6 August 1992 Income Tax Severed Letter 9218735 - Employee Benefit from Cost of Living Reimbu on Relocation

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.

921873
24(1) A. Humenuk
(613) 957-2134

Attention: 19(1)

August 6, 1992

Dear 19(1):

Re: Relocation Payments for Higher Cost of Living at New Location

We are replying to your letter of June 15, 1992, concerning the taxation of certain payments to employees to compensate them for the higher cost of living incurred due to a relocation requested by the employer.

You asked us to consider the situation where an employee who has been asked to relocate by his employer is unable to sell his home in the former location due to the state of the real estate market and thus rents out his home for $500 per month. He rents a comparable home in the new location for $900 per month. The employer pays the employee $500 a month to cover the rent differential and other miscellaneous cost of living differentials. It is your view, based on court cases such as The Queen v Splane [[1991] 2 C.T.C. 224] (92 DTC 6021), Phillips v M.N.R. [[1990] 1 C.T.C. 2372] (90 DTC 1274) and Lao v M.N.R. [[1991] 1 C.T.C. 2718] (unreported), that the allowance would not be required to be included in the employee's income.

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The Department does not agree with the decisions in the Phillips and Lao cases and has appealed those cases to a higher court. While the Department has not appealed the Splane case, we feel that the decision can be distinguished on its facts and we are not prepared to accept the case as a precedent in any situation except where the facts are substantially the same as that found in Splane (i.e. where the payment is made in respect of a mortgage interest differential). The Splane decision places employees receiving mortgage interest subsidies in a similar position to those employees who are entitled to a deduction under paragraph 110(1)(j) of the Act in respect of low interest loans received from the employer upon relocation.

While the Department accepts that the reimbursement by an employer of an employee's moving expenses in the situation where the employee has moved as a result of a change in work location is not taxable, it is our view that amounts paid to compensate an employee for increases in the cost of living are taxable as either an allowance for personal or living expenses or as a payment of such an expense. Paragraph 6(1)(b) of the Act specifically requires all allowances for personal or living allowances to be included in income unless excluded by that paragraph. An allowance for rent differential is not one of those exclusions.

On the other hand, if the amount is considered as a partial reimbursement of rent expense, the amount is included in income under paragraph 6(1)(a) of the Act as a benefit of any kind received in respect of an office or employment. Payments for increases in the cost of living at the new location can be distinguished from other reimbursements directly related to the relocation in that all residents of that new location bear the same costs related to the cost of living in that area regardless of whether they have relocated or not. Consequently, it is our view that, while a cost of living payment may be offered as an inducement to relocate, it is not a reimbursement of a moving expense incurred by the employee in the course of the relocation. We trust our comments have clarified our position in this matter.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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