Gernhart v. The Queen, 96 DTC 1672, [1996] 3 CTC 2369 (TCC), briefly aff'd 98 DTC 6026 (FCA), Docket: A-625-96

Bonner J.T.C.C.: — This is an appeal from an assessment of income tax for the appellant’s 1990 taxation year. The issue is whether financial assistance given to the appellant by her employer to offset the increased income tax burden imposed upon her as a consequence of a change in residence from the United States to Canada is income from office or employment under sections 5 and 6 of the Income Tax Act (“Act”).

In 1988 the appellant was a resident of the United States. She was employed by General Motors Corporation (“GM”) at Dayton, Ohio. She was one of a group of GM employees identified as International Service Personnel. Such employees are asked to accept international postings of relatively short duration. In June of 1988 the appellant was offered and accepted a position at a plant in Windsor, Ontario operated by General Motors of Canada Limited (“GM Canada”). The new position was intended to afford the appellant somewhat broader experience. It did not carry with it any increase in the grade or level of employment or any increase in the appellant’s base salary level. The appellant, who had previously resided only in the United States, secured a Landed Immigrant Visa required to work in Canada. She commenced to reside in Canada and to work for GM Canada in October of 1988. She continued to work for that firm until April of 1991 when she returned to the United States and took up a position there with GM.

The parties agreed to facts. which include the following: ...

11. As part of the process of transferring to the Canadian assignment in Windsor, Ontario, the Appellant was provided with counselling regarding the movement to Canada of herself and her family, including obtaining a work permit, medical examinations, getting Landed Immigrant status, health care, income taxes and all the other matters one needs to know when moving to work in a different country. Some of the counselling was provided in the United States and some in Canada.

12. With respect to income tax, the Appellant was advised that GM had a tax equalization policy,the effect of which was that, if she accepted the transfer, the amount of income tax during her assignment would approximate what she would have paid had she remained in her home country, since the company would equalize her taxes.

13. The company’s equalization policy provides that an employee who accepts such a temporary assignment at the request of the company will, whatever the tax rate in the country to which he or she is transferred, pay the same amount of income tax on General Motors compensation(as well as on other income such as investment income) as if the employment in the United States of America continued. Thus, if the tax rate in the new country were to be higher than in the United States of America, the employee would receive from General Motors the same after-tax amount as had been received in the United States of America. By the same token,if the country to which the employee was transferred had a low rate of tax or no tax at all, the employee would not benefit from such low or non-existent rate, but would continue to get the same after-tax receipts as if he or she had remained in the United States of America.

14. The mechanics of the required tax calculations are somewhat complicated, but proceed in principle on the basis of a comparison with what is referred to as the “hypothetical” tax that would have been paid on the General Motors compensation (as well as on other income such as investment income) had the employee remained in the United States of America. Any difference required to bring the employee back to the level of after-tax income he or she would have had had he or she remained in the United States of America is then paid by the company to the employee.

15. In preparing the information return (T4) for the Appellant in respect of the taxation year under appeal, GMCL included a tax equalization payment. The Minister has assessed the Appellant on the basis of her Canadian income tax return as thus filed and it is from that assessment that the Appellant has appealed.

16. The parties agree that, should the Court determine that the equalization payment made in respect of the Appellant’s 1990 taxation year is not properly includable in computing her income for that taxation year, the appropriate Order would be to refer the matter back to the Minister for reassessment accordingly within a period of 90 days and that failing agreement as to the amount of the applicable adjustment, either party may apply to the Court to reopen the hearing for evidence and argument restricted to the appropriate amount of the adjustment contemplated in the Order of the Court.

The Minister of National Revenue made the assessment of tax in issue on the basis that the tax equalization payment made by GM Canada, the appellant’s employer, was properly included in the appellant’s income in accordance with section 5 and paragraphs 6(1 )(a) and (b) of the Act.

Subsection 5(1) of the Act provides:

(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.

Paragraphs 6(1 )(a) and (b) of the Act provide in part:

(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,

(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, …

Counsel for the appellant characterized the payment in issue as one made by an employer to reimburse an employee who has been transferred from a low tax jurisdiction to a high tax jurisdiction in respect of the loss suffered by the employee as a result of a higher tax expense in the location of transfer. The payment, equal in amount to the after tax differential, reimburses the transferred employee for a loss in disposable income in the new work location. Counsel submitted that the principles to be applied in determining whether such a payment must be included in a taxpayer’s income for Canadian income tax purposes are those applied in cases which deal with the reimbursement of losses and expenses incurred by employees who are relocated in the course of their employment, in particular, the leading cases of Ransom v. Minister of National Revenue,' [1] Splane v. R. [2] and Hoefele v. Æ. [3] . Those cases, he submitted, stand for the principle that a reimbursement by an employer for an actual loss suffered by an employee or for an additional expense incurred as a result of a transfer are not a benefit within the meaning of paragraph 6(1 )(a) of the Act.

The extent of a taxpayer’s liability for income tax depends on the language of the Act. The scope of the language of section 5 and of paragraph 6(1 )(a) cannot be ignored. The leading case dealing with the language of paragraph 6(1 )(a) is R. v. Savage. [4] In that case the Supreme Court of Canada considered the taxability of a payment of $300 made by an employer to an employee as a reward for the successful completion of certain business related courses. The Court found that the payment was a benefit received in respect of employment within the meaning of paragraph 6(1 )(a). Dickson J. (as he then was) wrote the following, at page 399 (D.T.C. 5414):

... The meaning of “benefit of whatever kind” is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of “benefit”. Further, our Act speaks of a benefit “in respect of’ an office or employment. In Nowegijick v. R., 83 D.T.C. 5041 this Court said, at page 5045, that:

The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of’ is probably the widest of any expression intended to convey some connection between two related subject matters.

See also Paterson v. Chadwick, [1974] 2 All E.R. 772 (Q.B.D.)at page 775.

I agree with what was said by Evans J.A. in R. v. Poynton, [1972] 3 O.R. 727 at page 738, [72 D.T.C. 6329 at pages 6335-36], speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of section 3.

It is, I think, self-evident that a benefit in the form of a direct addition to the wealth of an employee is received when an employer discharges an income tax burden which would otherwise fall on the employee in his or her personal capacity. The Court of Session of Scotland and the House of Lords recognized this in The North British Railway Co. v. Scott. [5] In that case an employer paid the salaries of its officials without deduction for payments made by the employer in respect of tax payable by those officials. The position was stated with great clarity by the Lord President of the Court of Session, at page 336 as follows:

... A contract to pay a salary without deduction aof tax is neither more nor less than a contract to pay the amount of the salary plus the amount of the tax, and in such a case the profit of the office or employment is measured by the sum of those two figures. ... [6]

In the House of Lords a similar view was expressed by Lord Dunedin, at page 338:

… It is obvious that if the official here in question were asked, “What profits whatsoever do you get from your office!" his answer would have to be, “I get x pounds in cash and I get the Income Tax due in respect of my salary paid by the company." It would therefore be on the aggregate of these two sources of profit that the duty would have to be calculated. ...

It is said, however, on behalf of the appellant that the payment in issue is not a benefit within the meaning of section 6 of the Act because the appellant is simply being reimbursed for a tax cost which is a result of a transfer at her employer’s request from a position in the United States to a position in Canada. The appellant derived no pecuniary advantage because her after tax income in Canada was the same as it would have been if she had not moved to Canada in response to that request. The payment, being a reimbursement of an amount which the appellant was out of pocket by reason of her employment, was said to lack the quality of income and to fall within the principle of Ransom, and later decisions of the Federal Court of Appeal involving paragraph 6(1 )(a), in particular, Splane, and Hoefele. In Hoefele the taxpayer was required by his employer to move from Calgary to Toronto where housing costs were higher. The employer agreed to pay any increase in interest charges on mortgages on homes in Toronto up to a limit fixed by reference to differences in market value between similar homes in Calgary and Toronto. The evolution of the jurisprudence in this area is summarized briefly in the Reasons for Judgment of Linden J.A. His Lordship stated:

Our jurisprudence has long accepted the focus on net gain as the basis for determining whether a receipt is a “benefit” and whether it is therefore taxable. In the 1967 decision of the Exchequer Court of Canada, Ransom v. Minister of National Revenue, Noël J. applied the net gain concept to circumstances not too dissimilar from the present. An employee was transferred by the employer company to a different city and was reimbursed by that company for losses incurred on the sale of a house. In deciding that these reimbursements were not income, NoËl J. stated:

In a case such as here, where the employee is subject to being moved from one place to another, any amount by which he is out of pocket by reason of such amove is in exactly the same category as ordinary travelling expenses. His financial position is adversely affected by reason of that particular facet of his employment relationship. When his employer reimburses him for any such loss, it cannot be regarded as remuneration, for if that were all that he received under his employment arrangement, he would not have received any amount for his services. Economically, all that he would have received would be the amount that he was out of pocket by reason of the employment.

This is merely another way of describing the net gain idea that a receipt is not taxable if it does not improve the economic situation of the taxpayer; if it only reimburses for an amount for which an employee would otherwise be “out of pocket”, it is not a “benefit”. He treats relocation costs in the same way as ordinary travelling expenses. Reimbursement for out of pocket expenses incurred as a result of a move, explains NoËl J., cannot be considered a benefit because it adds nothing of value to the recipient’s economic situation. He States:

It appears to me quite clear there imbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord McNaughton 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”...

The approach of Savage and Ransom was adopted by this Court in R. v. Huffman where the issue was whether a clothing expense which was reimbursed to a plain clothes police officer was a benefit. Heald J.A., quoting from the Tax Court Judge and echoing Mr. Justice Dickson in Savage, held that it was not, describing the applicable test as follows:

It is therefore necessary to consider whether the facts here show that there was a material acquisition in conferring an economic benefit on the taxpayer.

Mr. Justice Heald went on to conclude:

the taxpayer was simply being restored to the same economic situation he was in before his employer ordered him to incur the expenses.

This Court once again applied this principle in affirming the decision of Cullen J. in Splane v. The Queen. There, a relocated employee was reimbursed for costs pertaining to an increased interest rate on a mortgage. Deciding that such reimbursement does not constitute a benefit, Cullen J. stated:

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.

At another point in the case, Cullen J., in characterizing the economic effects of the receipt, explained that “the plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating ...”.

Therefore, the question to be decided in each of these instances is whether the taxpayer is restored or enriched. Though any number of terms may be used to express this effect — for example, reimbursement, restitution, indemnification, compensation, make whole, save the pocket — the underlying principle remains the same. If, on the whole of a transaction, an employee’s economic position is not improved, that is, if the transaction is a zero-sum situation when viewed in its entirety, a receipt is not a benefit and, therefore, is not taxable under paragraph 6(1 )(a). It does not make any difference whether the expense is incurred to cover costs of doing the job, of travel associated with work or of a move to a new work location, as long as the employer is not paying for the ordinary, every day expenses of the employee.

As I see it, the position of the appellant is hardly comparable to that of the taxpayers in Ransom, Splane and Hoefele. Each of the three was called upon by his employer to move in the course of employment. The reimbursement of a cost associated with such a move can, at least arguably, be regarded in the context of such employment as a “zero-sum transaction”. Here, however, the payment was made pursuant to an element of the appellant’s overall, on-going compensation package and was designed to induce her to serve, as she did, outside the United States. It therefore constituted part of the appellant’s remuneration for services within the meaning of subsection 5(1) of the Act even though it was intended to compensate the appellant for the tax disadvantage inherent in rendering those services outside the United States. Remuneration is commonly adjusted to reflect advantages and disadvantages inherent in rendering services under an employment contract but does not for that reason cease to be remuneration for such services. In my view this case is clearly governed by the decision of the Supreme Court of Canada in Curran v. Minister of National Revenue.’ [7] It is not necessary to rely on subsection 6(3) of the Act.

The payment may also be viewed as a benefit taxable under paragraph 6(1 )(a) of the Act. It is necessary to guard against the sort of creeping erosion of clear statutory language which may arise from a repeated process of comparison of particular cases to earlier “similar-fact” cases decided under that language. The “zero-sum transaction” analysis in the cases relied on by the appellant rests on a comparison of the position of the taxpayer before and after moving. At first blush it appears to assist the appellant.

In this case, however, such an analysis is not helpful because it ignores the true nature of the payments as remuneration for services under a contract of employment. It leads to a result which is contrary to the plain meaning not only of section 5 but also of section 6. The tax equalization payment is an obvious benefit when the appellant’s position is compared with that of any other resident of Canada in receipt of the same income but not in receipt of tax equalization. Inherent in the tax treatment sought by the appellant is a privilege offensive to the principle that individuals in similar financial circumstances should pay similar amounts of tax. The appeal will be dismissed with costs.

Appeal dismissed.