McArthur T.C.J.:
1 This appeal, under the informal procedure, concerns the Appellant's 1992 taxation year. The primary issue is whether a mortgage interest subsidy payment is taxable under paragraph 6(1)(a) of the Income Tax Act (the “Act”). A secondary issue is whether a $3,101 cost of living reimbursement is taxable.
2 Dealing with the first issue, the relevant facts are as follows: In 1992, the Appellant was relocated by his employer, from Thunder Bay, Ontario to London, Ontario. He is a professional engineer who has been employed by the Ontario Ministry of Transportation for the past 16 years. In 1991, he was the successful applicant for a promotion to a position in London. In early 1992, he sold his Thunder Bay home for $157,000. He had purchased it for approximately $128,000. The appraised value upon sale was $165,000 yet he settled for less to complete the sale quickly.
3 He purchased a home in London for $294,000. To defray higher housing costs in London and to encourage employees to accept relocation, the Ministry had an Enhancement Relocation Plan. It operated, with respect to the Appellant as follows:
4 A national real estate company determined the market price differential between the Appellant's home in Thunder Bay and a similar one in London. The price differential arrived at was $58,000 which amount was not in dispute. To purchase a house in London similar or identical to his Thunder Bay home, the Appellant would have to pay $215,000. This amount deducted from his Thunder Bay sale price of $157,000 produces the $58,000 differential. The Appellant was eligible for an interest subsidy paid by his employer to the extent of part of the interest payable on the $58,000 increase in principal. The Ministry Directive from the office of the Director of Financial Planning and Administration stated:
Purchasing a Residence at the new location - Enhanced relocation plan
An employee purchasing a residence must be reimbursed for the financing costs on the housing-cost differential between the former and the new residence, or for the financing costs on whatever portion of the differential has been negotiated for reimbursement, to a maximum of $115,000.
If payments are made over five years, the financing costs for the initial year following the move are to be determined by multiplying the amount of the differential (or the negotiated portion of it) by the prime interest rate (that was in effect on the date of possession) plus one percent. Payments decrease by 20 percent per annum and therefore cease after the fifth year.
A second option is to receive a lump sum equivalent to the present value of above payments.
5 The Appellant opted for the lump sum equivalent to the monthly payments. The subsidy was calculated over a five year declining percentage basis. Thus, a 100% interest differential was allowed in the first year, declining 20% per year thereafter. The subsidy was directed solely towards defraying increased interest charges and it was not on account of principal. The principal of the $58,000 differential had to be paid by the Appellant.
6 The financing on his London home had to be arranged through normal or conventional methods. His employer played no role in assisting this process and in fact the lowest interest he could arrange was 9.75% per annum. The interest used in the subsidy calculation was 8.75% per annum. The lump sum subsidy in the amount of $13,817.95 was calculated as follows:
** Calculation for the Enhanced Relocation Plan Award **
NAME OF EMPLOYEE NINO D'ALESSANDRO
COST OF NEW RESIDENCE $215,000
SALE OF PREVIOUS RESIDENCE $157,000
________
HOUSING DIFFERENTIAL $ 58,000
________
PRIME INTEREST RATE = 7.75% APRIL 30 1992
________OPTION (A) FIVE YEAR INSTALLMENTS
_________________________________
YEAR 1 $5,075.00 (DIFFERENTIAL * (PRIME INTEREST RATE + 1))
YEAR 2 $4,060.00 (YEAR 1 * 0.8)
YEAR 3 $3,045.00 (YEAR 1 * 0.5)
YEAR 4 $2,030.00 (YEAR 1 * 0.4)
YEAR 5 $1,015.00 (YEAR 1 * 0.2)
_________
OPTION (A) TOTAL = $15,225.00
__________| NAME OF EMPLOYEE | | NINO D'ALESSANDRO |
| COST OF NEW RESIDENCE | $215,000 | |
| SALE OF PREVIOUS RESIDENCE | $157,000 | |
| HOUSING DIFFERENTIAL | $58,000 | | |
| PRIME INTEREST RATE = | 7.75% | APRIL 30 1992 |
| OPTION (A) FIVE YEAR INSTALLMENTS | | |
| YEAR 1 | | $5,075.00 | (DIFFERENTIAL * (PRIME INTEREST RATE + 1)) |
| YEAR 2 | | $4,060.00 | (YEAR 1 * 0.8) | |
| YEAR 3 | | $3,045.00 | YEAR 1 * 0.5) | |
| YEAR 4 | | $2,030.00 | (YEAR 1 * 0.4) | |
| YEAR 5 | | $1,015.00 | (YEAR 1 * 0.2) | |
| OPTION (A) | TOTAL = | $15,225.00 | | |
| COMPOUNDING OF INTEREST FACTOR AT PRIME * OPTION (A) PAYMENTS = PRESENT VALUE |
| FIRST YEAR | = | 1 | 1* YEAR 1 PAYMENT | = $5,075.00 |
| (PRIME RATE) 2ND POWER | = 1.0730015625 | = 0.9267827172 | * YEAR 2 PAYMENT | = 3,762.74 |
| (PRIME RATE) 4TH POWER | = 1.1642443719 | = 0.858926205 | * YEAR 3 PAYMENT | = 2,615.43 |
| (PRIME RATE) 6TH POWER | = 1.2562214964 | = 0.7960379622 | * YEAR 4 PAYMENT | = 1,615.96 |
| (PRIME RATE) 8TH POWER | = 1.3554649574 | = 0.7377542256 | * YEAR 5 PAYMENT | = $748.82 |
| LUMP SUM PAYMENT = | | $13,817.95 |
7 The Appellant noted that interest on $58,000 at 9.75% over a five year period exceeds $26,000 even when the principal was amortized over less than 20 years. He added that the subsidy did not go towards the principal of a more valuable asset but paid part of the interest only. His home in Thunder Bay was mortgage free. To purchase the equivalent but more expensive home in London, he had to borrow $58,000 with interest at 9.75% per annum. He, in fact, borrowed more than $58,000 to finance the purchase of the more expensive home.
8 Proof of his sale, purchase, mortgage financing, differential calculation and other expenses were documented and submitted to his employer. He purchased in London during the winter of 1992, being somewhat pressured to commence his new job and move his family. He was unable to find a replacement for his Thunder Bay home for $215,000 and purchased the more expensive home at $294,000.
Position of the Appellant
9 His employer had no intention of conferring a benefit to him. The plan was to assist in actual costs of relocation. The Appellant referred the Court to the case of Hoefele v. R. (1995), 95 D.T.C. 5602 (Fed. C.A.). He stated the following in his Notice of Appeal:
The money was not intended for the employee's personal gain and was directed at defraying increased interest charges. I did not gain any economic benefit or increase my net worth. My losses have only been partially restored since my actual total mortgage interest payments as can be seen on my bank printout (copy attached) far exceed the payments from my employer's mortgage interest plan. Payments from my Employer's plan only partially reimbursed me for mortgage interest differential charges. My bank personnel has confirmed this. I am still out of pocket a substantial amount in mortgage interest charges.
The mortgage interest payment printout from the bank indicates that on a mortgage amount of $58,000 (which was the market value housing differential in my case and used by my employer) my mortgage interest payments amounted to $26,224.56 for only 5 years. This is for only 5 years on a 25 year amortisation term and is substantially more than the $13,817.96 interest payment received from my employer. The total interest charges on a 25 year mortgage amount to $66,875.17. It should be noted that my employer's plan was based on prime interest + 1% which came to 8.75%. The best mortgage interest rate I could get at that time was 9.75%.
Position of the Respondent
10 Counsel referred to Phillips v. Minister of National Revenue (1994), 94 D.T.C. 6177 (Fed. C.A.)and stated that as in the Phillips case, the Appellant was assisted in obtaining a capital asset and his net worth was increased. He distinguished the Hoefele case by indicating that in Hoefele the mortgage interest subsidy was payable for 10 years and not in one lump sum and it was directed solely at defraying the increased interest charges and not the principal. He suggested that the law was in a state of flux. He concluded that the Appellant was enriched by the subsidy within the meaning of paragraph 6(1)(a) of the Act.
Legislation
11 Paragraph 6(1)(a) of the Act reads as follows:
6(1) 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) 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, except ... (There follow several exceptions of no concern to this appeal.)
Analysis
12 The question is whether the mortgage interest subsidy is taxable under paragraph 6(1)(a). While there is an abundance of relevant jurisprudence, I need only to refer to the Hoefele and Phillips decisions. In Hoefele the Federal Court of Appeal held that a home subsidy was not taxable. In Phillips the Federal Court of Appeal found a home subsidy taxable. Both decisions provide a thorough review of the relevant case law.
13 In Hoefele Linden J.A., set out the following facts at 5603:
The five taxpayers were each required in 1991 by their employer, Petro-Canada to relocate from Calgary to the Toronto area as part of a company-wide reorganisation. The relocation was mandatory, with affected employees given the option of moving or losing their jobs. The relocation was also purely geographical and involved no change in employee income.
To defray higher housing costs in the Toronto region and to encourage affected employees to accept relocation, Petro-Canada instituted a relocation incentive that worked ...(in manner very similar to that program of the Ministry in the present appeal)
He added at 5604 that:...the mortgage interest subsidy was payable for ten years on a declining percentage basis, 100% interest differential paid in the first year reducing gradually down to 50% in the tenth. It would cease upon termination of employment. The subsidy was directed solely at defraying increased interest charges and it could not be applied to principal.
Also important to note is that the financing taken on the homes was to be arranged through normal methods by the relocated employees. The employer played no role assisting in this process, except that the mortgages were available only from confederation Life, which billed Petro-Canada directly for the subsidy amount each year.
14 The facts in the present case differ from the Hoefele situation in that Mr. D'Alessandro's relocation was not mandatory, he received a salary increase and a lump sum subsidy as opposed to a monthly subsidy. Only the lump sum payment was raised by the Respondent's counsel. I find that these factual differences do not successfully distinguish Mr. D'Alessandro's appeal from Hoefele. The facts in both cases are very similar. The fact that the Appellant sought to improve his position and solidify his employment by applying for and accepting a promotion should in no way mitigate against him.
15 While he did receive a lump sum, as did the taxpayer in Phillips, the payment was a careful equalisation calculation of interest equalisation payments made over five years. His reimbursement plan was similar to the one found in the Hoefele case. In Hoefele, Linden J.A. concluded that the mortgage interest subsidy scheme did not increase the taxpayer's equity in his home. No economic gain occurred and his net worth was not increased. For paragraph 6(1)(a) to apply there must be an economic gain. He then quoted Sobier T.C.J. in his Hoefele reasons which reads in part:
The assistance received by the Appellant was not a colourable attempt to increase the Appellant's remuneration; it is merely a reimbursement for an expense incurred by virtue of employment.
Justice Stone stated further at 5607:I am in full agreement with this conclusion, for it is entirely consistent with the jurisprudence of the Supreme Court of Canada and of this Court. It is also mainly a finding of fact, something this Court cannot alter except in the rarest of circumstances.
This conclusion is, in my view, not inconsistent with the decision in Phillips. The facts in that case, a lump sum payment to employees that clearly benefited them economically by increasing their net worth, are not before us here. In Phillips, I concurred in the result on those facts. These facts are different. The employees here simply traded a house in Calgary for a similar one in Toronto. The employer defrayed some of the extra costs of doing so, without increasing any of the homeowners equity in the homes. Unlike the situation in Phillips, their net worth was not increased in these cases.
16 I adopt this reasoning as my own in the present case. The intention and effect of the subsidy program was to assist Mr. D'Alessandro in repaying certain out-of-pocket expenses. A mathematical formula was designed to meet that requirement. The calculations may not have the precision required by scientists splitting the atom but serve the practical purpose of attempting to defray the costs of a relocated employee without advancing his economic position.
17 The $58,000 disparity between the cost of the two homes is not in dispute. The Department of Finance of Ontario attempted to reimburse the Appellant for the expense incurred. A schedule was prepared for this purpose. This scheme or structure was not contested or contradicted by the Respondent. No mathematical evidence to the contrary was presented by the Respondent. I accept the calculations. I accept the evidence of the Appellant, based on the Finance Minister's calculations and those of the Bank that he was not enriched. Respondent's counsel presented no evidence. His argument was, primarily, that the Federal Court of Appeal held in Phillips that a $10,000 lump sum payment to the taxpayer was held to be a benefit and therefore taxable. Here we have the evidence of an actuarial schedule designed to compensate the Appellant at least in part for certain out-of-pocket expenses. He had to submit receipts and proof of costs including, sale of the Thunder Bay property - the purchase of London property, real estate Expert's differential calculation and mortgage and interest costs. Had the Appellant paid the $58,000 capital differential from savings, without mortgage interest costs, he would not have received the $13,817.95 assistance. I accept the evidence of the Appellant.
18 I now turn to the secondary issue. The Appellant's employer paid him an amount of $3,101.25 for miscellaneous costs. This amount was 50% of his monthly income. No receipts or accounting were required by his employer, nor were any details of expenditures presented in evidence.
19 The Court was referred to the decision of Mogan J. in McLay v. Minister of National Revenue (1992), 92 D.T.C. 2260 (T.C.C.), at 2264 where Judge Mogan stated:
According to the Federal Court of Appeal in Pascoe[FN1: <p><em>R. v. Pascoe</em>(1975), 75 D.T.C. 5427</p>] 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.
20 As did the taxpayer in McLay, Mr. d'Alessandro received a limited predetermined amount equal to one-half of his monthly salary. It was paid to enable him to discharge unspecified expenses related to his move. It was made available to him to be disposed of in his complete discretion.
21 At page 2266, Mogan J. continued:
In the absence of a precise summary of all amounts received by the Appellant from the R.C.M.P. as a direct consequence of his move from Vancouver to St. John's, 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.
22 Paragraph 6(1)(b) of the Act provides for the inclusion in income of all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except and a number of exceptions follow.
23 The present circumstances are similar to those in McLay. I find that the Appellant is required to include this allowance in his income since it meets the three criteria for an includable allowance as set out in R. v. Pascoe[(1975), 75 D.T.C. 5427 (Fed. C.A.)] and does not come within the exceptions contained in 6(1)(b).
24 Finally, at the conclusion of his submissions, the Appellant attempted to introduce evidence of new and further expenditures incurred in his moving to London which had not been included in his Notice of Appeal, nor previously raised by him to the Minister of National Revenue. During the trial I agreed with the Respondent's objection. I was not prepared to deal with a new claim that had not been included in the Appellant's Notice of Appeal.
25 In conclusion, the mortgage interest subsidy of $13,817.96 is not a taxable benefit under paragraph 6(1)(a) of the Act and the cost of living reimbursement in the amount of $3,101.25 is a taxable allowance under paragraph 6(1)(b) of the Act.
26 The appeal is allowed with respect to the mortgage interest subsidy, with costs, if any.
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