Vincent Lao v. Minister of National Revenue, [1991] 1 CTC 2718, 91 DTC 330

Mogan, T.C.J.:—The issue in this appeal is whether an amount of $22,500 received by the appellant soon after he commenced working for a corporation known as Equipment Planning Associates is to be included in computing his income for 1985 as income from employment.

In 1984 and prior years, the appellant resided in Edmonton where he was employed by an organization which he identified as the IBI Group. He was a management consultant specializing in the area of large public hospitals. In the fall of 1984, he was approached by Equipment Planning Associates (which I shall refer to as " EPA") to see if he would be interested in changing employment and going to work for them in the same field as a management consultant specializing in developing their operations in western Canada. He was interested and, in the primary discussions, it was contemplated that he would stay in Edmonton and continue to reside there after transferring his employment to EPA.

Upon further consideration, EPA concluded that it would be practical only if the appellant moved to Toronto in connection with the commencement of his employment by EPA. Further discussions took place which culminated in a letter dated February 25, 1985, (Exhibit A-1) which really was the basis of the employment contract between the appellant and EPA. It established that his work was to commence on March 25, 1985, which was of course one month after the letter; and so the contract of employment was established before the employment began.

There were a number of items discussed in the letter but the basic term of employment was a salary of $55,000 a year with an initial marketing bonus. He was to receive ten shares of non-voting class C EPA stock. There was a brief description of the benefit program and training period; and then the following clause providing for his relocation to Toronto:

You will relocate to Toronto as soon as possible after your children complete the school year in June. You will receive an allowance of $22,500 to compensate for the higher housing prices in Toronto as compared to Edmonton. However, any other costs related to your relocation from Edmonton to Toronto will be borne entirely by you. Office space and services will be provided for you at the Agnew Peckham office in Toronto.

The appellant testified and stated that after he received the second proposal indicating that he would be required to move to Toronto, he made a study of housing prices in Edmonton and Toronto in the spring of 1985. He determined that his house in Edmonton which was in an attractive suburban development in the southwest corner of the City known as Westridge would cost an additional $37,500 to duplicate in a comparable residential community proportionately close to Toronto. In other words, a house in suburban Toronto approximately the same as his Edmonton house would cost $37,500 more in the spring of 1985 than the value of his Edmonton house at that time.

The fact is that he sold his house in Edmonton in the spring of 1985 for $110,000 and bought a house in Unionville (just north of Toronto) for a price of $240,000. The houses were not comparable, however, because his house in Edmonton had only 2,000 square feet whereas the house in Unionville had 3,000 square feet. Therefore, he bought a substantially larger house and paid more than twice as much as the proceeds that he received from the sale of his Edmonton house. In any event, there was no evidence to contradict his personal appraisal that the additional cost of duplicating his Edmonton house in Toronto would be at least $37,500.

On those facts, the respondent attempts to apply three provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Firstly, the Minister seeks to make the amount of $22,500 taxable under the provisions of paragraph 6(1)(b) as an amount received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose. Secondly, the Minister attempts to make the amount taxable as "deemed remuneration” under the provisions of subsection 6(3). And thirdly, the Minister attempts to make the amount taxable under paragraph 6(1)(a) as a taxable benefit received or enjoyed by him in the year in respect of, in the course of, or by virtue of his office or employment.

The appeal was argued by both sides on the possible application of those provisions. There was also extensive reference to certain leading decisions in this area of the law, notably the decisions of Ransom v. M.N.R., [1967] C.T.C. 346; 67 D.T.C. 5235; McNeill v. The Queen, [1986] 2 C.T.C. 352; 86 D.T.C. 6477; Gagnon v. M.N.R., [1983] C.T.C. 2086; 83 D.T.C. 77.

The appellant stated that if he had purchased a house in Toronto for an amount less than the total of $110,000 plus $22,500, he would not have received the $22,500. Because he purchased a house the cost of which was in excess of $132,500, he received the amount promised in his employment contract of February 25, 1985. I have concluded that the amount of $22,500 should not be regarded as taxable because, on the evidence, the primary characteristic of that amount is reimbursement. Although the appeal will be allowed I must consider the three provisions of the Act relied on by the respondent.

The question under paragraph 6(1)(b) is whether the $22,500 is an allowance for personal or living expenses. Counsel for the Minister argued strongly that the amount in issue was not a reimbursement because it was an arbitrary negotiated amount and it did not relate to the actual cost of replacing his house in Toronto. There is no question that it was a negotiated amount and arbitrary because it falls far short of what the appellant had, in an amateurish way, determined to be the discrepancy in prices. It was apparently a saw-off as to what the prospective employer would offer and what the appellant was asking to induce him to accept employment and move to Toronto.

In my view, the fact that it is not reimbursement dollar-for-dollar of a cost actually proved by purchasing in Toronto at a price higher than the sale price in Edmonton does not deprive it of the character of being reimbursement. It can be a partial reimbursement and I am satisfied that that is what it was.

Applying the decision in Ransom, supra, the appellant was really no richer for having received the $22,5000 and having moved to Toronto. Indeed, he had incurred additional costs of financing a more expensive house. He was no richer in pocket.

The relevant words of subsection 6(3) are as follows:

6.(3) An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the player with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,

shall be deemed, . . ., to be remuneration for the payee's services rendered as an offer or during the period of employment, unless it is established that, . .. it cannot reasonably be regarded as having been received

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

At first blush, the amount of $22,500 falls within paragraph 6(3)(a) and (b) because it was received by the appellant while he was an employee of the payer and "in satisfaction of an obligation arising out of an agreement made. . . immediately prior to. . . a period” when the appellant was in the employment of the payer. On the other hand, such amount will not be deemed to be remuneration if it cannot reasonably be regarded as having been received for any of the purposes described in paragraph 6(3)(c), (d) or (e). In my view, paragraphs 6(1)(d) an (e) have no application because the amount of $22,500 was not received as any kind of remuneration for services or consideration for a covenant. The amount of $22,500 was clearly linked with housing costs and, in the letter itself, was severed from the remuneration clause by several paragraphs. Looking at paragraph 6(3)(c), I find that the amount in question was not in any way "consideration for accepting the office or entering into the contract of employment". In other words, it was not a signing bonus. In the precise words of the letter, the amount was consideration only for "the higher housing prices in Toronto as compared to Edmonton”. And in this regard, I accept the appellant's evidence that if the cost of his house in Toronto had not exceeded the selling price of his Edmonton house by $22,500 or more, he would not have received the full amount of the $22,500.

It could be said that moving from Edmonton to Toronto was a necessary requirement for accepting the office but, in my view, partial reimbursement for higher housing costs in Toronto is not the same as" consideration for accepting the office or entering into the contract”. On the evidence, if the cost of housing in Toronto had not exceeded the selling price of his house in Edmonton, the appellant would not have received all or any part of the $22,500.

Lastly, turning to paragraph 6(1)(a), I am satisfied that the amount of $22,500 was not a benefit received or enjoyed by the appellant in the year in respect of, in the course of, or by virtue of his office or employment. Such amount was intended by the prospective employer and by the appellant to be only a partial reimbursement of his additional housing cost in Toronto. There was no benefit enjoyed by the appellant because he was required to sell his Edmonton house (in this case, at $110,000) and buy a similar but larger house in Toronto for an amount substantially in excess of $132,500.

The appeal is allowed with costs.

Appeal allowed.