29 November 1996 Internal T.I. 9637437 - 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:

An individual, with respect to a job-related move, relocated from one city to another city where housing costs were higher. The employer paid the individual a lump sum amount in respect of the housing cost differential computed by reference to the interest rate of Prime plus 1%. The payment related to a time period of 5 years (there was a 20% reduction for each of the last 4 years). As long as the individual continued to work for the employer for a period of 2 years, he was entitled to retain the entire lump sum payment. The issue is whether the payment is non-taxable or whether it is taxable under paragraph 6(1)(a) or 6(1)(b) of the Act.

Position:

The payment is taxable either as a benefit under paragraph 6(1)(a) or as an allowance under paragraph 6(1)(b).

Reasons:

The payment relates to a personal expense of the individual and it satisfies the criteria set out with respect to allowances in Attorney General of Canada v. Roland M. Macdonald 94 DTC 6262 (FCA).

		November 29, 1996

	Toronto East Tax 	HEADQUARTERS
	  Services Office	M. Eisner
	Client Assistance Directorate	(613) 957-8953
	Lois Sellers (471-1-2)
                                                    		962743

Relocation - Financial Assistance

As discussed in our telephone conversation on October 28. 1996, we are replying directly to your office in respect of the letter which you referred to us on August 15, 1996. The letter was initially sent to your office by XXXXXXXXXX (the Individual) and concerns whether relocation assistance of $XXXXXXXXXX is taxable.

In connection with the issue raised by the Individual, we obtained additional documentation which has been enclosed for your reference. Pursuant to our telephone conversation, your office will advise the Individual on the tax consequences of the relocation assistance.

The Individual is an employee of XXXXXXXXXX (the Employer). When the Individual moved from XXXXXXXXXX in connection with his employment, he was entitled to participate in his Employer's "Enhanced Relocation Plan" (the Plan) under which he received the amount of $XXXXXXXXXX (the Subsidy). A general description of the Plan in relation to the Subsidy is as follows:

(a)An employee purchasing a residence will be "reimbursed" for the financing costs on the housing-cost differential between the former and the new residence or for the financing costs on whatever portion of the differential that was negotiated for reimbursement, to a maximum of $XXXXXXXXXX;

(b)Regularly scheduled payments over five years or a lump sum equivalent to the present value of those payments may be made. If payments are made over a period of five years, the financing costs for the initial year following the move are to be determined by multiplying the amount of the differential (or the negotiated portion of it) by the prime interest rate (that was in effect on the date of possession) plus one percent. Payments decrease by 20 percent per annum and, therefore, cease after the fifth year. Where a lump sum payment is made, the payment will be equivalent to the present value of the payments that would be made over a five year time period;

(c)In the event that an employee who participates in the Plan ceases to be employed with the Employer prior to the expiration of two years at the new work location, a prorated portion is subject to repayment.

The Individual received the Subsidy in respect of a housing cost differential of $XXXXXXXXXX - the actual housing cost differential in his case was $XXXXXXXXXX. The assistance provided to him was based on XXXXXXXXXX% of the theoretical costs of financing the housing cost differential of $XXXXXXXXXX (XXXXXXXXXX).

The Individual is of the view that the Subsidy is a non-taxable reimbursement of expenses. As support for this position, he has referred to the court decision rendered in Attorney General of Canada v. Hoefele, 95 DTC 5602 (FCA) in which it was held that a mortgage subsidy was held to be non-taxable. The Individual has also indicated that this decision is consistent with the decisions rendered in Cyril John Ransom v. M.N.R., 67 DTC 5235 (Exchequer Court), and Her Majesty the Queen V. R. Orrin J. Splane 92 DTC 6021 (FCA). These two cases involved reimbursements of certain expenses which were incurred as a result of job-related moves. The reimbursements were held to be non-taxable.

Our Comments

It is our opinion that the Individual should be taxed on the full amount of the Subsidy either as a "benefit" received pursuant to paragraph 6(1)(a) of the Act or as an "allowance" under paragraph 6(1)(b) of the Act.

In calculating the total amount of the Subsidy, a five year mortgage was assumed and the calculation was, irrespective of whether or not a mortgage was actually entered into by the Individual, based on the prime rate plus 1%. Since the Individual received the Subsidy as a lump sum payment, a present value calculation was made based on the prime rate.

It is our view that the circumstances of the Subsidy are considerably different from the circumstances of the Hoefele case. In the circumstances of the Hoefele case, the employer, pursuant to the program that was established, paid a portion of the mortgage interest directly to the mortgage company each month. While mortgage financing arrangements were made with the mortgage company by the employer, each employee had to qualify for the financing without the employer's involvement. In the case at hand, the Individual was not required to submit documentation concerning mortgage interest expenses and the employer's involvement was limited to making a lump sum payment to the Individual in respect of a housing cost differential. A further difference is that the Individual who received the Subsidy under the Plan was essentially free to use the funds as he wished including the reduction of mortgage principal that relates to the mortgage differential. As a result of these comments, it is our view that the Subsidy received by the Individual cannot be regarded as being non-taxable on the basis of the Hoefele decision. In our view, the principle established by the Phillips decision (94 DTC 6177) is more likely to apply.

We hope our comments are of assistance in responding to the Individual.

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch