Erwin Greisinger v. Minister of National Revenue, [1986] 2 CTC 2441, 86 DTC 1802

Brulé, T.C.J.:—This is an appeal from a reassessment dated December 8, 1983, whereby the appellant was assessed for additional tax in the 1982 taxation year. The Minister added to the appellant's declared taxable income the amount of $60,000 which was a debt forgiveness of an interest-free loan by his employer. The issue in this appeal is to determine if the debt forgiveness constituted a benefit within the meaning of paragraph 6(1)(a) of the Income Tax Act.

Facts

The Appellant is a real estate consultant and the executive vice- president of Patrician Land Corporation Ltd. (“the Corporation”) which operates in Calgary, Edmonton, Toronto and Denver.

The appellant was initially working and residing in Calgary before he was asked in 1981 to join a Management Team for their offices in Edmonton. His home in Calgary was listed for a price of $288,500 and he decided to build a new home in Edmonton. The Corporation provided a relocation policy whch included moving expenses. From evidence given, it also appears that for senior executives, the Corporation agreed to some kind of interim financing until one home was sold, and also for indemnification if a loss on a sale occurred. The appellant and his family moved to Edmonton at the beginning of December 1981. The construction of his new home cost him $237,700 plus other expenditures indicated by Exhibit A-3 to be in the amount of $38,917 and an estimated $2,500 to $3,000 was spent for special lighting, wallpaper and painting not supported by any documentary evidence. To assist the appellant in the acquisition of the Edmonton home, the appellant's employer loaned the Appellant $140,000. Initially, he was asked by his employer to get a loan from the bank. The appellant experienced difficulties selling his house in Calgary; the market in this city totally collapsed at that time due to changes in oil policies. This was one of the reasons why he was asked to work in Edmonton.

At the end of January 1982, the appellant was in a rather unenviable situation having to maintain two residences at the same time. For this reason, he decided to also list his Edmonton residence for sale. He sold it for $209,100. His family moved back to Calgary while the appellant still worked in Edmonton. He would travel between the two cities twice a week, paying for his own expenses. As a result, the appellant experienced a shortfall on the sale of his Edmonton residence.

At this time, the executive committee of the Corporation was informed that the appellant had experienced problems selling his home in Calgary. The committee agreed that the appellant should be reimbursed for his losses in Edmonton. The arrangement was that the appellant would give back part of his loan ($80,000 of $140,000) and the Corporation would forgive the balance of $60,000. Initially, the Corporation refused to assist the appellant. According to Denis P. Beneteau, the Corporation's finance vice- president, the $60,000 was entered in the books of the Corporation as a "bonus".

Appellant’s Submission

The appellant submits that the forgiveness by his employer ($60,000) of part of the loan constitutes a non-taxable reimbursement of losses suffered by the appellant. Consequently, this amount of money would not fall within section 6 of the Income Tax Act.

Minister's Position

The Minister argued that the amount of $60,000 had been correctly included in the income of the appellant for his 1982 taxation year as being a benefit that was received or enjoyed by him in respect of, in the course of, or by virtue of an office or employment pursuant to the provisions of section 3 and paragraph 6(1)(a) of the Income Tax Act. In other words, the amount did relate to services. In the alternative it was argued that, at best, only a part of the $60,000 was tax exempt.

Analysis

The purpose of section 6 of the Income Tax Act is to make certain that any benefits closely related to an office or employment are also included in the computation of the income of the employee or officer. Those benefits often appear to be of a non-cash nature (e.g. rent-free and low-rent housing, board and lodging, gifts, holiday trips and other prizes, transportation to the job, etc.) In the case at bar, the fact situation is a more particular one because it deals with an amount of money received by the taxpayer. At first sight, this would certainly have the appearance of income.

The forgiveness of $60,000 was centered in the Corporation's books as a "bonus" to the appellant. The appellant argued that the name of a transaction given by the parties does not decide its nature. I agree and the jurisprudence on this matter is clear. A substantial analysis was made by Mr. Justice Walsh of the Exchequer Court (as it was then called) in M.N.R. v. Ouellette and Brett, [1971] C.T.C. 121; 71 D.T.C. 5094 where at 136 (D.T.C. 5103) he said:

The jurisprudence is very clear that it is not what parties call a payment in a contract which determines the nature of it but the real character of the transaction. Simon’s Income Tax 1964-65, Vol. I, has this to say at page 59 in connection with the case of Internal Revenue Commissioners v. Duke of Westminster, (1936) A.C. 1, quoting from the judgment of Lord Russell of Killowen on the contrast between the form and the substance of an arrangement:

If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. . . . If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a doctrine.

He also quotes from the judgment of Viscount Simon in the case of Internal Revenue Commissioners v. Wesleyan and General Assurance Society, (1948) 1 All E.R. 555 at 557, as follows:

It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction which, on its true construction, is of a kind that would escape tax is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.

Again, at page 60, he states:

The true principle governing “substance” and “form” is that the taxing Acts are to be applied in accordance with the legal rights of the parties to a transaction. It is those rights which determine what is the “substance” of the transaction in the correct usage of that term. Reading “substance” in that way, it is still true to say that the substance of a transaction prevails over mere nomenclature.

There is no doubt in my mind that the qualification of “bonus”, in the present case, is merely an indication and can certainly not be by itself conclusive.

The main consideration here is to determine the intention of the parties in the said transaction. Did the Corporation intend to provide increased remuneration for the appellant or to reimburse him for losses suffered by reason of the move?

Evidence was given that while the Corporation did not have any written relocation policy it was agreed that with Senior Executives interim financing be provided while the employee owned two houses until one was sold and there would be a general indemnification if a loss on a sale occurred.

The appellant relied heavily on the case of Cyril John Ransom v. M.N.R., [1967] C.T.C. 346; 67 D.T.C. 5235. This decision relates to a sum paid by the employer in reimbursement of the loss the employee had suffered as a result of his transfer to another city. Indeed, the Court concluded that this was money disbursed by reason of, but not in the course of, employment which means that the reimbursement did not relate to remuneration for services. Among the reasons given by Justice Noël of the Exchequer Court, there is one reason that seems to provide a fairly interesting guideline to a company's policy on reimbursement. When a company decides to institute specific policies regarding losses suffered by its employees when they are transferred from one city to another, this is a pertinent criteria that the amount of money is not remuneration for services. If a company acts as such, it means that all the employees (or a certain category of employee) will be reimbursed if such an event occurs. It appears clear in those situations that the intention of the company was not to give an increased remuneration. The evidence here supports this interpretation.

In the Ransom case (supra), Mr. Justice Noël said at 358-59 (D.T.C. 5242) :

Indeed, here, as in Hochstrasser v. Mayes, the real basis for the decision that the payment received should not form part of his income, is that the legal source of the payment, and therefore the effective cause, was the source designated by the bona fide procedure and agreement entered into by the parties and not the services rendered.

This explains the subtle distinction between a payment made “by reason of employment" and “in the course of employment". Further at 360-61 (D.T.C. 5243-44) he set out:

Another class of payment by an employer to an employee is also so well established as to be beyond debate. Where an employment contract contemplates an employee being away from his home base from time to time, the employee must eat and sleep while away from home. The expense involved in providing himself with food and shelter while away from home are personal expenses, but they are personal expenses that arise because the employee is required to perform the duties of his employment away from his home base temporarily. Such a payment is money disbursed “by reason of" but not “in the course of" his employment. Nobody questions that reimbursement of such an expense is something quite different from remuneration for the services performed by the employee. Such personal expenses are incurred “by reason of” the employment. Until the employee has been reimbursed for such expenses, he is out of pocket “by reason of” the employment. His remuneration can only be what he receives over and above such reimbursement.

In a case such as here, 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.

Concerning paragraph 6(1)(a), one must apply reasoning by implication that when a benefit is not received in respect of, in the course of or by virtue of an office or employment it is not taxable. In my view, exceptions which do not fall within paragraph 6(1)(a) are implied and are not expressly written as opposed to those in paragraph 6(1)(b) where the legislator provided specific provisions (subparagraphs 6(1)(b)(i) to (ix)). In any event, the purpose behind the exceptions in paragraph 6(1)(a) and paragraph 6(1 )(b) is of the same nature.

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 is in 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. In cases where there is no specific policy by a company, the nature of a transaction of reimbursement may be more difficult to qualify. It may very well be a fictitious payment similar to remuneration.

In the present case, the appellant did receive a reimbursement for losses which occurred by reason of his employment. It appears from the evidence, although counsel for the appellant did not stress this point, that there was a plan for senior executives. This policy provided general indemnification if a loss would occur on the sale of a house because of a transfer to another city. This is a clear indication of the intention of the Corporation to give compensation for losses suffered.

However, I believe that the amount of $60,000 does not represent accurately the losses suffered. Evidence showed without doubt that as a consequence of the sale of his Edmonton residence, the appellant suffered a shortfall. The cost of the Edmonton house was $237,000. In addition, as mentioned above, the Appellant made certain expenditures as follows:

The problem in determining which of these expenditures should form part of the adjusted cost base of the property presents some difficulty. No argument or evidence was forthcoming as to the nature of these expenditures. I have no trouble in allowing the shower enclosure, vanity tops, kitchen countertop, compactor, closet doors, fencing and sod as part of the permanent residence and allow these items in the amount of $7,167 to be added to the adjusted cost base of the property. There is no question that the insurance should be disallowed. The other three items present a problem. The drapes, blinds and rods were installed at a cost of $5,838. In the contract for the sale of the property it is clear (from Exhibit A-6) that the drapes are not included, and without a breakdown for the cost of the rods, which are included, and which in any event would be a minor part of the total I do not allow this expenditure as an adjustment to the cost of the property. The appliances item of $2,184 is also confusing as there is no indication which appliances this refers to. In the contract the washer, the dryer and the fridge are not a part of the sale. Therefore, I cannot include this amount.

The greatest difficulty rests with the item for floor coverings of $13,025. This may be for wall-to-wall broadloom or for wood flooring in which cases it would be a part of the house. On the other hand there may have been a necessity in moving to a new house for the appellant to purchase area rugs. It might be part of one and part of the other. In any event no provision is made in the contract and no explanation was given to the Court.

Therefore in the absence of a definition I do not feel obliged to conjecture as to the nature of these expenditures. Furthermore, the appellant did not demonstrate that his other expenditures of $2,500 to $3,000 were something other than maintenance.

In addition to the above, the commission paid on the sale is allowed to the appellant. The total included in the appellant’s investment then amounts to $237,700 purchase price, plus allowances of $7,167 and sales commission of $10,273 for a total of $255,140. From this may be deducted the sale price of $209,100 for a shortfall of $45,571. For this reason, only the amount of $46,040 may be considered non-taxable as a reimbursement for losses. The balance of the $60,000 or $13,960 must be considered as a benefit under paragraph 6(1)(a) of the Income Tax Act. Indeed, such part of the forgiveness is closely related to the employment; to use the words of Judge Christie of the Tax Court of Canada, in McArdle v. M.N.R., [1984] C.T.C. 2277, 84 D.T.C. 1251, where an employer forgave a loan given to his employee, at 2278 (D.T.C. 1252):

I am satisfied that the forgiveness of the balance of the loan was an integral part of the arrangements under which the appellant's employment with Integrated was brought to an end by mutual agreement. This means there was a direct nexus between the course of action adopted by Integrated in respect of the loan and the appellant's employment. The thing which motivated the forgiveness of the loan was the existence of the contract of employment. This brings the $14,774.72 within those provisions of paragraph 6(1)(a) of the Income Tax Act ("the Act”) which require that there shall be included in computing the income of a taxpayer for a taxation year as income from employment the value of a benefit of any kind whatever received by him in the year in respect of, in the course of, or by virtue of that employment. In delivering the judgment of the Supreme Court of Canada in Nowegijick v. The Queen, [1983] C.T.C. 20; 83 D.T.C. 5041, Mr. Justice Dickson said at 5045:

The phrase “in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

[Emphasis added.]

Consequently, I find it reasonable to divide the forgiveness of the debt by the appellant's employer of the $60,000 housing loan. Similar reasonings were decided in Philp et al. v. M.N.R., [1970] C.T.C. 330; 70 D.T.C. 6237 where the Minister considered that the appellants received a taxable benefit in attending, with their wives, at the expense of the company, a six-day, all expenses paid trip to Nassau. Mr. Justice Thurlow concluded that the trip in question was of a combined holiday and business nature and that the value of the “holiday trip", which was in other words the said benefit, was fixed at 50 per cent.

I hereby allow the appeal in part and the matter is referred back to the Minister for reconsideration and reassessment in accordance with the foregoing reasons on the basis that the sum of $46,040 be allowed as a non- taxable receipt by the appellant and that the sum of $13,960 be included in his 1982 taxation year.

As the appellant is substantially successful in his appeal, he is allowed his costs on a party and party basis.

Appeal allowed in part.