Her Majesty the Queen v. William R. Phillips, [1993] 2 CTC 27, 93 DTC 5247

Jerome A.C.J. :—This is an appeal by the Crown from a decision of the Tax Court of Canada, dated January 25, 1990 [Phillips v. M.N.R., [1990] 1 C.T.C. 2372, 90 D.T.C. 1274], wherein it was held that moneys received by the defendant from his employer, in connection with his relocation from Moncton to Winnipeg, was not to be included in the computation of his income for the 1987 taxation year.

The facts are straightforward and not in dispute. The defendant, William Phillips, resided in Moncton and was employed by the Canadian National Railway Company (CNR) as a carman, responsible for the repairs and maintenance of railway cars. He served a four-year apprenticeship program in order to qualify for the position and was a member of the Moncton local of the Canadian division of the Brotherhood of Railway Carmen of the United States and Canada.

During the spring of 1986, the CNR announced its intention to close the Moncton shops, one of the three main facilities then in existence for the repair and maintenance of freight cars. The other two facilities were located in Montreal and Winnipeg. The closure of the Moncton shops was to affect 1,200 employees, approximately 950 of whom were members of seven different unions, including the Carmen Union, and approximately 250 of whom were management or non-union personnel. The announcement was considered as a crisis by the community and was followed by a number of emotional protests and demonstrations.

It also led to the establishment of a "Save our shops Committee”, through which the seven unions attempted to negotiate an agreement with the CNR. Since the parties were unable to do so, the Minister of Labour appointed a special mediator. An agreement was achieved (the"special agreement") which, subject to ratification by individual unions, set out the terms and conditions which would apply to union members adversely affected. The special agreement was eventually ratified by only four of the seven unions, one of which was the defendant's Carmen Union.

The agreement provided, among other things, that where work normally performed in Moncton by the Carmen Union was transferred to Winnipeg or Montreal, members of that union would be given, in order of seniority, the opportunity of transferring to Winnipeg or Montreal to perform that work. The special agreement also provided for a relocation payment in the amount of $10,000 to be paid to a member of the Carmen Union who fulfilled the following conditions:

(a) owned a house in Moncton;

(b) transferred from Moncton to Winnipeg;

(c) sold his house in Moncton;

(d) purchased a house in Winnipeg; and

(e) reported for work in Winnipeg.

Except for these conditions, no restrictions were placed on the use of the $10,000 payment received by employees from the CNR.

There were two important factors underlying CNR's agreement to pay the $10,000 relocation allowance. Assisting in relocating from Moncton to Win- nipeg facilitated the closure of the Moncton shops and reduced CNR's overall operating costs. The payment was also intended to partially offset higher housing costs in Winnipeg. All parties are in agreement, as stated in paragraph 18 of the Partial Agreed Statement of Facts, that the average cost of a detached bungalow in Winnipeg in 1987 was at least $23,000 higher than the cost of a detached bungalow in Moncton.

Sixty carmen were required to carry out the increased workload in Winnipeg resulting from the Moncton closure. The defendant could apply for continued employment with CNR in Moncton at another facility known as the Gordon Yard, or transfer to Winnipeg in accordance with the terms of the special agreement. For a number of reasons, Mr. Phillips chose to transfer to Winnipeg. There was no guarantee that his application to the Gordon Yard would be accepted, and if it were, he would not be performing the same work as he was currently engaged in. Furthermore, if he remained in Moncton he would have been required to work primarily shift work and his vacation time would have been in the spring or fall. Employment in Winnipeg, however, did not involve shift work and would have allowed the defendant to take his vacation in the summer, which coincided with his childrens’ summer vacation.

The most significant factor was long-term job security due to the profound decrease in rail traffic in Eastern Canada and the increasing shift of such work to Western Canada. Mr. Phillips, who was a number of years away from retirement and who had a young family to support, determined that his only option was to move to Winnipeg, as there would always be more work available there with CNR than there would ever be in Moncton. Indeed, events since his move to Winnipeg have shown that his concerns were legitimate and that his choice was the correct one.

In any event, the defendant fulfilled the conditions set out in the special agreement. He sold his house in Moncton in 1987 for $63,000 and in the same year purchased a house in Winnipeg for $91,000. As a result he was issued payment from his employer in the amount of $10,000.

By notice of reassessment dated July 4, 1988, the Minister of National Revenue included in the defendant's income for the 1987 taxation year the amount of $8,500. It is not clear why the Minister added only $8,500 and not the full $10,000. The defendant filed a notice of objection on August 17, 1988. By letter dated November 17, 1988, the Minister confirmed the reassessment. Mr. Phillips then appealed to the Tax Court of Canada which, by decision dated January 25, 1990, supra, allowed his appeal for the following reasons at page 2375 (D.T.C. 1276):

In this case, there was a real meeting of the minds between and among the CNR, the Brotherhood of Railway Carmen and the appellant concerning the purpose of the $10,000 amount described in article 14.4 of the special agreement. That amount was intended by all parties to reimburse the appellant, in part, for the additional housing cost he would incur when moving from Moncton to Winnipeg. It was not part of his remuneration under subsection 5(1); it was not a benefit or allowance under paragraphs 6(1)(a) or (b); and it was not an amount described in subsection 6(3). The $10,000 amount was not paid pursuant to the collective agreement between the CNR and the Brotherhood of Railway Carmen but it was paid pursuant to a special agreement between the CNR and four unions which applied only"to employees adversely affected by the closure of the Moncton Main Shop Complex”.

Appellant's arguments

The Crown now appeals from that decision on the grounds that the Tax Court Judge erred in failing to find that an employer who partially subsidizes an employee's housing costs on his personal residence, confers a taxable employment benefit on that employee. It is further submitted that the judge erred in finding that the relocation allowance received by the defendant was a reimbursement of expenses that was not subject to tax. The plaintiff maintains that, in light of the broad interpretation which has been conferred by the jurisprudence on the words “benefit in respect of employment" in 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"), an employee who receives a lump sum to offset higher housing prices at a new work location receives a taxable employment benefit. In the alternative, it is submitted that the amount is an allowance under paragraph 6(1)(b) of the Act.

Relevant statutory provisions

5(1) Income from office or employment.— 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.

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:

(a) value of benefits.— 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) personal or living expenses.— all amounts received by him in the year as an allowance for personal or living expenses or an allowance for any other purpose,

6(3) Payments by employer to employee.— 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, or in satisfaction of, an obligation arising out of an agreement made by the payer 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, for the purposes of section 5, to be remuneration for the payee's services rendered as an officer during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, 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 termination of the employment.

Analysis

I make the following findings of fact. The defendant was affected by circumstances which dramatically changed his life and over which he had no personal control. In that respect, he was one of a very large number of employees of the CNR who had to choose from a number of unpleasant alternatives. Remaining in the Moncton area was unacceptable since the shift of focus for the railroad and its maintenance work on rail freight cars was to Western Canada. The special agreement negotiated on behalf of perhaps not all, but a great number of employees, addressed difficulties faced by those moving, in particular to Winnipeg, and attempted to restore them financially to the position they had enjoyed previously in Moncton. The evidence also indicates that those who rented previously and took up rental accommodation in Winnipeg were to receive one amount, about $1,500, but certainly less than those owning their own home. Home owners like the defendant were to receive $10,000, but had to fulfill the condition not only of the transfer to Winnipeg for their work, but also the purchase of a home. The evidence also establishes that the house for house differential worked to the defendant's disadvantage in an amount of some $23,000.

For the plaintiff to succeed here, the amount paid to the defendant must be determined to be either a taxable benefit under paragraph 6(1)(a), or an allowance caught by paragraph 6(1)(b). It is convenient to deal first with the allowance under paragraph 6(1)(b).

The word “ allowance” was defined in Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235, at page 361 (D.T.C. 5244) as follows:

An allowance is quite a different thing from reimbursement. It is, as already mentioned, an arbitrary amount usually paid 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 this is why, I assume, "allowances" are taxed as though they were remuneration.

In The Queen v. Pascoe, [1975] C.T.C. 656, 75 D.T.C. 5427, the Federal Court of Appeal provided further clarification of the meaning of the word "allowance" in the Income Tax Act, stating at page 658 (D.T.C. 5428):

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.

[Emphasis added.]

The concept of an allowance, as defined above, is clearly not applicable to the payment received by the defendant in the present case. It was done in satisfaction of a contractual obligation on CNR arising from the special agreement designed to reimburse Mr. Phillips for the expense incurred by him in purchasing a house in Winnipeg where housing prices were notably higher than in Moncton. As such, the payment does not constitute an allowance for the purpose of paragraph 6(1)(b).

With respect to the taxable benefit submission, jurisprudence in this Court and in the Tax Court of Canada has confirmed that employees in the position of this defendant, facing this kind of transfer decision, are entitled to be financially restored to similar circumstances related to their previous residence without it being considered a taxable benefit. Clearly, the key word is "restored".

In Ransom v. M.N.R., supra, the taxpayer was required to transfer as a condition of his employment. He suffered a loss on the sale of his house and was reimbursed for the amount in accordance with his employer's general policy. When the Minister of National Revenue added the amount to the taxpayer's income, an appeal was launched to the Exchequer Court of Canada.

The Court allowed the taxpayer's appeal, holding that the amount did not constitute part of his income. At the time, the present subsection 5(1) was combined with paragraphs 6(1)(a) and (b) of the Act. Noël, J., referring to the old section 5 as a whole, stated at page 358 (D.T.C. 5242):

In order, however, to properly evaluate its intent it is, I believe, necessary to bear in mind firstly, that section 5 of the Act is concerned solely with the taxation of income identified by its relationship to a certain entity, namely, an office or employment and in order to be taxable as income from an office or employment, money received by an employee must not merely constitute income as distinct from capital, but it must arise from his office or employment. . .. Secondly, the question whether a payment arises from an office or employment depends on its causative relationship to an office or employment, in other words, whether the services in the employment are the effective cause of the payment.

In McNeil/ v. The Queen, [1986] 2 C.T.C. 352, 86 D.T.C. 6477 (F.C.T.D.), the taxpayer was employed by Transport Canada as an air traffic controller at Dorval Airport in Quebec. Disputes arose between the employer and some air traffic controllers and between the anglophone and francophone controllers when the use of French was introduced as a working language for air traffic at the airport. In order to defuse the situation, the employer offered the employees three options, one of which was to accept a transfer outside of Quebec. Those employees who chose to accept the offer 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. The taxpayer chose this option and was eventually transferred to Ottawa. The Minister included the allowance in the taxpayer's income. The taxpayer's appeal to the Tax Review Board was dismissed, and an appeal to this Court followed.

The Court held that the allowance did not constitute part of the taxpayer's income for the taxation year in question. Rouleau, J. made the following findings at pages 360-63 (D.T.C. 6483-85):

Paragraph 6(1)(a) states that there is to be included in an employee's income 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. . . .

My interpretation of paragraph 6(1)(a) leads me to the conclusion that a determination must be made as to whether the payment received by the taxpayer did in fact constitute a benefit and whether it was received “in respect of, in the course of, or by virtue of an office or employment".

As previously stated, I am satisfied that the payment made to the taxpayer in question did not arise in relation to his office or employment: substantially it 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.

Having so found, it is questionable whether I need make a finding as to whether the payment in question in fact constituted a benefit. Nevertheless, this appears to be an appropriate case to expound further upon the meaning of the phrase benefits of any kind whatever" as it is used in paragraph 6(1)(a) of the Act.

I think it is clear that the purpose of paragraph 6(1)(a) is to include in the taxable income of a taxpayer those economic benefits arising from his employment which render the taxpayer's salary of greater value to him.

[Emphasis added.]

Both Ransom and McNeil! were discussed and relied upon by this Court in Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (confirmed by Federal Court of Appeal, [1991] 2 C.T.C. 224, 91 D.T.C. 5549). The taxpayer, at his employer's request, moved from Ottawa to Edmonton in 1984. During his 1985 and 1986 taxation years, he received from his employer 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. The Minister included the amounts in the taxpayer's 1985 and 1986 income from employment.

The taxpayer's appeal to this Court was allowed on the basis that the payments were neither "benefits" nor "allowances" under paragraph 6(1)(a) or

(b) of the Act. After reviewing the jurisprudence on what constitutes a taxable benefit, Cullen, J. stated at pages 202-03 (D.T.C. 6445):

Based on the preceding comments, it is apparent that these mortgage interest differential payments did not constitute taxable benefits under paragraph 6(1)(a) of the Act. 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.

There is no evidence in the present case to support a finding that the payment in question meets the criteria of a benefit. The Crown's contention that Mr. Phillips did not have to move to Winnipeg, and having done so, did not have to purchase a house, has no merit. To maintain his current employment status with CNR, which included performing work as a carman and which was of a secure and long-term nature, Mr. Phillips was required to relocate from Moncton to Winnipeg. He incurred expenses in doing so, most significantly in terms of increased housing prices. As those expenses arose in consequence of his employment, his employer undertook to partially indemnify him against them. I cannot see that he has acquired any profit from the reimbursement of those expenses whatsoever. As in Splane, Mr. Phillips was merely restored, although only partially, to the financial state he was in before he moved.

I therefore concur with the disposition of this matter by the learned Tax Court Judge. This appeal is dismissed with costs.

Appeal dismissed.