Werner J. Krampl v. Her Majesty the Queen (Informal Procedure), [1995] 2 CTC 2624

Rip J.T .C.C.:-The issue in this appeal (informal procedure) from an assessment for 1992 is whether Werner J. Krampl, the appellant, received a benefit of $25,000 pursuant to paragraph 6(1 )(a) and subsection 6(15) of the Income Tax Act (’’Act") or whether he received the $25,000 as a tax- free benefit to restore him to his previous financial state within the legal parameters established in Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.); [1992] 2 C.T.C. 224, 92 D.T.C. 6021 (F.C.A.); The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, and Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235. See also Phillips V. The Queen, [1994] 1 C.T.C. 383, 94 D.T.C. 6177 (F.C.A.).

Prior to 1986 Krampl was employed by BC Gas Inc. ("BC Gas") in Vancouver and resided in Richmond, B.C., a suburb of Vancouver. In 1986 BC Gas requested the appellant to move to Penticton, B.C. and assume the position of District Manager for the South Okanagan. The appellant sold his home in Richmond for approximately $144,000 and he purchased a new home for his family in Penticton for $106,000; he added improvements of approximately $7,000 to his new home.

In 1989 Krampl was promoted to a position which required him and his family to move back to the Vancouver area. He testified that in looking for a new home he discovered that the value of properties similar to the residence he previously owned in Richmond had increased to between $225,000 and $250,000, that is, an increase between $80,000 and $105,000 over three years. [1]

At the same time, he said, the Penticton home did not increase in value during this period. Krampl sold the Penticton property in April 1989 for $117,000.

Krampl testified he could not afford to purchase a home for $224,000 in 1989 and therefore purchased a home (smaller than the one he owned in Richmond) for $195,000 [2] in Coquitlam, B.C., a locality further from Vancouver than Richmond. BC Gas loaned him $50,000 to assist him in purchasing this home. The borrowed amount was secured by a promissory note executed by Krampl and his wife in favour of BC Gas. The sum of $50,000 was to be paid in instalments of:

Two hundred and fifty dollars commencing June 1, 1989 and on the first day of each and every month and each and every year thereafter to and including May 1, 1991;

$300 commencing June 1, 1991 and on the first day of each and every month and each and every year thereafter to and including May 1, 1994;

$350 commencing June 1, 1994 and on the first day of each and every month and each and every year thereafter to and including May 1, 1999; and

$12,200 on June 1, 1999.

The note provided that in the event Krampl ceased to be employed by BC Gas, "all remaining instalments shall immediately become due and payable".

Krampl testified that when he negotiated the loan with BC Gas he was in a "weak" negotiating position. He said he wanted his employer to restore him to a financial position where he would have been had he not left Vancouver in 1986 and had not sold his Richmond home.

In 1991 Krampl left the employ of BC Gas. He engaged a solicitor to negotiate a severance settlement with BC Gas. Krampl stated that at this time he felt he was in a strong bargaining position and so "pressed the issue for $25,000 outright". As a result of the negotiations, Krampl and BC Gas agreed that he would cease to be employed by the company effective February 14, 1991 and that BC Gas would engage his services as a consultant for a maximum of 100 days during the period April 16, 1991 to February 14, 1992. The agreement also provided:

10.2 The company agrees to maintain the housing loan to Krampl during the period of this agreement and conditions that existed immediately prior to the termination of the employment of Krampl.

10.4 After the termination of this agreement the company ... will foregive $25,000 of the housing loan referred to in paragraph 10.2, the balance of the housing loan at that time becoming due and payable.

10.5 If the company terminates the agreement in accordance with the provisions of this agreement, the company will...foregive the $25,000 housing loan as set forth in paragraph 10.4 and if Krampl terminates the agreement, the company ... will not be obligated to foregive $25,000 of the housing loan.

It is the forgiveness of the amount of $25,000 on the termination of the consulting agreement in 1992 that is in issue in this appeal. The Minister of National Revenue ("Minister") included the $25,000 in the appellant’s 1992 income as a benefit received by the appellant in respect of, in the course of, or by virtue of his employment with BC Gas: paragraph 6(1 )(a) and subsection 6(15). [3]

In the appellant’s view he suffered a "permanent capital value loss" as a result of selling his Richmond home, acquiring and selling his Penticton home and acquiring his Coquitlam home, all because his employer transferred him to Penticton and back to Vancouver. In 1991, appellant argued, he owned an asset, his residence, which had a value of $198,500. Meanwhile, the Richmond residence, which he had sold to move to Penticton at the request of his employer, had a value of approximately $250,000. He "lost" over $50,000 as a result of the move. [4] If the appellant had remained employed in Vancouver in 1986, his home (in Richmond) would have been worth not less than $250,000 in 1989 and this would have been reflected in his net worth.

The appellant submitted the amount of $25,000 forgiven by BC Gas partially restored him to the financial and economic state he would have had, had he not sold the Richmond residence. The $25,000, if not the full amount of the loan of $50,000, was intended to restore the capital value of an asset, the residence, on the appellant’s personal balance sheet.

Krampl stated that had he not lived in Richmond, but had simply been moved by his employer from Penticton to Vancouver, he would have no grounds for complaint. His net worth would not have suffered due to his employer causing him to have moved and sell his residence.

Krampl argued that "our current principal residence asset value has not increased by the $50,000 housing assistance, over that which it would have increased had we remained in the Richmond principal residence". In other words, he states in his notice of appeal, "had we remained in Richmond our balance sheet would have shown an asset value of between $225,000 to $250,000 - and this increase from the 1986 value of $145,000 would never have been taxed". All BC Gas tried to do, in the appellant’s view, was to restore a portion of the capital gain on the residence, that is, put the appellant where he would have been had the job related moves not taken place. If he had not moved to Penticton he "would have been ahead of the game". Krampl concluded Revenue Canada is attempting to tax a capital gain On a principal residence, and this is not permitted under the Act.

Counsel for the Minister submitted the appellant did not incur a loss; he simply missed an opportunity. The purpose of the loan was to permit the appellant to purchase a home, nothing more. The forgiveness of the loan was part of the severance package on termination of the appellant’s employment with BC Gas.

The meaning of the word "benefit" in paragraph 6(1 )(a) was considered by the Supreme Court of Canada in Savage, supra. In Savage, the taxpayer received a cash award from her employer on successfully completing three life insurance courses. The Minister added the amount of the award to her income. The taxpayer was successful in her appeal to the Tax Review Board ([1979] C.T.C. 2301, 79 D.T.C. 338). The Crown’s appeal from the Tax Review Board decision was allowed by the Federal Court-Trial Division ([1980] C.T.C. 103, 80 D.T.C. 6066). The Federal Court of Appeal ([1981] C.T.C. 332, 81 D.T.C. 5258) then ruled in favour of the taxpayer and the Crown appealed to the Supreme Court of Canada.

Dickson J., (as he then was) speaking for the majority of the Court held, at pages 435-42 (C.T.C. 396-99; D.T.C. 5412-14), that the amount in issue was a benefit in respect of employment and therefore subject to tax unless exempted by another provision of the Act. He agreed with the comments of Evans J.A. in The Queen v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329 (Ont. C.A.), at pages 419-20 (D.T.C. 6335-36), that "benefits" in paragraph 6(1 )(a) of the Act extend to any "material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g. loan or gift". Dickson J. also recalled the statement of the Supreme Court in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, at page 39 (C.T.C. 25; D.T.C 5045):

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 Canada v. Blanchard, [1995] 2 C.T.C. 262, 95 D.T.C. 5479 (F.C.A.).

The first case heard by a Canadian Court to consider the taxability of an indemnity paid to an employee against the loss sustained on the sale of his house when he or she is transferred from one locality to another was Ransom, supra, a decision of Noel J. as he then was, of the Exchequer Court.

Noel J. explained, at page 361 (D.T.C. 5243-44):

In a case...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 a move 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.

The Court allowed Ransom’s appeal on the basis that the reimbursement of the loss by his employer "puts nothing in the pocket, but merely saves the pocket” (per Lord MacNaughton in Tenant v. Smith, [1892] A.C. 150, 3 T.C. 158 (H.L.), cited at page 361 (D.T.C. 5244)). The reimbursement Ransom received from his employer to make up the loss, was not a benefit received in respect of, in the course of, or by virtue of his employment: paragraph 6(1 )(a) of the Act.

Richard McNeil] was employed by Transport Canada as an air traffic controller at Dorval, Quebec. Disputes arose between the employer and some air traffic controller and between French speaking and English speaking controllers with respect to the use of French as the working language for air traffic at Dorval Airport. In order to defuse the situation, the employer offered the employees three options, one of which was to accept a transfer out of Quebec. Those employees who accepted this option were entitled to receive an "Air Traffic Control Linguistic Relocation Allowance” made up of an "Accommodation Differential" designed to lessen the impact of increased mortgage costs and a "Social Disruption Allowance", which was based on salary and years of service. McNeill chose to accept this option and moved to Ottawa. The Minister added the allowance to his income. McNeill appealed to the Federal Court (McNeill v. The Queen, [1986] 2 C.T.C. 352, 86 D.T.C. 6477).

Rouleau J. found that the Accommodation Differential component of the allowance was not a benefit received "in respect of, in the course of, or by virtue of" McNeill’s employment. It did not arise by virtue of the contract of employment. Rouleau J. found, at page 361 (D.T.C. 6483), the payment "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".

The Federal Court-Trial Division considered in Splane, supra, the receipt by a taxpayer from his employer of mortgage interest differential payments to reimburse him for increased mortgage interest payments which the taxpayer had to make following the purchase of a home in his new work location. The Federal Court of Appeal agreed with Cullen J. that the payment were not benefits under paragraph 6(1 )(a). A "benefit", said Cullen J. involves the receipt of something of economic significance in excess of a mere reimbursement of a loss. The payments made by the employer did not confer any economic benefit on the taxpayer; there was no contribution to the capital cost of the house. The subsidy was likened to a reimbursement of expenses incidental to the move. The employer "put nothing in the employee’s pocket".

The CNR transferred an employee from Moncton to Winnipeg and gave him $10,000 to assist him with the purchase of a new home in Winnipeg. The Federal Court of Appeal held the sum of $10,000 did not restore the taxpayer to his previous financial state. Rather it increased his net worth by $10,000. There was no actual loss as in Ransom. As Robertson J.A. stated: "CNR did more than save [the taxpayer’s] pocket — it put money in it" (page 393 (D.T.C. 6185)). CNR paid its employee to compensate him for increased housing costs on the purchase of replacement property and the amount of payment roar a benefit within the meaning of paragraph 6(1 )(a) of the Act: Phillips, supra. [5]

Five appeals having essentially the same facts were heard by this Court under the informal procedure: Hoefele v. Canada, [1995] 1 C.T.C. 2177, 94 D.T.C. 1878 (T.C.C.); Zaugg v. Canada, [1994] 2 C.T.C. 2425, 94 D.T.C. 1882 (T.C.C.); Mikkelsen v. The Queen, 95 D.T.C. 118; Krall v. Canada, [1995] 1 C.T.C. 2570, 95 D.T.C. 411 (T.C.C.), and Krull v. The Queen, [1995] 2 C.T.C. 2204, 95 D.T.C. 206 (T.C.C.). Four of the appeals were successful, Krull was not.

Petro-Canada requested the taxpayer, their employee, to move from Calgary to Toronto. Prices of comparable homes in the Toronto area exceeded those in Calgary. Petro-Canada offered to reimburse the taxpayers for the extra mortgage principal required to purchase their comparable Toronto area home. The reimbursement was calculated to take into account interest on the increase in the amount of the mortgage and the difference in interest on the original principal. The subsidy paid to the employee was to be gradually reduced over a ten-year period, that is, from 100 per cent in the first year to 50 per cent in the tenth and last year.

In Krall, supra, Mogan J.T.C.C. narrowed the issue to whether the portion of the interest subsidy contributed by Petro-Canada was a non- taxable receipt for certain expenses under the Splane umbrella or a taxable benefit under the Phillips umbrella and concluded, at page 2575 (D.T.C. 414), the interest subsidy fell under the Splane umbrella. The subsidy did not increase the employee’s net worth qua employee like the $10,000 payment in Phillips. My colleague also stated the interest subsidy was to be phased out over ten years, it was not a permanent subsidy to the employee. Finally, Mogan J.T.C.C. was of the view the subsidy was more like a reimbursement of expenses incidental to the move; the subsidy was directed at only a portion of the mortgage interest which is a revenue type of expense and was not directed to any part of the capital cost of the new home which is a capital outlay. The decisions in the appeals of Hoefele, Zaugg and Mikkelsen were based on Ransom and Splane in that it was found Petro-Canada put nothing in its employees’ pockets.

The facts of the appeal at bar are different from those in both Splane and Phillips. The move to a new work location which, according to the appellant, caused the loss he complains of, was the move from Richmond to Penticton. Had the appellant not moved from, and sold, his Richmond residence he would today — and in 1991 — own an asset which appreciated considerably. On the other hand, had he remained in Penticton, he would not be complaining.

The appellant’s complaint, as I see it, is that he has suffered a loss in potential net worth due to his employer transferring him from Vancouver to Penticton and back to Vancouver. Had he stayed put in Vancouver, he would have enjoyed the increase in the value of the Richmond home. As a result of the move to Penticton, he lost out. To put salt in the wound, when he returned to Vancouver he could not afford the house he owned only three years earlier. In the appellant’s view his employer ought to have reimbursed him to the extent his Richmond home increased in value (less his modest capital gain on the sale of the Penticton residence) and this is what he wanted to negotiate with BC Gas in 1989 but could not. Instead BC Gas loaned him $50,000 to assist in the purchase of the Coquitlam residence.

It is obvious that Krampl does not fall into the Splane series of cases. The $25,000 forgiven by BC Gas does not represent any reimbursement for expenses incidental to the move back to Vancouver. No such amount was reimbursed for an actual loss by the appellant.

A condition of the loan of $50,000 from BC Gas was that if Krampl left the employ of the company all remaining instalments due on the note securing the loan would become due and payable. This is a condition not dissimilar to that considered by Robinson J.A. in Phillips, supra, at page 389 (D.T.C. 6180):

...it is also apparent that if an employee receives a payment on the condition that he or she continues to work for the employer ... then that payment can hardly be said to have stemmed from considerations extraneous to the employment relationship.

The forgiveness of the amount $25,000 increased Krampl’s net worth in 1992 by the same amount of $25,000. Krampl did not incur a true economic loss as a result of the moves. His loss was a notional one. He was not out of pocket as a result of the move back to Vancouver. He did not sell his house in Penticton at a loss. If he had any loss it was one experienced by many people every year: a loss of opportunity. Had he remained in Richmond, as he argued, he would have been wealthier.

I must consider the context in which BC Gas agreed to forgive the amount of $25,000. Krampl, for whatever reason, was leaving BC Gas. He retained a lawyer to negotiate a severance settlement with his employer. Negotiations culminated in an agreement entitled "Consultant agreement". But the agreement was more than what its title suggested: it served to settle completely the relationship between Krampl, as employee, and BC Gas, as employer. As a result of the settlement with BC Gas on termination of his employment, Krampl was required to pay an amount less than the amount of debt outstanding at the time of the forgiveness. Krampl was left with more money in his pocket than he had before he and his employer struck the deal. The settlement included the forgiveness of the amount of $25,000 owed to BC Gas once the consulting agreement terminated. The forgiveness of the loan in these circumstances is a "benefit of any kind whatever ... in respect of, in the course of, or by virtue of an office or employment": Savage, supra, page 440 (C.T.C. 399; D.T.C. 5414).

Sarchuk J.T.C.C. was satisfied in Bolton v. Canada, [1993] 2 C.T.C. 3203, 95 D.T.C. 277 (T.C.C.), that the agreement reached with the taxpayer and his employer on termination of the employment

to extinguish the unpaid balance of the loan was part and parcel of the employer/employee relationship which constituted a benefit to [the taxpayer] within the meaning of paragraph 6(1 )(a)...

Similarly in McArdle v. M.N.R., [1984] C.T.C. 2277, 84 D.T.C. 1251, Christie C.J.T.C.C. (as he then was) was convinced that the forgiveness of the balance of a loan was an integral part of the arrangements under which the taxpayer’s employment was brought to an end by mutual agreement with the employer. The thing which motivated the forgiveness of the loan was the existence of a contract of employment. The amount forgiven, therefore, is a benefit received by the taxpayer in respect of his employment.

Krampl is in no different situation. As a result of the forgiveness of the amount of $25,000 by BC Gas he received a benefit "in respect of" his employment by BC Gas within the meaning of paragraph 6(1 )(a) and subsection 6(15) of the Act.

The appeal is dismissed.

Appeal dismissed.