Zaugg v. The Queen, 94 DTC 1882, [1994] 2 CTC 2425 (TCC)

O'Connor J.T.C.C.:— This matter was heard in Toronto, Ontario on July 8, 1994. It is an appeal pursuant to the informal procedure of this Court relative to the appellant's 1991 and 1992 taxation years.

Issue

The sole issue in these appeals is whether amounts of $5,573.74 in 1991 and $9,530.59 in 1992 were includable in the appellant's taxable income for those years as employee benefits.

Facts

The relevant facts are:

1. The appellant was a chemical engineer employed by Petro-Canada.

2. In 1991, Petro-Canada transferred the appellant from Calgary, Alberta to Toronto, Ontario.

3. Petro-Canada had a Home Relocation Program ("program") for transferred employees.

4. Pursuant to the program as applicable to the appellant's situation:

2(a) Royal Lepage, a national real estate company determined that at or near the time of transfer, the prices of homes in the Toronto area were 155 per cent of the prices of homes in Calgary. This factor was accepted as accurate by the respondent. Royal Lepage's findings are based upon an examination of 18 centres in Canada related to Petro-Canada's work sites and employees, utilizing average sales data, square footage of homes and target neighbourhoods and is updated three times a year.

(b) Appellant's Calgary home sold for $179,000. 155 per cent of $179,000 is $277,450.

(c) Appellant, in 1991, purchased a home in Mississauga in the Toronto area for $285,000.

(d) As required by the program, the appellant applied all the proceeds from the sale of the Calgary home, namely $98,000 ($179,000 less the existing Calgary mortgage of $81,000) to the purchase of the Mississauga home. He thus required a mortgage of $187,000 to complete the purchase.

(e) The mortgage of $187,000 was obtained from Confederation Life as required by the program. The program obliges employees to apply directly to Confederation Life for the mortgage loan, and they must meet normal lending criteria.

(f) Petro-Canada's obligation under the program is to pay the interest on that part of said mortgage which is equal to the difference between the $179,000 selling price of the Calgary home and the established value for a Toronto area home ($277,450) namely $98,450. Petro-Canada pays said interest directly to Confederation Life. Said interest was $5,573.74 in 1991 and $9,530.59 in 1992.

(g) Petro-Canada's obligation to pay said interest diminishes from 100 per cent in the first year of the mortgage to 50 per cent in the tenth year and then the obligation ceases entirely. It also ceases if the employee is relocated back, sells the new home, or his employment terminates.

Law

The applicable law is paragraph 6(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which reads as follows:

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 . . . .

[The exceptions are not relevant.]

The reply of the respondent had referred to section 80.4 and subsection 6(9). These provisions relate, inter alia, to a loan to an employee by an employer at low or no interest rates. At the hearing counsel for the respondent confirmed that these provisions were no longer in issue and that the Court was only dealing with paragraph 6(1 )(a).

Analysis

Several cases were cited dealing with the taxability or non-taxability of various employee benefits paid when an employee is transferred. The most relevant however are Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442, a decision of the Federal Court-Trial Division, which was confirmed by the Federal Court of Appeal at [1991] 2 C.T.C. 224, 92 D.T.C. 6021, and the very recent decision of the Federal Court of Appeal in Phillips v. M.N.R., [1994] 1 C.T.C. 383, 94 D.T.C. 6177.

In Splane, supra, at his employer's request, the taxpayer had moved from Ottawa to Edmonton. During his 1985 and 1986 taxation years he received from his employer mortgage interest differential payments of $1,123 and $856 respectively to reimburse him for the increased mortgage interest payments which he had to make following his purchase of a home in Edmonton to replace his Ottawa home. Both the Federal Court-Trial Division and the Federal Court of Appeal found that these payments were neither benefits nor allowances within the meaning of paragraphs 6(1 )(a) and 6(1 )(b) of the Act. They were found to be merely reimbursements intended to restore the taxpayer to the economic situation he enjoyed before the transfer. The trial judge said at page 203 (D.T.C. 6445):

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.

In Phillips, supra, the Federal Court of Appeal, in reversing decisions of the Tax Court of Canada and of the Federal Court— Trial Division, found that a $10,000 payment received by the taxpayer from his employer to defray higher housing prices when relocating from Moncton to Winnipeg was taxable. In Phillips, Robertson J.A. found that the $10,000 did not restore the respondent to his previous financial state. Rather it increased his net worth by $10,000. The $10,000 was an amount arrived at by negotiations between the employer, C.N.R. and various unions and no restrictions were placed on the use of the $10,000.

Robertson J.A. appeared to cast certain aspersions on the Splane decision. For example, he stated at page 389 (D.T.C. 6181-82) as follows:

The tax treatment of compensation directed only to the loss of a favourable mortgage rate on the sale of a house is, in my view, governed by Splane. Unfortunately, the trial judge’s recital of the facts in that case is not comprehensive. ThisCourt affirmed the trial judge's decision with brief oral reasons.

We do know that in Splane, the taxpayer sold his Ottawa house for $63,000 and purchased one in Edmonton for $65,000. We also know that his employer reimbursed him for the costs of the 1.75 per cent higher mortgage rate on the replacement house. The facts, however, do not disclose whether the principal amount of the new mortgage loan exceeded that owing under the Original mortgage. The trial judge relied on Ransom as persuasive authority in reaching the following conclusion that the payments were not taxable (at page 204 (D.T.C. 6496)):

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.

In light of these comments, I think it reasonable to infer that the Court in Splane was dealing with a capital loss as contemplated by Ransom. I acknowledge, however, that it is also plausible that the compensation in Splane was directed at the acquisition costs of the new residence. In any case, the circumstances in Splane are not before this Court today. Fortunately, the facts at Bar are less ambiguous.

It is clear that these comments were obiter. In fact on this point Linden J.A., in Phillips, stated as follows at page 393-94 (D.T.C. 6185):

I agree with the result arrived at by Mr. Justice Robertson and with much of the reasoning leading to that conclusion. However, there are a few items with which I disagree. I feel it is necessary to comment only on some of them.

In particular, as a member of the panel of this Court which decided Splane, supra, I feel it is incumbent upon me to say that there is no reason, in this case, by means of hypothetical example, to reach out in order to try to limit the effect of its holding. Here we are dealing with a cash payment upon relocation of $10,000 used in the purchase of a house, whereas in Splane the issue revolved around the reimbursement of additional interest payments necessitated because of relocation. It is not necessary, in deciding this case, to opine that there should be a difference in treatment between additional interest payment because of an increase in interest rates and additional interest payments because of an increase in the principal amount of the mortgage. That issue was not before this Court, nor was it before the Court in Splane. Because that precise question may well come before this Court in the future, I believe it is inadvisable to try to decide that issue prematurely in this case, where it is not before the Court for decision.

In regard to these decisions, it is interesting to note that the appellant has filed, as Exhibits A-8, A-9 and A-10, three Consents to Judgment in cases involving three other employees of Petro-Canada. In these Consents, the respondent agreed that the mortgage interest payments pursuant to the program did not constitute taxable benefits. Counsel for the respondent explained that prior to the decision in Phillips it was the position of the Minister of National Revenue ("Minister") that the decision in Splane governed the interest payments contemplated in the program but that this position had changed following the decision in Phillips. There can be no estoppel against the Crown but it certainly is of no comfort to the appellant to realize that some of his co-employees have been treated favourably while he has not.

Dealing with the particular issues in this case, it is clear from the jurisprudence that paragraph 6(1 )(a) is to be given a broad interpretation. It is also clear in the Court's opinion that any benefits that the appellant may have received as a result of the payments of the interest by Petro-Canada were either received or enjoyed by him in respect of, in the course of, or by virtue of an office or employment. Admittedly he did not actually receive the interest payments. They were paid directly by Petro-Canada to Confederation Life. However, they were paid on his behalf and I doubt that it can be successfully argued that he has not received or enjoyed them as an employee. It is clear that had he left Petro-Canada he would not have received them. Consequently the benefits relate to an employment situation.

The key question however is whether the appellant received an economic advantage or, as stated in Ransom, did the payments "only allow him to maintain the same position as that which he occupied prior to his transfer."

The appellant testified in extensive detail that he was receiving a lot less house in Mississauga for a lot more money. The respondent submits that the appellant has received an economic advantage because he now owns a more valuable home (on a Petro-Canada valuation basis). The respondent further points out that when the Mississauga home is sold the real value of the economic advantage will crystallize. It is clear from the evidence that the appellant is not obliged to reimburse Petro-Canada for the interest payments.

In Phillips, Robertson J.A. cited, with approval, the following statement of Brulé J.T.C.C. in Creisinger v. M.N.R., [1986] 2 C.T.C. 2441, 86 D.T.C. 1802 (T.C.C.), at page 391 (D.T.C. 6183):

The rationale why this reimbursement should not be taxable is that there must be harmony and balance between the employee that is transferred to another city and the employee that is not. Indeed, the first may suffer losses as the second isin a stable position. A company, in order to render those transfers more economically favourable, will compensate its employee. Consequently an economical balance has been created and for this reason, this reimbursement should not be taxed.

Although this citation was cited with approval, I am not quite certain whether its application to the Phillips case was appropriate. Greisinger, supra, 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 until his house in Calgary was sold. 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 held that this amount of $60,000 (less an amount of $13,960 related to "non-house" items) was not subject to tax.

Counsel for respondent argued, on the basis of some of the statements of Robertson J.A., in the Phillips case, that there must be equity in the tax treatment of employees in the same area. Since the appellant was receiving some benefit from the interest payments, he was being treated more favourably than his coemployees who were not transferees but were already residents of Mississauga. Therefore, the required equity was absent and consequently the appellant should be taxed.

With respect, I do not accept this argument. I believe the reasoning in Splane and Ransom, supra, applies in this case. The appellant's equity in the new house remained the same. The house in Mississauga may at the time of transfer have been a more valuable asset but the appellant’s equity in the asset did not increase. In Calgary, the appellant’s equity in his home was $98,000. In Mississauga, the appellant’s equity was still $98,000. A person's economic position is not advanced by maintaining the same equity position in a more valuable asset. The appellant assumed all responsibility for payments on account of increased principal as well as on account of increased interest over the amounts paid by Petro-Canada. His monthly mortgage payments were greater in Mississauga than in Calgary.

I do not feel that the appellant has received an economic advantage. He has received the benefit of some interest payments which, in the end analysis, had the result of assisting to put him in a home comparable to the one he left in Calgary. According to him it is not even comparable. If employment ceased or the employee was relocated back to Calgary, the assistance ceased. The assistance received by the appellant was not a colourable attempt to increase the appellant's remuneration. It was merely a reimbursement for an expense incurred by virtue of employment and only a partial reimbursement.

The only decision that may appear to diminish the effect of Splane is Phillips. As mentioned, this apparent diminishing results from certain obiter statements of Robertson J.A. The facts in Phillips are totally different from the facts of thepresent case. In Phillips there were no strings attached to the $10,000 payment. As Robertson J.A. stated, "the company put money into the employee's pocket." Payment of the interest amounts in the present case relate to the carrying costs of the new home. This is not a lump-sum payment. Further, the appellant, was obliged by the program to transfer his entire equity from the old home to the new home. Moreover, he had to personally qualify for the new mortgage loan with Confederation Life. Also, the interest payments do not compensate for the difference in the prices or values of the two homes.

Since I have found that no taxable benefit was conferred, it is not necessary to discuss what was the value of the benefit as that is what is taxed by paragraph 6(1)(a). However, interest payments were made and in some way assisted the appellant. Did they have value? How can one establish the value, if any, that the appellant has received? This presumably would necessitate a speculation as to what the Mississauga home will sell for at some time in the future, calculations of the time value of money, factoring in the increased carrying costs, such as taxes, insurance and interest, comparison of the features of the Calgary home to those of the Mississauga home and other considerations. None of this was done in this case and I do not think it acceptable to simply look at the valuation of a Toronto area home and to conclude that since Petro-Canada has assisted the appellant, by way of the mortgage interest payments, in acquiring a higher valued home, he has therefore somehow received a benefit from employment, the value of which is exactly equal to the amounts of these interest payments.

In conclusion, since the Splane decision is the closest on a fact comparison basis with these appeals, and since, in my opinion, it has clearly not been overruled by the decision on different facts in the Phillips case, I feel that the principles set forth in Splane are applicable and consequently the appeals are allowed with costs. It follows that the deductions of $2,006.34 and $1,845.75 allowed by the Minister pursuant to paragraph 110(1 )(j) of the Act related to the alleged employee benefits are not to be allowed.

For the above reasons, the assessments herein are referred back to the Minister of National Revenue for reconsideration and reassessment.

Appeal allowed.