5 November 1998 External T.I. 9821655 - RELOCATION EXPENSES EMPLOYEE

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 of relocation payment related to cost of maintaining two residences, when old residence has not sold

Position: payment fully taxable if non-accountable allowance; if reimbursement of specific expenses, payments related to temporary accomodation or carrying costs of old residence while actively trying to sell, amounts are not taxable benefit. Other amounts are taxable.

Reasons: Per Employer Guide to Source deductions, certain expenses non-taxable if paid or a reimbursement.

XXXXXXXXXX 982165
R. Albert, CA
November 5, 1998

Dear XXXXXXXXXX :

Re: Employee Relocation Payment

We are writing in reply to your letter of August 12, 1998. Your letter requested our views concerning the tax treatment of an employee relocation payment.

You advised in your correspondence that an employee of your firm had transferred from Vancouver to Toronto effective May 1, 1998. The employee experienced difficulty in selling his condominium in Vancouver, and decided in early August to take the property off the resale market. The property was then leased for a period of one year. The employee rented a home in Toronto effective May 1, 1998. XXXXXXXXXX, as the employer, has agreed to make a payment to the employee to assist in the monthly costs of maintaining two residences. A one time lump sum payment was calculated. This payment is equal to the sum of:

1. the carrying costs of the Vancouver condo computed as the excess of expenses over rental income in Vancouver x 18 months.

2. the rental costs of the employee’s personal residence in Toronto x 18 months.

It is not clear from the information provided whether a portion of the 18 month period in the above calculation includes the time period while the employee was moving and actively trying to sell this property. Accordingly, we have provided you with our views recognizing this payment could be exclusively for anticipated future expenses or, alternatively, for reimbursement of expenses up to the date the property was removed from the resale market and an allowance for future anticipated expenses.

The situation described involves actual ongoing transactions involving a specific taxpayer. Your Tax Services Office has the responsibility for determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments that may be of assistance.

Our Comments

As the employee in the situation presented began employment at a new work location before October 1998, we have not had to consider whether the October 27, 1998 legislative proposals to amend section 6 of the Income Tax Act affect our comments.

Allowances that employees do not have to account for are called non-accountable allowances. We consider a non-accountable allowance for incidental relocation or moving expenses of up to $650 to be a reimbursement of expenses that an employee incurs because of the move. This allowance would be non-taxable. To be considered a reimbursement for incidental expenses, the employee has to certify in writing that they incurred expenses for at least the amount of the allowance. Non-accountable allowances in excess of this amount would be considered employment income. If the payment is a one time lump sum payment for estimated future costs, it may be a non-accountable allowance and fully taxable.

If the payment represents an accountable allowance or reimbursement of specific expenses, the following outlines our general views of the tax treatment of such payments:

1. Carrying costs from date of move to date of removal of old residence from resale market.

In our “Employer’s Guide to Payroll Deductions, Taxable Benefits”, we outline our views on what amounts can be paid or reimbursed to an employee without a taxable benefit arising. We refer you to this list. Typically, mortgage interest, property taxes, heat, hydro, insurance and grounds maintenance costs related to the upkeep of the old residence after the move, when all reasonable efforts to sell this residence have not been successful, can be reimbursed or paid without creating a taxable benefit. It is a question of fact as to whether all reasonable efforts were made to sell a particular property. Some factors to be considered include: whether the employee has used the service of a real estate agent; the list price of the property compared to that of similar properties offered for sale in the area; and the market conditions for real estate during that time. The fact that an employee eventually chooses to rent the property may be a reflection of market conditions so poor that the property could not be sold at any price. On the other hand, the rental of the property may be an indication of the taxpayer’s original intent.

Certainly, once a property has been removed from the resale market, the individual would not be considered to be making reasonable efforts to sell the property and the reimbursement of expenses which may have previously not been a taxable benefit, would become taxable.

2. Reimbursement of net rental loss on an old residence

The reimbursement of a projected net loss on an old residence for a period while it is rented would be considered to be a taxable benefit and included in an employee’s employment income.

3. Rental costs of an employee’s personal residence in a new work location

The payment or reimbursement of monthly rental costs of an employee’s personal residence in a new work location may not result in a taxable benefit to the extent that the payment or reimbursement is on account of reasonable temporary living expenses while the employee is waiting to occupy new, permanent accommodations. However, a payment or reimbursement of rental costs in a new work location, while the employee’s old residence is rented on a long term lease and no other accomodation is being sought, would not be considered a payment in respect of temporary living arrangements. Such a payment or reimbursement would be considered taxable to the employee.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch