Thomas Hodges v. Her Majesty the Queen, [1996] 3 CTC 2086 (Informal Procedure)

Taylor J.T.C.C.: — This is an appeal heard in Ottawa, Ontario, on March 21, 1996, against an assessment for the year 1989 under the Income Tax Act (the “Act”) in which the Respondent included in taxable income in accordance with the provisions of paragraph 6(1 )(b) of the Act, an amount of $25,000.00 received by the Appellant by virtue of abolition of his employment position. Correspondence and discussions ensued with Revenue Canada as a result of the Appellant filing his 1989 income tax return, but when the matter finally reached the Court, the position of Mr. Hodges regarding his Notice of Appeal was:

Relief sought

The appellant submits that the $25,000.00 was not an allowance for personal living expenses as put forward by the respondent, nor was it a benefit by virtue of his employment. As set out above, the $25,000.00 was provided to cover a loss incurred in the sale of a home.

Accordingly, the appellant requests that the appeal be allowed. In the alternative, the appellant requests that the interest related to this matter be waived as a result of the actions of Revenue Canada which contributed to the actions of the appellant in this matter.

The Respondents’s Reply to Notice of Appeal stated:

- during the 1989 taxation year, the Appellant was an employee of Canadian National Railway Company (the “Employer”) and the United Transportation Union (the “UTU”);

— during the 1989 taxation year, the Employer closed its Fort Erie, Ontario terminal where the Appellant worked;

— the Appellant received income from employment of $25,166.54 from the Employer and $69,309.97 from the UTU during the 1989 taxation year;

- the Appellant reported income from employment of $94,476.51 on his 1989 income tax return, being the total of the two amounts referred to in subparagraph 9(d) above;

— the amount of $25,166.54 referred to in subparagraph 9(d) above included a relocation allowance in the amount of $25,000.00 received by the Appellant from the Employer during the 1989 taxation year with respect to the closure by the Employer of the Fort Erie terminal;

- the said relocation allowance in the amount of $25,000.00 was determined by negotiations between the Employer and the UTU;

— the said relocation allowance was an allowance for personal or living expenses of the Appellant;

— in computing his taxable income, the Appellant deducted the said relocation allowance in the amount of $25,000.00 received by him from the Employer during the 1989 taxation year, and as a result, considered the said amount to be a non taxable allowance;

— the relocation allowance in the amount of $25,000.00 received by the Appellant from the Employer during the 1989 taxation year, was a predetermined amount which had not been calculated with respect to any actual costs or expenses which the Appellant might incur;

— the relocation allowance in the amount of $25,000.00 received by the Appellant from the Employer during the 1989 taxation year, was intended for the particular purpose of covering the costs of future losses from the relocation of the Appellant’s place of work as a result of the closure by the Employer of the Fort Erie terminal;

— the relocation allowance in the amount of $25,000.00 received by the Appellant from the Employer during the 1989 taxation year, was intended for the particular purpose of covering the costs of future losses from the relocation of the Appellant’s place of work as a result of the closure by the Employer of the Fort Erie terminal;

— the Appellant received the relocation allowance in the amount of $25,000.00 from the Employer and was not required to account for the manner in which the allowance was spent;

— the Appellant’s taxable income for the 1989 taxation year was understated by the amount of $25,000.00 which represents the amount paid by the Employer to the Appellant during the 1989 taxation year for a relocation allowance as a result of the closure by the Employer of the Fort Erie terminal; and

— the said relocation allowance of $25,000.00 is income from an office or employment.

The Respondent submitted:

— that in the 1989 taxation year, the Appellant received a relocation allowance from the Employer in the amount of $25,000.00, as an allowance for personal or living expenses of the Appellant, in the capacity of employee and as such the relocation allowance received by the Appellant has been properly included in his income from employment, as a taxable allowance, in accordance with paragraph 6(1 )(b) of the Act.

— In the alternative, that if it is determined that the amount of $25,000.00 is not an allowance for personal or living expenses within the meaning of paragraph 7(1 )(b) of the Act, that the said amount was received as a benefit by virtue of his employment within the meaning of paragraph 6(1 )(b) of the Acct.

Mr. Hodges has been one of the Chairpersons of the United Transportation Union involved and took a serious part in the negotiations for the agreement out of which arose the disputed amount. These negotiations had a basis in the following clause from the labour agreement, according to Mr. Hodges:

— reimbursement for loss sustained on the sale of a relocating employee’s private home which he occupied as a year-round residence, provided that the Company is given the right in priority to everyone else to purchase the home. Loss sustained is determined as the difference between the value determined in accordance with paragraph 79.5 of this Agreement plus any real estate agent and legal fees, and the amount established as the selling price in the deed of sale;

He gave a detailed testimony explaining the circumstances leading up to the railway closure and the events that occurred after that. In his view, the payment was for employees who would be adversely affected by the closure (my emphasis), and it was his observation that “with the closure of CN’s Fort Erie terminal housing sales plummeted 20.9% for the period December 1989 to December 1990, with a further 14.8% and 1.5% for the same period in the following two years. In the same period house prices dropped 15% for houses under $200,000.00 and 20% for houses above $200,000.00”. Further he contended that he had lost probably $35,000 on the sale of his house (presumably related to earlier values) when the house eventually sold some three years after the closure, during which time he relocated to a different job altogether. The terminals affected were Fort Erie, Niagara Falls, Sarnia, Hamilton and Toronto. Some portions of the “agreement” submitted to the Court read as follows:

It was agreed during these negotiations that the following is in full and final settlement of all issues raised in respect to Company’s notices dated 15 February, 1989. Accordingly the following conditions will apply:

1. The home station of Fort Erie, Ontario, will be closed and thereafter all freight and passenger trains will be operated through Fort Erie on a run through bases.

2. Each of the employees listed in the attached Appendix “A” will elect one of the following two options:

(a) Accept a lump sum payment of $25,000.00

OR [1]

Both parties made a reference to the jurisprudence touching on this subject, particulary the cases of Hoefele v. R. (sub nom. Hoefele v. Canada) (sub nom. Krull v. Canada (Attorney General)), [1996] 1 C.T.C. 131, (sub nom. Canada (Attorney General) v. Hoefele), 95 D.T.C. 5602 (F.C.A.) and Canada (Attorney General) v. MacDonald (sub nom. Canada v. MacDonald), [1994] 2 C.T.C. 48, 94 D.T.C. 6262 (F.C.A.). The attack on the assessment by Mr. Hodges was largely based on the assertion that the closure had a serious negative effect on the real estate market in Fort Erie, and the $25,000.00 served — if only in part - to compensate for that result. No substantive data to support this assertion were presented by Mr. Hodges detailed some anecdotal information which tended to show it might well have had some merit. There was no requirement that the $25,000.00 be used to relocate, to buy a new home, or upgrade the existing home, or any thing related to the home. Further, an employee who, for example, worked in Fort Erie but lived in Niagara Falls, and due to accepting a different position with the same employer in Niagara Falls (therefore not being required to relocate) did not receive the $25,000.00.

The Respondent took the view that since the Appellant had not been required to account for it and there was no relation to actual costs incurred - if any - it was an allowance - and such not a reimbursement (even though so characterized in some documentation). That contention of course refers to paragraph 6(1 )(b) of the Act and reference was also made to the “benefit” provisions of paragraph 6(1 )(a) of the Act.

Analysis

First dealing with MacDonald supra and paragraph 6(1 )(b) of the Act, I follow the comments there of the learned Justice at page 6264:

An allowance is an arbitrary amount in that the allowance is not normally calculated to cover a specific expense. The amount may still be arbitrary even though it is roughly tailored to meet the employer’s expectation of the magnitude of the expense or the proportion of the expense which the employer is prepared to bear. In other words, the amount of the allowance is predetermined without regard to the exact amount of a particular actual expense or cost, although the figure can be determined with reference to a projected or average expense or cost.

Two other references in the same judgment gave me some cause for reflection — but I do not see that they should overrule the fundamentals of the quotation above. In the quotation from the R. v. Pascoe, [1975] 1 C.T.C. 656, 75 D.T.C. 542 (F.C.A.) on the same page:

A payment in satisfaction of an obligation to indemnify —

might be argued to have some relation to the clause from the labour agreement quoted above:

— reimbursement for loss sustained on the sale of a relocating employee’s private home —

Also the comment from MacDonald (supra) on the same page, provided by E.C. Harris, the phrase - “on his employer’s behalf’, might be taken to moderate the primary definition I have noted above. In the end analysis, I am not persuaded that the amount in question here - $25,000.00

- can escape the framework for an allowance - and as far as paragraph 6(1 )(b) is concerned a taxable allowance.

The Appellant also made reference to paragraph 6(1 )(a) of the Act - and the Respondent rejected that position. The case of Hoefele (supra) would deserve review were it not for the above determination that the amount is an allowance. Nevertheless, I will briefly comment on that point and paragraph 6(1 )(a), since much of the Appellant’s argument took this perspective. If this were a case analogous to Hoefele (supra), my personal perception would be that reflected in the dissenting reasons provided by the learned Justice Robertson in Hoefele (supra), because of the comments I made in Krull v. R. (sub nom. Krull v. Canada), [1995] 2 C.T.C. 2204, 95 D.T.C. 206, reversed (sub nom. Krull v. Canada (Attorney General)) [1996] 1 C.T.C. 131, (sub nom. Canada (Attorney General) v. Hoefele) 95 D.T.C. 5602 (F.C.A.). But I would clearly be guided by the majority view in Hoefele (supra) expressed on page 139 (D.T.C. 5606) to determine if it were applicable:

No economic gain accrued to any of the taxpayers as a result of the subsidy. Their net worth was not increased.

One reservation would be a question whether upon acceptance of the $25,000.00 amount Mr. Hodges was still an employee of the railroad. A contrasting concern I had in Krull (supra) was that Mr. Krull had retained his employment, to some degree at least because of the subsidy arrangement at issue. I would also add that the phrase from the Agreement (supra) “in full and final settlement of all issues raised in respect to Company’s notices dated 15 February 1989” would deserve consideration. The notices to which the reference is made arise out of the labour agreement apparently. It was not made clear at the trial whether the $25,000.00 might be construed to have some value to issues other than the “relocation allowance”. Although I have decided above that the amount at issue was an “allowance”, it is at lease debatable that it was necessarily a relocation allowance as referenced in the labour agreement excerpt quoted earlier. That of course raise the eerie question of whether the amount might not have been more properly regarded in relation to the termination of employment for Mr. Hodges, but I need not deal with that thorny point here - since it was not raised by either party. I would also make reference to the detailed comparative account of various alternative measures provided by the learned Justice at page 5606 of that case (Hoefele). From that lengthy and informative paragraph, I would simply select one sentence as an example:

Thus if a company gives $500 to an employee as a lump-sum payment to offset some cost or expense, but does not require receipts, the money is taxable.

In the event of any question, this Appellant might have with regard to the “allowance” determination noted above, he would still face major difficulties to securely place himself within the framework of Hoefele (supra) in my view.

The appeal is dismissed.

Appeal dismissed.