21 April 1999 Income Tax Severed Letter 9907486 - MOVING 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:

The taxpayer is eligible to claim moving expenses in 1997 as a result of relocating for employment reasons. He borrowed funds (bridge loan) to purchase a new residence pending the closing of the sale of his old residence. There was a delay between the time the funds were available on the closing date and the date of registration of the deeds for the purchase of the new residence and the sale of the old residence. The lawyer held the funds during the mentioned period until the registration date.

(1) Is the interest paid in 1997 on the bridge loan deductible as a moving expense?

(2) Should the interest earned on the sales proceeds of the old residence be included in computing income without being offset by the interest paid on the bridge loan?

Position:

(1) No

(2) Yes.

Reasons:

(1) Interest costs on the purchase of the new residence do not qualify as moving expenses as this term is defined in subsection 62(3) of the Income Tax Act (“Act”). The proposed tax amendment resulting from the 1998 Federal budget to treat up to $5,000 of interest costs and some other expenditures as moving expenses does not apply to 1997 but only applies in respect of expenses incurred in 1998 and subsequent years; furthermore, the interest costs referred to in the proposed tax amendment are those incurred in respect of the old residence (not the new residence) while it is vacant and for sale.

(2) Interest earned on the sales proceeds of the old residence is to be included in income pursuant to paragraph 12(1)(c) of the Act ( as income from property in this case). Such interest income cannot be offset by any of part of the interest paid on the bridge loan: the interest expense on the bridge loan was not laid out for the purpose of earning the interest income, as required by paragraph 20(1)(c) of the Act, and its deduction from income is prohibited by paragraph 18(1)(h) of the Act on the basis that it is a personal expense relating to personal-use property (the new residence).

								April 21, 1999

	Client Services Directorate			HEADQUARTERS
	Ministerial Correspondence Division 	S. Parnanzone
	Richard Gendron					(613) 957-9232
	Manager

	Attention:  Colleen Miller
								990748

XXXXXXXXXX
Moving Expenses - Interest

This is in reply to your memorandum of March 18, 1999, concerning the tax treatment of the interest XXXXXXXXXX paid on a bridge loan to purchase a new residence and the interest he earned on funds from the sale of the old residence. This case involves a ministerial letter. During our recent telephone conversation (Parnanzone/Miller), you advised that the case will be closed with a telephone call, instead of a written reply to the taxpayer.

The facts as we understand them are as follows:

XXXXXXXXXX moved for job reasons in 1997. On February 19, 1999, he wrote to our Minister, the Honourable Herb Dhaliwal, concerning the reassessment of his 1997 claim for moving expenses. XXXXXXXXXX complained that the Department, while allowing a number of items of his claim, had disallowed, on the one hand, the interest he paid on the bridge loan to purchase his new residence and had taxed, on the other hand, the interest he earned on the sales proceeds from his old residence. The circumstances giving rise to the interest expense of $XXXXXXXXXX and interest income of $XXXXXXXXXX was explained in your MSmail of April 13, 1999, as follows:

Apparently the Land Titles offices are quite scattered in Saskatchewan, and they are not yet computerized. It is common for title transfers to take up to 8 weeks to be registered. The closing date for the old residence was XXXXXXXXXX. The transfer of title was requested on that date, however, the lawyer did not release the funds from the sale of this house until the transfer was registered, over 3 weeks later. During this period, the client earned $XXXXXXXXXX interest on this money that he reported as income on his return. In addition he had to borrow money for the down payment on the new house, and was charged interest until the lawyer released the money from the previous sale. The closing date for the new residence was XXXXXXXXXX. The transfer of title was requested on that date. The lawyer did not release the proceeds to the seller until the transfer was registered. This transfer of title was not registered until XXXXXXXXXX, and the client had to pay additional interest for this period.

You have asked two questions. The first concerns whether XXXXXXXXXX interest expense of $XXXXXXXXXX qualifies as a moving expense for tax purposes. The second question is whether the $XXXXXXXXXX interest XXXXXXXXXX earned on the sales proceeds from his old residence should be included in his 1997 income without offsetting by any part of the interest paid on the bridge loan.

Our Comments

In answer to your first question, our view is that the $XXXXXXXXXX of interest paid by XXXXXXXXXX on the bridge loan is not eligible for deduction as a moving expense. Interest costs are not part of the list of eligible moving expenses described in subsection 62(3) of the Income Tax Act. As indicated in the post-amble to subsection 62(3) of the Act, the only costs that can be deducted as moving expenses in respect of the acquisition of a new residence are those falling within the provisions of paragraph 62(3)(f) of the Act. As discussed in paragraphs 12(f) and 13 of Interpretation Bulletin 178R3, only the following costs can be claimed in respect of the new residence provided the taxpayer or spouse is selling or has sold the taxpayer’s old residence as a result of the move:

(a) legal fees, and

(b) any tax, fee or duty (excluding GST or value added tax) imposed on the transfer or registration of title.

Accordingly, XXXXXXXXXX is not allowed to deduct as a moving expense the interest he paid in 1997 on the bridge loan to purchase his new residence.

We would mention that there is a proposed tax amendment to expand the list of moving expenses. The additional expenses would be those described in the following two paragraphs which are proposed to be added to subsection 62(3) of the Act:

(g) interest, property taxes, insurance premiums and the cost of heating and utilities in respect of the old residence, to the extent of the lesser of $5,000 and the total of such expenses of the taxpayer for the period

(i) throughout which the old residence is neither ordinarily occupied by the taxpayer or by any other person who ordinarily resided with the taxpayer at the old residence immediately before the move nor rented by the taxpayer to any other person, and

(ii) in which reasonable efforts are made to sell the old residence, and

(h) the cost of revising legal documents to reflect the address of the taxpayer's new residence, of replacing drivers' licenses and non-commercial vehicle permits (excluding any cost for vehicle insurance) and of connecting or disconnecting utilities,

The additional expenses in proposed paragraphs 62(3)(g) and (h) of the Act would qualify as moving expenses if they are incurred in 1998 and subsequent years.

While the proposed tax amendment appears to be of no value to XXXXXXXXXX since his moving expenses were incurred in 1997, we would also observe that the interest qualifying as a moving expense under the proposed tax amendment is not that paid on a bridge loan to purchase a new residence; rather it is interest in respect of the old residence.

With respect to the answer to your second question, our view is that the interest of $XXXXXXXXXX earned on the sales proceeds from the old residence should be included in XXXXXXXXXX 1997 income without reduction by the interest he paid on the bridge loan. The authority for including the $XXXXXXXXXX in income is paragraph 12(1)(c) of the Act. The authorities for denying the offsetting of the interest paid on the bridge loan against the $XXXXXXXXXX interest income are paragraphs 20(1)(c) and 18(1)(h) of the Act. Generally, paragraph 20(1)(c) of the Act provides that interest expense can be deducted if it is incurred for the purpose of earning income from business or property. Paragraph 18(1)(h) of the Act prohibits the deduction from income of personal and living expenses. The interest XXXXXXXXXX paid on the bridge loan cannot be deducted from the interest income because it is a personal expense since it was paid in respect of a personal-use-property (the new residence) and was not incurred for the purpose of earning income from business or property.

We trust that the foregoing comments are of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch