Attorney General of Canada v. MacDonald, 94 DTC 6262, [1994] 2 CTC 48 (FCA)

Linden, J.A. (Mahoney, MacGuigan, JJ.A., concurring):— This is an application for judicial review of a decision of Judge Taylor of the Tax Court of Canada in which it was held that a monthly housing subsidy paid to the respondent in 1990 was not a taxable allowance or a taxable benefit under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). In so doing, Judge Taylor ignored the earlier decision of Judge Teskey who determined that the same subsidy for the year before, 1989, was a taxable allowance. In my view, Judge Taylor erred and Judge Teskey was correct — the subsidy in this case is a taxable allowance under paragraph 6(1)(b) of the Act. Therefore, it is not necessary to decide if the subsidy is also a taxable benefit under paragraph 6(1 )(a), a question recently dealt with by this Court in Phillips v. M.N.R., [1994] 1 C.T.C. 382; 94 D.T.C. 6177.

Facts

The respondent is a member of the Royal Canadian Mounted Police (RCMP) who was transferred from Regina to Toronto. After his transfer, the respondent was paid by the Department of Supply and Services $700 each month as a housing subsidy. The payment of this housing subsidy was authorized by Treasury Board and described in a Treasury Board Information Bulletin. It was payable to members of the RCMP "posted to Toronto. . .who relocated. . .on or after January 1, 1986, and who are subject to further rotational transfers."

The respondent did not include the housing subsidy in his income on his tax return, and he was reassessed by the Minister of National Revenue who determined that the money should be included in the respondent's income. The respondent's application to have the reassessment set aside was heard under the informal procedure in the Tax Court. Judge Taylor purported to follow the decision of this Court in The Queen v. Splane, [1991] 1 C.T.C. 224, 92 D.T.C. 6021, to hold that there was no taxable benefit or allowance to the taxpayer who was being reimbursed for increased housing costs.

Relevant legislation

It is necessary to begin by considering the relevant portions of the Income Tax Act. Section 5 of the Act provides that a taxpayer's income from an office or employment "is the salary, wages and other remuneration, including gratuities, received by him in the year.” The phrase "salary, wages and other remuneration" is not broad enough to encompass all of those amounts flowing from an employer to an employee which are income from an office or employment, since remuneration is payment for services rendered or things done. Other advantages may be received by employees which are not remuneration but which should be considered income.

The Act contains provisions for bringing amounts, other than remuneration, flowing from an employer to an employee within a taxpayer's income from an office or employment. Section 6 lists certain specific amounts that must be included in calculating a taxpayer’s income from an office or employment. In this application, paragraph 6(1)(b) is the key provision:

6(1) Amounts to be included as income from office or employment.— 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:

(b) personal or living expenses.— 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. . . .

None of the exceptions to paragraph 6(1)(b) are applicable.

Paragraph 6(1)(b) has a companion paragraph, paragraph 6(1)(a), which requires a taxpayer to include in income benefits received in the course of employment. The purpose of paragraphs 6(1 )(a) and 6(1 )(b) is to include in a taxpayer's income from employment those gains or advantages arising from the taxpayer's employment that in effect increase the taxpayer's income from that employment. Paragraph 6(1 )(a) is directed mainly towards benefits of a non-monetary nature, such as board or lodging, but can also include specific sums of money. Paragraph 6(1)(b), on the other hand, is designed mainly to capture money payments that meet the criteria of "allowances". As I already indicated, paragraph 6(1 )(b) will be the focus of these reasons. In my view, the subsidy is a taxable allowance; it is not necessary, therefore, to discuss whether the subsidy is also a taxable benefit under paragraph 6(1)(a).

Analysis

The wording of paragraph 6(1 )(b) provides little in the way of assistance in determining what constitutes an allowance. The paragraph simply requires taxpayers to include in their income from office or employment all amounts received in the year as an allowance for personal or living expenses or as an allowance for any other purpose. However, there are certain common sense aspects of the concept of an allowance which have surfaced in the jurisprudence.

The decision of the Exchequer Court in Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235, provides a good starting place in determining the qualities of an allowance. Noël, J. reasoned as follows at page 359 (D.T.C. 5243):

[A] reimbursement of an expense actually incurred in the course of the employment or of a loss actually incurred in the course of the employment is not an “allowance” within the meaning of the word in paragraph 5(1)(b) [now 6(1)(b)] as an allowance implies an amount paid in respect of some possible expense without any obligation to account.

He continued 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 paia 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.

I agree with Noël, J.’s definition of an allowance under paragraph 6(1)(b). An allowance is an arbitrary amount in that the allowance is not normally calculated to cover a specific expense. The amount may still be arbitrary even though it is roughly tailored to meet the employer's expectation of the magnitude of the expense or the proportion of the expense which the employer is prepared to bear. In other words, the amount of an allowance is predetermined without regard to the exact amount of a particular actual expense or cost, although the figure can be determined with reference to a projected or average expense or cost.

Another excellent definition of an allowance was offered by Mr. Justice Pratte of this Court in The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427, at page 658 (D.T.C. 5428) as follows:

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.

A similar explanation was expounded by E.C. Harris, in Canadian Income Taxation (4th ed. 1985) at page 108:

An “allowance” is a round amount given to an employee to cover expenses that he will incur, such as travel or entertainment, on his employer's behalf. The employee is not required to account to the employer later for what ne has actually spent. If the employee accounts to the employer for his actual expenses, neither an initial advance given him by his employer nor any subsequent payment by the employer to reimburse him for his expenses is an “allowance”. The scope for abuse of allowances is greater: because the employee does not have to account tor an allowance, large allowances might be given as a form of hidden remuneration. Hence the general rule that allowances form part of employment income.

Since an allowance does not have the character of reimbursement, it follows that the recipient of the allowance need not account for the manner in which the allowance is spent. The corollary of no accounting being required is that the recipient is free to disburse the money or not, as she or he pleases. This does not mean, however, that the allowance cannot be intended for a particular purpose. Indeed, the wording of paragraph 6(1 )(b) captures allowances for personal or living expenses or "any other purpose”. That an allowance is, in fact, used for its intended purpose or does not overcompensate its recipient does not lead to the conclusion, after the event, that there was an obligation to so use it.

Pascoe, supra, was somewhat modified in Gagnon v. The Queen, [1986] 1 S.C.R. 264, [1986] 1 C.T.C. 40, 86 D.T.C. 6179, in a way that is not of importance in this case. Both Pascoe and Gagnon considered an allowance dealing with the deductibility of spousal or child support payments pursuant to paragraph 56(1)(b) of the Income Tax Act, which contains detailed statutory language rather different than the wording of paragraph 6(1)(b). While Pascoe and Gagnon are certainly relevant and helpful when looking at the broader concept of an allowance, they are not necessarily always apt in the context of cases such as this one.

Nonetheless, following Ransom, Pascoe and Gagnon the general principle defining an “allowance” for purposes of paragraph 6(1)(b) is composed of three elements. First, an allowance is an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost. As I noted above, however, the amount of the allowance ma be set through a process of projected or average expenses or costs. Second, paragraph 6(1 )(b) encompasses allowances for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purpose. Third, an allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or cost.

Applying these principles in this case, the housing subsidy has all the legal characteristics of a taxable allowance. This is not a case of reimbursement for a particular expense. First, the respondent received the $700 as a limited, predetermined, "round" amount, which might also be described as arbitrary, in that it was not calculated with respect to an actual cost or expense of the respondent's. Second, the money was for a particular purpose, namely to subsidize the respondent's accommodation costs. This is certainly a personal or living expense within the meaning of paragraph 6(1)(b) and paragraph 248(1 )(a). Finally, the respondent received the money totally in his discretion; he was not required to account for buying a house in Toronto or paying a certain rent in order to receive the subsidy. No receipts had to be submitted. Indeed, the respondent was not required to incur any accommodation expenses whatsoever in order to receive the monthly payment. We have here, therefore, a "hidden" or "concealed increase in remuneration", which, in all fairness, must be treated as income.

With respect to Judge Taylor's reliance on Splane, supra, that case is distinguishable on its facts. In Splane, a taxpayer received money from his employer to compensate him for increased mortgage interest payments he incurred because of his transfer from Ottawa to Edmonton. The taxpayer was required to present receipts in order to be reimbursed for the difference between the interest he paid in Ottawa and that which he had to pay in Edmonton. The trial judge held that the money received by the taxpayer was not an allowance because it was 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” ([1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.), at page 203 (D.T.C. 6445)). Mr. Justice Cullen's decision was affirmed by this Court on appeal. By contrast, the payment in this application falls precisely within the definition of a taxable allowance used by the trial judge in Splane.

Conclusion

In the result, the housing subsidy is a taxable allowance within the meaning of paragraph 6(1 )(b) of the Income Tax Act. The application will be allowed, the decision of Judge Taylor dated October 13, 1992 will be set aside, and the reassessment of the Minister for 1990 will be restored. The respondent is entitled to his reasonable and proper costs of the appeal, to be taxed if necessary, as provided by section 18.25 of the Tax Court of Canada Act.

Application allowed.