12 October 1995 Internal T.I. 9524630 - BENEFITS FROM RELOCATION INDUCEMENTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

7 questions on taxable benefits arising from the relocation of an employee

Position: taxable

Reasons: cost of living compensation is not a relocation expense

DRAFT

1995 Ontario Tax Conference
October 12, 1995

Employee Allowances and Reimbursements

On October 11, 1995 Revenue Canada was advised that the Federal Court of Appeal had released its judgement in the Hoefele, Zaugg, Mikkelsen, Krall and Krull cases, and that the decisions were all in the taxpayers' favour. The reasons for the judgement of the Federal Court of Appeal were neither received nor analyzed by the Department as of October 12, 1995. Consequently, the Departmental views expressed on that date reflect the Department's position as at that date.

Question 1

The taxpayer is transferred from the United States to Canada for an 18 month assignment with his current employer. His employer provides him with a cost of living differential of $800 per month that is intended to compensate him for the higher costs associated with his temporary assignment in Canada. The amount of the differential is calculated by an unrelated third party relocation company that specializes in this, based on the specific fact situation of the taxpayer. The differential covers only commodities and services, including food at home, household supplies, personal care, medical care, clothing, transportation, domestic services, recreation and entertainment, food away from home, and alcoholic beverages and tobacco.

Can it be said that these payments are calculated by reference to specific expenses incurred by the taxpayer? If so, they would not constitute an allowance.

If these payments are not an allowance then are they taxable under paragraph 6(1)(a) - a taxable benefit - the taxpayer is not economically better off (see for example the Splane case)? The payments are designed to keep the employee whole and ensures that he is no worse off while on a temporary assignment.

Department's Response

Setting aside for a moment, the distinction between an allowance and a reimbursement, it is our view that amounts paid to compensate an employee for increases in the cost of housing or living expenses at the new location are taxable under either paragraph 6(1)(a) or 6(1)(b) of the Act. 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 locations is not taxable, variations in the cost of living or in the cost of assets are not considered moving expenses. Taking any other position would give the recipient taxpayer who was relocated to a new location at the employer's request preferential treatment to employees who have always resided at that location or employees who relocated to that location without the benefit of assistance from the employer.

As you have/will note, Demers v M.N.R. (79 DTC 918), was reversed on appeal (original (80 DTC 6326), English Translation (81 DTC 5256)). In our opinion, the fact that an employer or a consultant hired by the employer computes costs of living at the old and new work locations and the employee receives a cost of living differential based on that comparison does not make that amount non-taxable. Whether the amount is an allowance or a reimbursement it would be taxable.

On October 11, 1995 Revenue Canada was advised that the Federal Court of Appeal had released its judgement in the Hoefele, Zaugg, Mikkelsen, Krall and Krull cases, and that the decisions were all in the taxpayers' favour. The reasons for the judgement of the Federal Court of Appeal were neither received nor analyzed by the Department as of October 12, 1995. Consequently, the Departmental views expressed on that date reflect the Department's position as at that date.

Question 2

Assume that an individual is required to move from Calgary to Toronto. The employer agrees to provide the individual with a formula-derived subsidy to assist the taxpayer in meeting the increased interest charges in the following situations on:

(i)a third party mortgage of equal value to the one he had in Calgary

(ii)a third party mortgage of greater value than the one he had in Calgary (his equity in the house remained the same)

What are the Department's views with respect to the types of payments described in (i) and (ii) above?

Would the results be different if the subsidy was part of a company policy that applied to relocating employees or if it was a custom deal for a specific employee?

Department's Response

Situation (1) appears to be in line with the Splane case, in which a mortgage interest differential payment was held not to be taxable. The Department's position is that where the fact situation is substantially the same as in Splane no amount need be included in income on account of the mortgage interest subsidy.

Situation (ii) is similar to that in the cases of Hoefele v M.N.R. (94 DTC 1878), Zaugg v M.N.R. (94 DTC 1882), Mikkelsen v M.N.R. (95 DTC 118), Krall v M.N.R. (95 DTC 411) and Krull v M.N.R. (95 DTC 206). We are awaiting the reasons for judgement of the Federal Court of Appeal for all these cases. At the present time we are not prepared to accept Splane 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 an increased mortgage interest rate and not in respect of an increased principal amount of mortgage on the new residence). Consequently, where the mortgage interest subsidy is based in whole or in part on an increase in the principal of the mortgage, the subsidy will be considered a taxable benefit under paragraph 6(1)(a) unless the circumstances indicate that the loan can be treated as a loan received by virtue of employment (in which case the benefit to be included in income under subsection 6(9) will be determined under the rules of subsection 80.4(1) of the Act).

In answer to the additional question posed, we do not at this time see any difference in results if the subsidy were part of a company policy that applied to relocating employees or if it were a custom deal for a specific employee.

Question 3

Assume that a taxpayer has been hired by a company and is required to move to another city. As a result of the move he sold his house at a loss of $10,000. The company reimbursed him for the loss he incurred on the sale of his house.

(i)the reimbursement of a loss on the sale of a house as a result of a company requested move is part of a company policy for relocating employees (like the Lao case except there is a loss rather than a payment for higher housing costs in the new location)

(ii)the reimbursement of the loss was part of a custom deal for the taxpayer (as in Rino Volpé v. M.N.R. 90 DTC 1707 (T.C.C.)) the agreement to pay this amount was included as a part of the contract of employment

Basically the same facts exist in each case except that in (i) the reimbursement would not be taxable but in (ii) the amount would be taxable because of subsection 6(3). There seems to be an inequity here. Could the Department provide its views on this situation?

Department's Response

As stated in paragraph 35 and 37 of IT-470R, the Department accepts that the reimbursement of an actual loss on the sale of an employee's home will not be treated as a taxable benefit upon the relocation of the employee provided that the reimbursement is not greater than the actual loss, calculated as the amount by which the cost of the home exceeds the net selling price of the home to the employee. Notwithstanding the court's comments on subsection 6(3) of the Act in Volpé v MNR (90 DTC 1707), the Department does not require an individual to include an amount in income under subsection 6(3) where it is received as a reimbursement of actual moving expenses incurred and does not result in a benefit to the employee. In the case of Volpé, the payment was for a loss in market value and not for an actual loss incurred in respect of the disposition.

Question 4

Assume that a taxpayer is required by his U.S. employer to move to Toronto where housing costs are substantially higher. The taxpayer rents his house in the United States for $1,000 a month, which covers his costs and rents a comparable house in Toronto for $3,000 a month. His employer provides him with a housing differential payment of $2,000 a month to compensate him the increased housing costs.

The payment is not an allowance as it relates to specific expenses accounted for. Is it then taxable as a benefit? There is no economic benefit.

Department's Response

Depending on the level of accountability, a rental subsidy could be viewed as an allowance or as a reimbursement. In either case, it is our view that the subsidy of personal living expenses will be taxable. In this connection, reference should be made to the comments on living expenses set out on page 6184 of the Phillips decision (94 DTC 6177).

Question 5

A taxpayer is required by his employer to move to Canada from the United States. The taxpayer is tax equalized (i.e., his employer reimburses him for the increase in taxes between Canada-federal and provincial tax and the United States-federal, state and local tax). The payment is not an allowance as it is based on specific calculations. There is no economic benefit as it is a reimbursement to ensure that the employee is no worse off.

Does the Department agree that a reimbursement of this nature is not a taxable benefit?

Department's Response

The Department's position with regard to tax equalization payments is always to consider these payments as taxable amounts under paragraph 6(1)(a) or (b) of the Act depending on whether the amount is paid as an allowance or as a reimbursement. This position is consistent with the decision in Phillips, in which an amount paid to compensate for the higher cost of purchasing a new residence (higher cost of living) in a new place of work was considered a taxable benefit within the meaning of paragraph 6(1)(a) of the Act. A payment made by an employer to an employee to compensate for additional tax in Canada compared to the tax that would otherwise have been payable in his usual country of residence is an economic benefit that the employee receives from his employer, in the same capacity as the benefit in Phillips and, as a result, is a taxable benefit for the employee.

Question 6

A taxpayer is required by his employer to move to Canada from the United States. As part of a company policy the taxpayer is required to have his returns prepared by an accounting firm appointed by the company. The accounting firm provides the taxpayer with tax advice on his transfer, prepares the taxpayer's Canadian and United States tax returns for $2,500 and computes the portion of the tax that the employer is responsible for (fee $500) in accordance with the company's' policy. The annual fee of $3,000 is paid by the company.

Prior to the move the taxpayer had his United States tax returns prepared by a local accountant for a fee of U.S. $150 annually.

There is no economic benefit to the taxpayer for the increased accountants' costs ($3,000 less U.S. $150). The taxpayer has no choice as to who to use and it would have been difficult for the taxpayer to do the returns and calculations himself. The increased expense was only incurred as a result of the move.

Does the Department agree that the fees paid are not a taxable benefit to the employee?

Department's Response

As stated in our commentary on fact situation 5, a tax equalization payment made by the employer gives rise to a taxable benefit in the hands of the employee. As stated in paragraph 6 of the special release to Interpretation Bulletin IT-470R "Employees' Fringe Benefits", the payment by an employer of fees for the preparation of an employee's income tax return will normally result in a taxable benefit to the employee. As indicated in the case of Cutmore et al. v M.N.R. (86 DTC 1146), the fact that an employer has a bona fide business reason for requiring its employees to have their income tax returns prepared by tax specialists does not alter the fact that a benefit accrues to the employee where the employer pays for the cost of such services. As stated previously, variations in the cost of living between the former work location and the new work location (which includes the cost of accounting fees) fall outside the scope of direct relocation expenses and should be treated as additional remuneration from employment.

Author: A. Humenuk
File: 952463
Date: October 2, 1995