2 December 1996 External T.I. 9633385 - RELOCATION COMPENSATION

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:

Whether lump sum payment to employee to compensate for
decrease in value of residence upon relocation by company

deductible.

Position:

Question of fact.

Reasons:

Could be part of the company's cost of acquiring the

residence.

963338
XXXXXXXXXX A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

December 2, 1996

Dear Sirs:

Re: Deductibility of Lump-Sum Payment to Compensate for Loss on the Sale of Employee's Principal Residence

This is in reply to your letter dated September 30, 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") in the situation where a corporation relocates one of its employees and makes a lump-sum payment to the employee to compensate for the decrease in the fair market value of his residence from the time of acquisition by the employee to the time of the transfer.

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.

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.

Paragraph 18(1)(b) of the Act denies a deduction in respect of an outlay, loss or replacement of capital or a payment on account of capital. Therefore, an employer will not be entitled to a deduction for a lump-sum payment where the payment is in respect of the acquisition of a capital property.

In the situation where a corporation requests an employee to relocate and become an employee of its wholly-owned subsidiary, and the corporation acquires the employee's residence at its fair market value, it is not obvious to us that a lump sum payment to the employee for the excess of the employee's cost over the fair market value of the residence would be a deductible expense. Subject to the provisions of section 69 of the Act, it is possible that all payments to the employee with respect to the residence would be included in the corporation's cost of the residence.

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