14 June 2010 External T.I. 2010-0365151E5 - Moving expenses deduction

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.

Principal Issues: Whether a taxpayer would be allowed to claim as moving expenses various selling costs and legal fees incurred as a result of: (1) the sale of an original home resulting from a move to another city because of a change in employment and (2) the purchase of a subsequent home located 0.7 kilometres from the original home due to a move back to the original city resulting from another change in employment.

Position: 1. No. The original home was not sold as a result of the move and therefore the expenses do not meet the requirements of paragraph 62(3)(f). 2. Yes. As long as the legal expenses in connection with the purchase of the subsequent home meet the requirements of subsection 62(1), they should be deductible since they are on account of moving expenses incurred in respect of an eligible relocation.

Reasons: The taxpayer decided to rent the original home and made no effort to sell the original home as a result of the move.

XXXXXXXXXX 								2010-036515
      								T. Elsey
June 14, 2010

Dear XXXXXXXXXX :

Re: Moving expenses

We are writing in response to your email dated April 24, 2010 regarding moving expenses. You have asked for our opinion as to whether you would be allowed to claim as moving expenses, the sales commission and legal fees you incurred on the sale of your house located at XXXXXXXXXX ("House A") and the legal fees you incurred on the subsequent purchase of a house located at XXXXXXXXXX ("House B") as a result of moves for employment. We note that House A and House B are located in the same city ("City A"), approximately 0.7 kilometers apart from each other.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are however, prepared to provide the following general comments, which may be of assistance.

Our Comments

Subsection 62(1) of the Income Tax Act (the "Act") allows a taxpayer to deduct, from income, amounts paid by the taxpayer "as or on account of moving expenses incurred in respect of an eligible relocation". Therefore, the central issue is whether the sales commissions and legal fees in connection with the sale of House A and the legal fees in respect of House B can be considered to be "as or on account of moving expenses incurred in respect of an eligible relocation".

Moving expenses that are eligible for deduction for the purposes of subsection 62(1) of the Act are defined at subsection 62(3) of the Act. According to subsection 62(3) of the Act, the legal fees and real estate commissions for the sale of the taxpayer's old residence and the legal fees in respect of the purchase of the taxpayer's new residence would qualify as eligible moving expenses. This is again confirmed at paragraph 12 of IT-178R3, Moving Expenses Deduction.

The term "eligible relocation" is defined in subsection 248(1) of the Act to include a relocation that enables a taxpayer to be employed or carry on business at a new work location in Canada. Both the residence at which the taxpayer ordinarily resided before the relocation ("old residence") and the residence at which the taxpayer ordinarily resided after the relocation ("new residence") must be in Canada, and the new residence must be at least 40 kilometers closer to the new work location than the old residence was. Finally, in order for eligible moving expenses to be considered as or on account of moving expenses incurred in respect of an eligible relocation", they must fall within the limitations in subsection 62(1) of the Act.

As explained in paragraph 18 of IT-178R3, a taxpayer is generally considered to have changed residences when the new residence is established as the place at which that individual ordinarily resides as result of the move of that individual, members of the household and their possessions. Indications of such a move include the selling, renting or advertising for sale or rent of the former residence or cancelling a lease for the former residence.

Based on our understanding of the facts as you explained them, it appears that there were three moves as a result of three different jobs undertaken by you between the years 2007 and 2009. Specifically, we understand that:

1. Move 1 occurred in XXXXXXXXXX 2007 when you and your family moved from City A to XXXXXXXXXX ("City B"). House A was rented out under a one year lease, commencing in XXXXXXXXXX 2007, following your relocation to City B for the job in City B.

2. Move 2 occurred in XXXXXXXXXX 2007 when you and your family moved from City B to XXXXXXXXXX ("City C") for a job in City C. Further, we understand that at this time, you decided to buy a house in City C, however, you did not want to pay a penalty by breaking the lease on House A, so you waited for the lease to expire before putting House A up for sale. Therefore, the first time that any effort was made to sell House A was in XXXXXXXXXX 2008 when you were living in City C. House A eventually sold on XXXXXXXXXX , 2009.

3. Move 3 occurred in XXXXXXXXXX 2009 when you and your family moved from City C back to City A so that you could undertake a new job. When you and your family relocated back to City A, you moved directly into House B which is approximately 0.7 kilometers from House A. House A had been sold by this time.

With respect to Move 1, the "old residence" would be House A in City A and the "new residence" would be the place you and your family rented in City B. With respect to Move 2, the "old residence" would be the place you and your family rented in City B and the "new residence" would be the place you and your family lived in while in City C. With respect to Move 3, the "old residence" would be the place that you and your family lived in while in City C and the "new residence" would be House B in City A. Therefore, with each move, both the old and new residences were in Canada and each new residence was at least 40 kilometers closer to the new work location than the old residence was and each move enabled you to be employed at a new work location in Canada. Therefore, it appears that each of the moves meets the definition of an "eligible relocation" in accordance with subsection 248(1) of the Act.

However, the moving expenses must also be in accordance with subsection 62(1) of the Act. According to paragraph 62(3)(f) of the Act, moving expenses include: "any expenses incurred where the old residence is sold by the taxpayer or the taxpayer's spouse or common-law partner as a result of the move, the cost to the taxpayer of legal services in respect of the purchase of the new residence and of any tax, fee or duty (other than any goods and services tax or value-added tax) imposed on the transfer or registration of title to the new residence". House A was leased out under a one year lease upon your relocation to City B and was not put up for sale until after you had accepted and were working at the job in City C. Further, there was no indication that you had made any effort to sell House A while you were living in City B.

Under the circumstances, it would be difficult to conclude that House A was sold as a result of the move to City B. In general terms, the greater the length of time that separates an employee's change of work location and the sale of the employee's former residence, the less likely the costs associated with the sale will be incurred "as or on account of moving expenses in respect of an eligible relocation". The fact that you did not take immediate action to sell House A is not, in and of itself, the reason for our view.

However, this combined with the fact that you leased House A under a one year lease demonstrates more that it was your intention to hold the property for investment purposes (i.e., which not only includes capital appreciation but the ability to earn rental property income), further combined with the fact that you made no effort to sell House A while you were living in City B, leads us to the view House A was not sold as a result of the move to City B and therefore, the selling costs with respect to House A can not be claimed as a moving expense as they are not in accordance with paragraph 62(3)(f) of the Act.

With respect to the legal fees in relation to House B, provided that the legal fees on the purchase of House B meet at the conditions for deductibility as outlined in subsection 62(1) of the Act, you would generally be entitled to a deduction for the legal fees on the purchase of House B as they are considered to be as or on account of moving expenses incurred in respect of an eligible relocation since they appear to be in accordance with paragraph 62(3)(f) of the Act and the definition of "eligible relocation" in section 248(1) of the Act.

While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Randy Hewlett
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch