22 October 1996 External T.I. 9629355 - DEDUCTIBILITY OF EMPLOYEE RELOCATION EXPENSES

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:

Deductibility of employee relocation expenses by a corporation where employee will become employee of a wholly-owned subsidiary of the corporation.

Position:

Generally not deductible.

Reasons:

Unless the relocation expenses being paid by the corporation relate to the services rendered to the corporation by the employee the expenses will not be deductible by the employee.

									962935
XXXXXXXXXX							A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

October 22, 1996

Dear Sirs:

Re: Deductibility of Employee Relocation Expenses Incurred by a Corporation

This is in reply to your letter dated August 28, 1996 in which you requested a technical interpretation with respect to the application of paragraph 18(1)(a) of the Income Tax Act (the "Act") to a corporation which relocates an employee upon termination of employment and incurs certain expenses related thereto.

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Tax Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with IC 70-6R2. Nevertheless, we can provide you with the following general comments with respect to the application of paragraph 18(1)(a) of the Act which may be of some assistance.

The general limitation with respect to the deductibility of an expense by a corporation is contained in paragraph 18(1)(a) of the Act. Paragraph 18(1)(a) of the Act denies the deduction of any outlay or expense except to the extent that it was made or incurred for the purpose of gaining or producing income from a business or property. Whether or not an outlay or expense is made for the purpose of gaining or producing income from a business or property is a question of fact that can only be determined after a review of all of the facts relating to a particular situation.

Generally, an employer will not be entitled to a deduction for the payment of relocation expenses of an employee unless they relate to the services provided by the employee. Therefore, in the situation where a corporation requests an employee to relocate and become an employee of its wholly-owned subsidiary, the deductibility of any payments made by the corporation as reimbursement for mortgage, utility or other similar expenses incurred by the employee upon termination of his/her employment with the corporation would generally only be permitted to the extent that they are reasonable and to the extent that the reimbursement relates to the services performed by the employee to the corporation.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch