22 September 1999 External T.I. 9913025 - PAYMENT OF RELOCATION COSTS BY EMPLOYER

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: Tax treatment to employee of various amounts paid by an employer in respect of an employment related relocation.

Position: Payments in respect of a housing loss are taxable; one-half of payments in excess of $15,000 for eligible housing loss are taxable' payments in respect of cost, financing, use, or right to use a residence are taxable; most other expenses remain non taxable

Reasons: Policy in IT-470R; New subsections 6(19) to 6(23)

xxxxxxxxxx			W. Antle
				5-991302

September 22, 1999

Dear XXXXXXXXXX:

This is in response to your letter of April 27, 1999 wherein you requested our comments on the tax treatment of various employee relocation expenses paid for or reimbursed by an employer. We are prepared to offer the following general comments which are not binding on the Department.

As noted in paragraph 35 of Interpretation Bulletin IT-470R, generally where an employer reimburses an employee for the expenses incurred by the latter in moving the employee and the employee's family and household effects either because the employee has been transferred from one establishment of the employer to another or because of having accepted employment at a place other than where the former home was located, this reimbursement is not considered as conferring a taxable benefit on the employee.

However, new subsections 6(19) to 6(22) of the Income Tax Act (the "Act") provide special rules for taxing payments made by an employer in respect of a "housing loss" incurred by an employee. A housing loss is basically a payment by the employer in respect of an actual loss or decline in value of the house. Except in the case of an "eligible housing loss", all such payments should be included in the employee's income. An eligible housing loss is a housing loss in respect of an eligible relocation, which is essentially a relocation to enable the taxpayer to be employed at a new work location; both the taxpayer's old residence and the taxpayer's new residence are located in Canada, except in the case of a person resident in, but absent from, Canada; and, the new residence is at least, 40 kilometers closer to the new work location than is the old residence. Only one half of the amount in excess of $15,000 of payments made by an employer in respect of an eligible housing loss is treated as an employment benefit received by the employee.

Subsection 6(23) provides that payments made by an employer in respect of the cost, financing, or use of a residence, or the right to use a residence are considered to be taxable benefits from employment and should be included in the employee's income.

With regard to Appendix I to your letter, payments made by an employer in respect of the items listed remain non-taxable except for the following:

1) Mortgage interest on old residence. New subsection 6(23) of the Act refers to amounts paid in respect of the financing of a residence. The payment of mortgage interest on the old residence is clearly related to the financing of a residence.

2) Actual loss on sale of old residence. As noted above, new subsections 6(19) to 6(22) of the Act provide special rules for the taxation of amounts paid in respect of a housing loss.

3 Bridge financing. Payments made for bridge financing are considered to be in respect of the financing of a residence and are taxable under subsection 6(23) of the Act.

4) Mortgage insurance premiums for new residence. These payments would also be considered to be made in respect of the financing of a residence and would be taxable under subsection 6(23) of the Act.

Please note that new paragraph 62(3)(g) of the Act expands the definition of "moving expenses" to include interest, property taxes, insurance premiums and heating and utility costs, to a maximum of $5,000, where those expenses are incurred for the period during which reasonable efforts are being made to sell the residence, provided that it is not rented out or occupied by the taxpayer or a member of the taxpayer's household. In addition, the cost of utility connections and disconnections, changing addresses on legal documents and replacing drivers' licenses and vehicle permits will now qualify as moving expenses. Therefore, where the payment of mortgage interest on the old residence is included in the employee's income, he may be entitled to claim all, or a portion of it, as a moving expense. Moving expenses will not include any amount paid or reimbursed by the employer, where the payment or reimbursement is not included in the employee's income.

In the appendix to your letter, you indicated that payments made by an employer for house-hunting trips, real estate commissions on the sale of the old residence, and legal fees and land transfer tax for the new residence would become taxable under the new legislation. In our opinion, these items do not fall within the purview of the new provisions and will remain non-taxable if they are reasonable in the circumstances.

You also ask for our comments on the following matters:

Calculation of Housing Loss

New subsection 6(21) defines a housing loss for the purposes of section 6. Generally, a taxpayer's housing loss is defined as the amount by which the adjusted cost base or the fair market value of the house (whichever is greater) exceeds the lesser of the proceeds of disposition or the fair market value of the house. The selling costs are not included in the calculation of a housing loss. As noted above, the payment of selling costs by an employer as part of an employment-related relocation does not result in a taxable benefit to the employee.

Impairment of Proceeds

The calculation of a housing loss is structured to account for situations where proceeds of disposition are impaired. While in many cases proceeds of disposition are the best evidence of fair market value, proceeds of disposition may be less than fair market value where an employer has instructed an employee to sell the residence immediateYy to facilitate a quick transfer to the new work location. Accordingly, the calculation of the housing loss is based on the lesser of proceeds and fair market value.

Definition of "Eligible Relocation"

According to paragraph (b) of the definition of "eligible relocation" in subsection 248(1) of the Act, the old residence and the new residence must be located in Canada. Although there is an exception for persons resident in, but absent from, Canada, subsection 250(5) of the Act is amended to read:

"Notwithstanding any other provision of this Act, a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada."

Where a person is resident in another country, and not resident in Canada, pursuant to a tax treaty with that other country, then, for all purposes of the Act, the person is deemed not to be resident in Canada. Accordingly, the exception in the definition of "eligible relocation" would not apply, and both the old and new residence would be required to be located in Canada in order for the move to qualify.

We trust that our comments will be of assistance to you.

Yours truly

R. Albert, C.A.

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