Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether rental payments incurred qualify as moving expenses under section 62 of the Act.
Position: It is a question of fact.
Reasons: See response.
August 14, 2014
Re: Moving expenses
We are writing in response to your letter of March 31, 2014, wherein you asked whether certain rental payments qualify as moving expenses under paragraph 62(3)(d) of the Income Tax Act (Act).
In the situation described, the taxpayer accepts a job transfer with the same employer and relocates to another location in Canada. Prior to the move, the taxpayer, his or her spouse, and child lived in an apartment that was leased by the taxpayer's spouse. Under the terms of the lease agreement, the lease cannot be cancelled prior to the end of its term. The taxpayer and his or her spouse made rental payments for a period during which neither he nor she nor any other person occupied the apartment.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Under subsection 62(1) of the Act, subject to certain conditions and limits, a taxpayer may deduct moving expenses incurred in respect of an "eligible relocation". The term "eligible relocation" is defined in subsection 248(1) of the Act and includes a relocation that occurs to enable the individual to carry on a business or to be employed at a new work location, where the new residence is located at least 40 kilometres closer to the new work location than the old residence. It is always a question of fact whether a move is an eligible relocation.
Moving expenses that are eligible for deduction for the purposes of subsection 62(1) of the Act are defined in subsection 62(3) of the Act. In particular, paragraph 62(3)(d) of the Act allows a taxpayer to deduct "the cost to the taxpayer of cancelling the lease by virtue of which the taxpayer was the lessee of the old residence."
Generally, where a taxpayer incurs lease cancellation costs in respect of an eligible relocation, he or she would only be able to deduct those costs if he or she was the lessee of the old residence. However, the Canada Revenue Agency (CRA) provides spouses and common-law partners with some flexibility in claiming moving expenses. The CRA allows the spouses or common-law partners to decide how the deduction will be claimed (e.g., 100% by one spouse, 50/50) provided the requirements of section 62 of the Act have otherwise been met. In other words, a taxpayer may deduct lease cancellation costs where his or her spouse was the lessee, provided the costs otherwise qualify.
The phrase "cancelling the lease" is not defined in the Act. Where the legislation does not define a phrase, we generally rely on case law and the ordinary meaning (e.g., dictionary definition). Based on case law and the dictionary meaning of the word "cancel", it is the CRA's view that the contract or lease must be terminated. Depending on the terms of the agreement, there may or may not be a cost for cancelling the lease. It is a question of fact whether a lease has been cancelled.
It is the CRA's view that a lease would generally be considered cancelled where the terms of the lease allowing for the cancellation are satisfied or the lease is assigned (i.e., another person takes over the lease with the permission of the landlord). A lease would generally not be considered cancelled where the taxpayer sublets to another person because the lease between the taxpayer and the landlord is not usually terminated.
The courts have taken the view that "costs of cancelling the lease" includes additional penalties or administrative fees charged by a landlord for cancelling the lease agreement. Generally, any amount incurred to cancel (i.e., terminate) a lease would be considered an eligible moving expense under paragraph 62(3)(d) of the Act. This may include rental payments (e.g., forfeiture of last month deposit). However, where the rental unit is occupied by the taxpayer or members of his or her household during the period for which the rent is paid, it is the CRA's view that the rental payments would not be considered "costs of cancelling a lease" for purposes of paragraph 62(3)(d) of the Act.
Based on the information provided, the rental payments are likely not eligible moving expenses under paragraph 62(3)(d) of the Act because they were not incurred to cancel the lease. Although your family did not occupy the apartment after the move, the lease was not terminated prior to the end of its term.
We trust these comments will be of assistance.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
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