expense.

3.3 Miscellaneous Moving Expenses

3.3.1 In any removal of household effects, the mover should be depended upon for professional advice concerning any special care or preparation which should be provided for articles to be moved. However, the mover is not qualified to provide some of the necessary services. Therefore, the member is expected to arrange for such services and the charges should be paid from the incidental allowance provided under section 2.13.

NOTE: Receipts should be obtained for income tax purposes.

The following is a representative list of examples:

— disconnection, connection or electrical conversion of appliances and the preparation of appliances for shipment;

— taking up or re-laying wall-to-wall carpeting, hall runners, etc.;

— removing or installing valance boxes, curtain rods, wall hooks, clocks, etc.;

— disassembling and assembling garden and patio furniture, above ground pools, utility sheds and similar equipment;

— [many more examples listed but not shown in this excerpt]

In determining whether the amount of $4,166.58 must be included in the computation of income, the relevant statutory provisions are:

5(1) Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit. . .

(b) all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except

When attempting to apply the above statutory provisions to the amount of $4,166.58 designated as a transfer allowance, I regard McNeil! v. The Queen, [1986] 2 C.T.C. 352, 86 D.T.C. 6477 (F.C.T.D.) as a leading authority. In that case, McNeilll was an air traffic controller employed by Transport Canada at Montreal's Dorval Airport. In 1975, there was a controversy concerning the use of bilingual air traffic controllers in the province of Quebec and Transport Canada was concerned because air safety was in jeopardy. To resolve the situation, employees were offered three options: early retirement, relocation or language training. To those who opted for relocation, Treasury Board authorized a special payment called "air traffic control linguistic relocation allowance”. This allowance had two components: an accommodation differential which assumed that the cost of accommodation in any other metropolitan centre would be greater than the value of similar accommodation in Montreal; and a social disruption allowance. The accommodation differential was payable to any employee who owned his home in Montreal and it was intended to offset part of the increase in mortgage costs between the appraised value or sale price of his house in Montreal and the appraised value of similar accommodation at his new place of work. The social disruption allowance was a lump sum payment based on an arbitrary formula being 1 per cent of the employee's annual salary multiplied by his years of service with a minimum of $500 and a maximum of 5,000

McNeill received $15,571 as his accommodation differential and $2,155.41 as his social disruption allowance. Both amounts were included in one cheque representing McNeill’s "Air Traffic Control Linguistic Relocation Allowance”. When the Minister of National Revenue added both amounts to McNeill's reported income for 1976, he appealed. In the Federal Court-Trial Division, Rouleau, J. held that the accommodation differential was not taxable. As I understand his judgment, he concluded that the accommodation differential was a form of reimbursement or indemnity. He stated at page 359 (D.T.C. 6482):

The amount paid to the plaintiff was intended to defray the additional cost of a greater mortgage he would have to assume upon relocating.

This payment, offered to transferring employees, did not arise by virtue of the contract of employment. Its source is the object of a special, collateral arrangement between employer and employee arrived at just prior to the transfer. This arrangement was not part of the terms of employment either before or after: the scheme was designed to indemnify transferring employees for a capital loss and to quell a possible labour relations catastrophe. The payment never arose under the contract of employment nor in relation to services rendered to the employer by the employee

He further stated at page 363 (D.T.C. 6485):

Accordingly, the purpose of paragraph 6(1)(a) is not to impose taxation upon an employee for an amount received by him as reimbursement when it cannot be found in the exemption provisions or paragraph 6(1)(b).

Although the accommodation differential was held to be not taxable, Rouleau, J. held that the social disruption allowance ($2,155.41) was taxable as a benefit under paragraph 6(1)(a) “in the absence of any proof put forward by the plaintiff to show that he actually suffered other losses due to his relocation equal to the $2,155.41 he received”.

Comparing this appeal to McNeill, the plain clothes allowance of $363 is similar to the accommodation differential because it is in the nature of a reimbursement but the transfer allowance of $4,166.58 is at first blush similar to the social disruption allowance because it is not tied to any particular expense or cost. In Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235, Noël, J. stated at page 361 (D.T.C. 5244):

An allowance is quite a different thing from reimbursement. It is, as already mentioned, an arbitrary amount usually paid in lieu of reimbursement. It is paid to the employee to use as he wishes without being required to account for its expenditure. For that reason it is possible to use it as a concealed increase in remuneration and that is why, I assume, “allowances” are taxed as though they were remuneration.

It appears to me quite clear that reimbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord MacNaughton in Tenant v. Smith (1892), A.C. 162, puts nothing in the pocket but merely saves the pocket) is neither remuneration as such or a benefit "of any kind whatsoever". . . .

[Emphasis in original.]

Counsel for the appellant relied on a number of cases to support the exclusion of the travel allowance from the appellants income. I agree with the statements of Brulé, J. in Greisinger v. M.N.R., [1986] 2 C.T.C. 2441, 86 D.T.C. 1802 that the name which the parties give to a transaction does not determine its legal character. Two persons could describe themselves as employer/ employee when in law they may be partners; and vice versa. The fact that the $4,166.58 is referred to as a "travel allowance" in the R.C.M.P. documents does not necessarily determine that it is a taxable allowance as described by Noël, J. in the passage from Ransom quoted above or as referred to in paragraph 6(1)(b) of the Income Tax Act. I nave already set out above a passage from the decision of the Federal Court of Appeal in Huffman in which Heald, J.A. quotes from the decision of the same Court in The Queen v. Pascoe, [1975] C.T.C. 656,75 D.T.C. 5427. According to the Federal Court of Appeal in Pascoe, the three conditions for a payment to be an “allowance” are (i) the amount must be limited and predetermined; (ii) the amount must be paid to enable the recipient to discharge a certain kind of expense; and (iii) the amount must be at the complete disposition of the recipient who is not required to account for it.

In Gagnon v. The Queen, [1986] S.C.R. 264, [1986] 1 C.T.C. 410, 86 D.T.C. 6179, the Supreme Court of Canada reviewed the decision of the Federal Court of Appeal in Pascoe and, with respect to the third condition, Beetz, J. delivering judgment for the Court stated at page 273 (C.T.C. 415-16, D.T.C. 6183):

It is important to specify what is meant in requiring that, to be an allowance, an amount must be“ "at the complete disposition of the recipient”.

According to Pascoe, this condition means that the recipient must be able to apply this amount to certain types of expense, but at her discretion and without being required to account for it.

However, the condition could also mean that the recipient must be able to dispose of the amount completely, and that, provided she benefits from it, it is not relevant that she has to account for it and that she cannot apply it to certain types of expense at her complete discretion.

It seems to me, with respect, that the second interpretation is the correct one, in light of the earlier decisions which Pascoe appears to have misinterpreted.

What matters is not the way in which a taxpayer may dispose of, or be required to dispose of, the amounts he receives, but rather the fact of whether he can dispose of them or not.

The third condition for an "allowance" as described by the Federal Court of Appeal in Pascoe has. now been qualified by the decision of the Supreme Court of Canada in Gagnon. Although the decisions in Pascoe and Gagnon involved amounts paid as alimony or maintenance following a marriage breakdown, I assume that the judicial comments on“ allowance” would apply to any amount which may be characterized as an allowance under the Income Tax Act and, in particular, paragraph 6(1)(b).

In the cases of Phillips v. M.N.R., [1990] 1 C.T.C. 2372, 90 D.T.C. 1274 (T.C.C.) and Lao v. M.N.R., [1991] 1 C.T.C. 2718, 91 D.T.C. 331 (T.C.C.), I considered the taxability of a lump sum amount paid by an employer to an employee who moved from one city to another at the employer's request. In each case, the lump sum amount was directly related to the cost of purchasing or financing a new house in a city where real estate values were significantly higher than in the city from which the employee moved. In those cases, I held that the lump sum amount was not a taxable allowance but was similar to the accommodation differential in McNeil! because it was in the nature of a reimbursement. The circumstances in which the lump sum amounts were paid to the taxpayers in Phillips and Lao are quite different from the circumstances in which the appellant herein received his amount of $4,166.58. Also, my decisions in Phillips and Lao are under appeal.

In Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.), an employee was asked to move from Ottawa to Edmonton and, according to the policy described in the employer's Relocation Directive”, the employee received the amounts of $1,124, $856 and $546 in 1985, 1986 and 1987 respectively as a” mortgage interest differential payment”. The mortgage on the house in Edmonton carried a higher rate of interest than the mortgage on the house in Ottawa. Cullen, J. allowed Splane's appeal and held that the three amounts in question were a reimbursement of mortgage expenses and not a taxable benefit or allowance. In Côté v. M.N.R., [1990] 2 C.T.C. 2617, 91 D.T.C. 261 (T.C.C.), an employee was required to move from Cap-Rouge to St-Bruno in the Province of Quebec and was paid $3,461 (representing four weeks' salary) for expenses related to his move. Lamarre Proulx, J. relied on the decision in McNeil], supra, to allow Coté's appeal.

The circumstances in Côté are close to the circumstances in which the appellant received the amount of $4,166.58 because Côté received four week's salary and the appellant received one-twelfth of his annual pay. Each amount would appear to satisfy the three conditions for an“ "allowance" as laid down by the Federal Court of Appeal in Pascoe and modified by the Supreme Court of Canada in Gagnon. Each amount was limited and predetermined being four Weeks's salary for Côté or one-twelfth of annual pay for McLay. Each amount was paid to enable the recipient to discharge unspecified expenses related to his move. And each amount was at the complete disposition of the recipient. In the Côté decision, Lamarre Proulx, J. held that the amount $3,461 was not an allowance within the meaning of paragraph 6(1)(b) of the Act because Côté actually incurred expenses related to his move for the amounts received.

In my view, the essence of the second condition in Pascoe is that the predetermined amount is paid to enable the recipient to discharge certain expenses. That being the situation, the actual payment or incurring of those expenses should not by itself change a taxable allowance into a non-taxable reimbursement. If the quantum of the amount paid by an employer to an employee is dependent upon the quantum of a particular expense or cost (like the accommodation differential in McNeill), then it is not a predetermined amount; the first condition is not satisfied; and the amount could easily be a reimbursement. But in this appeal, the amount of $4,166.58 was predetermined. It was not dependent upon or related to any particular expenses and so it was not a reimbursement. And it was paid to enable the appellant to discharge certain unspecified moving expenses as contemplated by the second condition.

Most of the expenses which an individual would ordinarily incur as a result of moving from one city or town in Canada to another fall within the definition of "moving expenses" in subsection 62(3) of the Act. If the conditions in subsection 62(1) are satisfied, moving expenses are permitted as a deduction in computing the individual's income to the extent that they are not paid by an employer. Therefore, if an individual like the appellant receives an amount (which I shall call the "moving amount”) because his employer has asked him to move from one city to another, and if the individual is required to include the moving amount in his income as an allowance under paragraph 6(1)(b), he will not pay any income tax on the moving amount if those moving expenses (as defined in subsection 62(3)) that were not paid by his employer exceed the moving amount. I should add that "moving expenses" are defined in subsection 62(3) in an inclusive manner.

It is difficult to decide this second issue without knowing precisely all of the amounts which were received by the appellant from the R.C.M.P. (over and above his salary) as a consequence of his move from Vancouver to St. John’s. For example, I assume that the actual cost of moving his wife and children (meals, hotel, air fare, etc.) and the cost of moving his furniture (common carrier fees) were reimbursed on the basis of vouchers or receipts. Also, in the appellant's 1985 income tax return (Exhibit A-16) and notice of assessment, there is reference to an amount of $1,658.96 which he received from the R.C.M.P.; reported at line 130 of his return; and was permitted to deduct at line 222 (where he also attempts to deduct the amount of $8,810.89 described above).

In the absence of a precise summary of all amounts received by the appellant from the R.C.M.P. as a direct consequence of his move from Vancouver to St. John’s, I am inclined to regard this amount of $4,166.58 as an “allowance” because all three conditions are satisfied. The amount itself is predetermined as one month's salary. The amount is paid only when a member of the R.C.M.P. is relocated and, I assume, it is intended to enable the recipient to discharge certain unspecified kinds of moving expense. And finally, the amount is at the complete disposition of the recipient who is not required to account for it.

Returning briefly to the decision of the Federal Court-Trial Division in McNeil], Rouleau, J. went out of his way to find that the accommodation differential was not part of McNeill’s terms of employment. In addition to the passage quoted above from page 359 (D.T.C. 6842), he further stated at page 361 (D.T.C. 6483):

As previously stated, I am satisfied that the payment made to the taxpayer in question did not arise in relation to his office or employment; substantially it was made in order to avoid a potential labour dispute and directed to the plaintiff as a person rather than in his capacity as an employee.

In this appeal, by way of contrast, the "transfer allowance” was part of the appellant's terms of employment; it was available to any member of the R.C.M.P. who was relocated; and it was not related to any particular expense or capital cost. In my opinion, the amount of $4,166.58 must be included in the appellant's 1985 income as an "allowance" within the meaning of paragraph 6(1) (b) of the Act.

The third issue is whether the appellant may deduct in computing income “the full amount of non-reimbursed costs or losses he incurred in disposing of his Surrey residence and relocating from Vancouver to St. John’s as deductible moving expenses pursuant to subsection 62(1) of the Income Tax Act” (direct quote from paragraph 4 of amended notice of appeal). If the appellant in this third issue is attempting to deduct the amount of the loss he suffered upon sale of his Surrey residence for $87,000, the amount of such loss is not deductible whether it is determined by reference to the cost ($123,000) of the Surrey residence in 1981 or the fair market value ($94,500) of the Surrey residence as at February 1985. The loss is not a" moving expense” as defined in subsection 62(3) or in the ordinary meaning of those words because the loss was not caused by the appellant's move from Vancouver to St. John’s. It was caused by a decrease in the market value of residential houses in Surrey between 1981 when the house was purchased and 1985 when the house was sold. The only connection between this loss and the appellant's move is the fact that his move forced the realization of a pre-existing loss which had accrued from market conditions. It was a capital loss in a classic sense and its amount would not be deductible in computing income unless permitted by an explicit provision in the Act. No such provision was brought to my attention.

With respect to subsection 62(3) of the Act, I assume that most "moving expenses" as defined therein have been allowed as deductions in computing the appellant's income to the extent thatthey were not paid by the R.C.M.P. The only specific expense identified in this appeal which the respondent did not allow as a deduction under section 62 and which was apparently not reimbursed by the R.C.M.P. is the amount of $1,310.89 representing mortgage payments on the Surrey residence from July 16 to September 10, 1985. In my view, the interest portion (if any) of those mortgage payments should be deducted as a moving expense because those payments cover a period when the appellant was required to own two homes; a person in the appellant's circumstances does not ordinarily own two homes; and the need to retain his Surrey residence for a period of 57 days after he purchased his St. John’s residence was a direct consequence of his move from Vancouver to St. John’s. I would allow the appellant to deduct only the interest portion of those mortgage payments because he would have recovered the principal portion of those payments upon the sale of the Surrey residence. Because no other specific expense was identified as an alleged moving expense in this appeal, I would not grant to the appellant any further relief under this third issue. The appeal is allowed in part without costs in accordance with the above reasons.

Appeal allowed in part.