Whalen v. R., [1999] 4 CTC 2109 (Informal Procedure)

O’Connor 7.C.J.:

These appeals were heard on common evidence at London, Ontario on May 13, 1999 pursuant to the Informal Procedure of this Court. Both Appellants gave evidence and presented argument.

The issue is whether the Appellants, who were and still are members of the Royal Canadian Mounted Police (“R.C.M.P.”), were obliged to include in their taxable income certain transfer allowances which they received on obligatory job-related relocations of their residences. Mr. Whalen was transferred in 1990 from London to Toronto and in 1992 back to London, and received transfer allowances of $3,947.75 in 1990 and $4,877.26 in 1992. Mr. Kenny was transferred in 1992 from Toronto to London and received a transfer allowance of $4,474.67 in that year.

The Appellants presented their appeals in a very professional and thorough manner. They were quite familiar with the relevant jurisprudence and the principles involved. Notwithstanding that many similar cases involving transfer allowances paid to R.C.M.P. members had been decided against the R.C.M.P. members, the Appellants contend that perhaps in some of those decisions the arguments presented by the members were not complete or sufficiently forceful.

The transfer allowance is provided for in Exhibit A-3, paragraph K.9 of which reads as follows:

K.9. Transfer Allowance

a. Entitlement

l. A member, including a reengaged ex-member, who qualifies under one of the following conditions is entitled to a transfer allowance when relocated under the provisions of the RCMP Relocation Directive, excluding local moves and retirement relocation;

l. three years’ service in the RCMP; or

2. upon transfer from the first or subs7equent place of duty following completion of initial training and, for a Cst. or native S/Cst., recruit field training.

2. Entitlement to the transfer allowance will be effective on the calendar day that the member departs for the new posting or,...

3. The amount is calculated as follows:

1. For a member who moves his/her dependents, an amount equal to one month’s salary (/12 of annual pay) at his/her substantive rate in effect the day before his/her departure....

2. For a member who moves without dependents, an amount equal to half of one month’s salary ('/24 of annual pay) at his/her substantive rate in effect the day before departure.

As the Appellants maintain that there is something to be gathered from the distinction between a transfer allowance and a plain clothes allowance it will be useful to quote from Exhibit A-4 which provides for the plain clothes allowance:

K.6. Plainclothes Allowance

a. General

1. Duties which require plainclothes are limited to those where operational effectiveness would be impeded by wearing a uniform or those where it is in the best interest of the RCMP that the member not be identified as a peace officer.

1. PCA will be paid on an annual basis when duties listed in App. 11-4-5 are performed 80 percent of scheduled hours. PCA will be paid on a per-day rate when duties are performed less than 80 percent of scheduled work shifts.

2. Effective 96-04-01 PCA rates are as follows:

1. Male member rates are $1,044 annual/$4.10 per diem.

2. Female member rates are $1,723 annual/$7.07 per diem.

9. Income tax will continue to be deducted at source for per diem PCA.

1. If a member can substantiate that he/she purchased special clothing to perform specific plainclothes duties on a per diem basis, the member may seek an exemption.

10. A member must report as taxable income any amount of annual PCA not spent in purchasing and maintaining special clothing during the taxation year. In the event of a Revenue Canada Taxation audit, the member must be prepared to provide proof of expenditures.

It is to be noted that income tax 1s, in most cases, deducted from the plainclothes allowance but not from the transfer allowances.

Both Appellants concede that the transfer allowances were used to make improvements, renovations and to meet other expenses resulting from or related to the transfer but that no such expenses qualify under the Income Tax Act (“Act”) as moving expenses. All actual qualifying moving expenses were paid for by the R.C.M.P.

The Appellants, however, make the following submissions. Mr. Kenny argues that the information obtained by Revenue Canada from the R.C.M.P. with respect to the names and details of members who were in receipt of transfer allowances was obtained improperly. It appears that for the years in question, namely 1990 and 1992, the R.C.M.P. was not filling out the T4 forms as required by law in that the transfer allowances were not shown as a separate item but rather were lumped in with the total salary paid. The R.C.M.P. then received a verbal request from Revenue Canada for the information, i.e. what were the amounts of the transfer allowances and to whom were they paid, and the R.C.M.P. complied with this request. Mr. Kenny argues that his rights under section 231 of the Income Tax Act (“Act”), as well as under section 8 of the Charter, were infringed by the R.C.M.P. providing this information without having obtained the judicial authorization provided for in section 231. In connection with this argument, Mr. Kenny submits that the R.C.M.P. is, in effect, a third party and that the actual employer was the Treasury Board and consequently, section 231 is applicable.

Both Appellants also contend that being mobile, i.e. being subject to being relocated at any time, was a condition of their employment with the R.C.M.P. and that this should be taken into consideration in determining whether the transfer allowances should be taxable or at least should be offset by actual expenses incurred as a result of their moves even though those expenses do not qualify as moving expenses.

Both Appellants also contend that the transfer allowances should be likened to the plainclothes allowance. The transfer allowances should not be included in income when in fact they are used to discharge actual expenses related to the move. The allowances did not put money in their pockets.

Analysis and Decision:

I have considered carefully the submissions of both Appellants. On the first point, if the R.C.M.P. had properly completed the T4 forms the information that Revenue Canada was seeking would have been readily available to Revenue Canada. Moreover, in filing their income tax returns, the Appellants specifically made mention of the transfer allowances. In other words, I do not find that the action of the R.C.M.P. in responding to the inquiry of Revenue Canada constitutes an infringement of the members’ rights whether under section 231 of the Act or section 8 of the Charter. As Teskey, J. of this Court stated in Dreilich v. R., [1999] 2 C.T.C. 2589 (T.C.C.) the R.C.M.P. as employer was at fault for not completing the T4 forms properly but there was no impropriety in what Revenue Canada did and what the R.C.M.P. did after the inquiry was made.

With respect to considering the transfer allowances in the same light as the plainclothes allowance (which to the extent of expenditures on clothes is not taxable) the simple answer is that these are two types of payments. The plainclothes allowance is a reimbursement, whereas the transfer allowance is not. In any event, I am bound by decisions of the Federal Court of Appeal and in Morris v. R. (1997), 97 D.T.C. 5531 (Fed. C.A.) that Court held that transfer allowances paid to a member of the R.C.M.P. in respect to relocations had to be included in the taxpayer’s income having in mind the various decisions of the courts on the point.

As to whether the employer was the Treasury Board or the R.C.M.P., I don’t believe that the distinction helps the Appellants. In any event the employer on the T-4 slips is shown as the R.C.M.P.

The Appellants referred to the decision of Lamarre Proulx. J of this Court in Côté v. Minister of National Revenue (1990), 91 D.T.C. 261 (T.C.C.) where in similar circumstances involving a non-R.C.M.P. employee who was transferred it was held that the amount there in question was not an allowance within the meaning of paragraph 6(1)(b) of the Act because the taxpayer in that case actually incurred expenses related to his move equal to the amounts received.

In my view that decision has been distinguished, and correctly so by Mogan, J. of this Court in McLay v. Minister of National Revenue (1992), 92 D.T.C. 2260 (T.C.C.). That decision, which dealt with an R.C.M.P. member provides an excellent analysis of the meaning of the word “allowance”. Mogan, J. stated:

I will consider first the plain clothes allowance because it is the easiest issue to decide.

In The Queen v. Huffman, 90 D.T.C. 6405, the taxpayer (a police officer) was paid $500 under the terms of a collective agreement to assist in defraying the costs of purchasing oversized clothing required to conceal his police equipment (revolver, handcuffs, intercom, etc.). The Minister of National Revenue added the $500 to the taxpayer’s income whose appeal to the Federal Court — Trial Division was allowed. When dismissing the Crown’s appeal, the Federal Court of Appeal (Heald, J.A.) stated at page 6408:

I therefore find, as a fact, that the plaintiff spent more than $500.00 in the year in question and was reimbursed for that expenditure the maximum allowance under the contract of employment, $500.00.

This reimbursement cannot be said to be an allowance as that term is used in paragraph 6(1 )(£>). In interpreting the use of the word “allowance” in another section of the Income Tax Act this Court said in the case of The Queen v. Pascoe, 75 D.T.C. 5427 at 5428:

An allowance 1s, 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 discretion 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.

Applying that test to these facts, it is obvious that the $500 here in issue or any part of it cannot be said to be an allowance.

In Ransom v. M.N.R., 67 D.T.C. 5235, Noel, J. stated at page 5244:

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 that is why, I assume, “allowances” are taxed as though they were remuneration.

It appears to me quite clear that reimbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord MacNaughton in Tenant v. Smith, (1892) A.C. 162, puts nothing in the pocket but merely saves the pocket) is neither remuneration as such or a benefit “of any kind whatsoever ’...

.. According to the Federal Court of Appeal in Pascoe, the three conditions for a payment to be an “allowance” are (i) the amount must be limited and predetermined; (ii) the amount must be paid to enable the recipient to discharge a certain kind of expense; and (iii) the amount must be at the complete disposition of the recipient who is not required to account for it.

In Gagnon v. The Queen, 86 D.T.C. 6179, the Supreme Court of Canada reviewed the decision of the Federal Court of Appeal in Pascoe and, with respect to the third condition, Beetz, J. delivering judgment for the Court stated at page 6183:

It is important to specify what is meant in requiring that, to be an allowance, an amount must be “at the complete disposition of the recipient”.

According to Pascoe, this condition means that the recipient must be able to apply this amount to certain types of expense, but at her discretion and without being required to account for it.

However, the condition could also mean that the recipient must be able to dispose of the amount completely, and that, provided she benefits from it, it is not relevant that she has to account for it and that she cannot apply it to certain types of expense at her complete discretion.

It seems to me, with respect, that the second interpretation is the correct one, in light of the earlier decisions which Pascoe appears to have misinterpreted.

What matters is not the way in which a taxpayer may dispose of, or be required to dispose of, the amounts he receives, but rather the fact of whether he can dispose of them or not.

The third condition for an “allowance” as described by the Federal Court of Appeal in Pascoe has now been qualified by the decision of the Supreme Court of Canada in Gagnon. Although the decisions in Pascoe and Gagnon involved amounts paid as alimony or maintenance following a marriage breakdown, I assume that the judicial comments on “allowance” would apply to any amount which may be characterized as an allowance under the Income Tax Act and, in particular, paragraph 6(1)(b).

In the cases of Phillips v. M.N.R., 90 D.T.C. 1274 and Lao v. M.N.R., 91 D.T.C. 331 [330], 1 considered the taxability of a lump sum amount paid by an employer to an employee who moved from one city to another at the employer’s request. In each case, the lump sum amount was directly related to the cost of purchasing or financing a new house in a city where real estate values were significantly higher than in the city from which the employee moved. In those cases, I held that the lump sum amount was not a taxable allowance but was similar to the Accommodation Differential in McNeil! because it was in the nature of a reimbursement. The circumstances in which the lump sum amounts were paid to the taxpayers in Phillips and Lao are quite different from the circumstances in which the Appellant herein received his amount of $4,166.58....

In Splane v. The Queen, 90 D.T.C. 6442, an employee was asked to move from Ottawa to Edmonton and, according to the policy described in the employer’s “Relocation Directive”, the employee received the amounts of $1,124, $856 and $546 in 1985, 1986 and 1987, respectively, as a “mortgage interest differential payment”. The mortgage on the house in Edmonton carried a higher rate of interest than the mortgage on the house in Ottawa. Cullen, J. allowed Splane’s appeal and held that the three amounts in question were a reimbursement of mortgage expenses and not a taxable benefit or allowance. In Coté v. M.N.R., 91 D.T.C. 261, an employee was required to move from Cap-Rouge to St-Bruno in the Province of Quebec and was paid $3,461 (representing four weeks’ salary) for expenses related to his move. Lamarre Proulx, J. relied on the decision in McNeil! (supra) to allow Coté’s appeal.

The circumstances in Coté are close to the circumstances in which the Appellant received the amount of $4,166.58 because Coté received four weeks’ salary and the Appellant received one-twelfth of his annual pay. Each amount would appear to satisfy the three conditions for an “allowance” as laid down by the Federal Court of Appeal in Pascoe and modified by the Supreme Court of Canada in Gagnon. Each amount was limited and predetermined being four weeks’ salary for Coté or one-twelfth of annual pay for McLay. Each amount was paid to enable the recipient to discharge unspecified expenses related to his move. And each amount was at the complete disposition of the recipient.

In the Coté decision, Lamarre Proulx, J. held that the amount $3,461 was not an allowance within the meaning of paragraph 6(1)(b) of the Act because Coté actually incurred expenses related to his move for the amounts received.

In my view, the essence of the second condition in Pascoe is that the predetermined amount is paid to enable the recipient to discharge certain expenses. That being the situation, the actual payment or incurring of those expenses should not by itself change a taxable allowance into a non-taxable reimbursement. If the quantum of the amount paid by an employer to an employee is dependent upon the quantum of a particular expense or cost (like the Accommodation Differential in MacNeill), then it is not a predetermined amount; the first condition is not satisfied; and the amount could easily be a reimbursement. But in this appeal, the amount of $4,166.58 was predetermined. It was not dependent upon or related to any particular expenses and so it was not a reimbursement. And it was paid to enable the Appellant to discharge certain unspecified moving expenses as contemplated by the second condition.

...I am inclined to regard this amount of $4,166.58 as an “allowance” because all three conditions are satisfied. The amount itself is predetermined as one month’s salary. The amount is paid only when a member of the R.C.M.P. is relocated and, I assume, it is intended to enable the recipient to discharge certain unspecified kinds of moving expense. And finally, the amount is at the complete disposition of the recipient who is not required to account for it.

Returning briefly to the decision of the Federal Court — Trial Division in McNeill, Rouleau, J. went out of his way to find that the Accommodation Differential was not part of McNeill’s terms of employment. In addition to the passage quoted above from 86 DTC 6477, he further stated at page 6483:

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.

In this appeal, by way of contrast, the “transfer allowance” was part of the Appellant’s terms of employment; it was available to any member of the R.C.M.P. who was relocated; and it was not related to any particular expense or capital cost. In my opinion, the amount of $4,166.58 must be included in the Appellant’s 1985 income as an “allowance” within the meaning of paragraph 6(1)(b) of the Act.

In my opinion the Reasons for Judgment of Mogan, J. and the decision of the Federal Court of Appeal in Morris apply to these appeals. Conse- quently, relying thereon I have no alternative but to dismiss these appeals and I therefore do so.

Appeals dismissed.