Enrique Hoefele v. Her Majesty the Queen, [1995] 1 CTC 2177, 94 DTC 1878

Sobier J.T.C.C.:-The appellant elected to have his appeal heard pursuant to the informal procedure.

This appeal concerns the appellant’s 1992 taxation year and arises from an inclusion by the Minister of National Revenue (the "Minister") of amounts paid by the appellant’s employer on his behalf relating to increased interest payable as a result of the appellant’s move from Calgary to Toronto. These amounts were taxed as an employment benefit.

Facts

The appellant was required by his employer, Petro-Canada Inc. (the "company"), to relocate from Calgary to Toronto as part of a companywide reorganization. The relocation was involuntary, in the sense that either he relocate or he would be laid off. The move was purely geographical and did not involve career advancement.

The cost of housing in Toronto was greater than in Calgary and consequently, the appellant was able to apply for assistance under a company relocation program operated as part of company policy, pursuant to which the company subsidized interest on a portion of the increased principal. The program operates by establishing a market differential between the place of current residence and the place of intended residence. In this case, Royal LePage Corporate Relocation Department ("Royal LePage"), a national real estate company, established that housing costs in Toronto were 1.55 times those in Calgary. In establishing the differential, Royal LePage examined 18 centres in Canada based upon the company’s worksites and employees. Utilizing average sales data, square footage and target neighbourhoods, the market differential is established and updated three times a year.

When the appellant’s house was sold, the proceeds were multiplied by the differential rate to establish the maximum cost of comparable housing in Toronto. In the appellant’s case, his house sold for $148,000, which set the maximum comparable value in Toronto at $229,400. The difference in these values set the limit on the principal amount entitled to assistance under company policy. That is, any principal amount over $148,000, but under $229,400, is entitled to assistance. The policy subsidizes the increased interest charges on the difference in the principal values. The assistance is provided on a declining balance, with 100 per cent being subsidized in the first year until the tenth year when no assistance is available. The decline is not in equivalent increments to zero and substantial assistance is available in each qualifying year.

Entitlement to assistance is based on several conditions. All proceeds from the sale of the old house, including equity and conventional financing, must be transferred to the new residence. The Mortgage Assistance Program is operated through Confederation Life Insurance company (’’Confederation Life"), and one is only permitted assistance if one meets the normal lending criteria of that institution. Once approved, the company makes the subsidy payment directly to Confederation Life, and it in no way contributes to principal payments. The increased principal amount is the responsibility of the employee as well as increased interest payments in later years when the subsidy is reduced.

When the appellant moved to Toronto, he purchased a house for $215,000. This is $67,000 greater than his old residence but within the parameters for assistance. He applied to Confederation Life for mortgage financing, was approved and received company assistance.

Minister’s position

Counsel for the respondent advances the position that the interest assistance constitutes an employment benefit which it is required to be included in the appellant’s income by virtue of paragraph 6(1 )(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Appellant's position

The appellant’s position is straightforward. He maintains that the amount is not a taxable benefit.

Scheme of the Act

Employees are taxed on amounts received by way of salary, wages or other remuneration. The phrase "other remuneration" in section 5 would probably be broad enough to include in income the value of any employee benefits. Nonetheless, paragraph 6(1 )(a) of the Act was added, for greater certainty, to deal specifically with benefits received in respect of employment. The rationale for including benefits in income from office or employment was identified by Mr. Justice Robertson of the Federal Court of Appeal in Phillips v. M.N.R., [1994] 1 C.T.C. 383, 94 D.T.C. 6177 (F.C.A.), a case that dealt with $10,000 lump sum payment by the taxpayer’s employer to assist in the purchase of a home. At page 391 (D.T.C. 6183), it is said:

Quite obviously, section 6 of the Act seeks to limit tax avoidance relating to monetary and non-monetary compensation not reflected in wages or salaries.

In Ransom v. M.N.R., [1967] C.T.C. 346, 67 D.T.C. 5235 (Ex. Ct.), a reimbursement to an employee for a loss incurred on the sale of his house was held not to be a taxable benefit. During the course of the judgment, Mr. Justice Noël commented, at page 359 (D.T.C. 5242), that:

It cannot be said here also that the payment was a fictitious or colourable bargain designed to disguise remuneration payable on some other account....

He continued at page 361 (D.T.C. 5244):

It appears to me quite clear that the reimbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord MacNaughton in Tennant v. Smith, [1892] A.C. 162, puts nothing in the pocket but merely saves the pocket) is neither remuneration as such or a benefit "of any kind whatsoever" so it does not fall within the introductory words of subsection 5(1) or within paragraph (a). It is equally obvious that it is not an allowance within paragraph (b) for the reasons that I have already given.

[Emphasis in original. I

It is patent that the purpose of paragraph 6(1 )(a) has always been to equalize the income tax treatment of employees who receive compensation in money with those who receive compensation in some combination of money, emoluments and perquisites. This is a manifestation of our concept of perquisites and of our concept of horizontal equity in the tax system whereby individuals in like situations should be taxed in a like manner.

The term benefit has been broadly interpreted. The time honoured definition of "benefit" as espoused in The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, by the Supreme Court of Canada is set out below at C.T.C. page 399 (D.T.C. 5414):

If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of section 3.

In that case, a $300 award for passing an insurance exam was held to be a taxable benefit. It was further held in Savage, supra, that a benefit pursuant to paragraph 6(1 )(a) of the Act, need not have the character of remuneration. Mr. Justice Dickson (as he then was) commented at C.T.C. page 399 (D.T.C. 5414):

With great respect, however, I do not agree with the latter part of the passage last quoted and in particular the statement that, to be received in the capacity of employee, the payment must partake of the character of remuneration for services. Such was the conclusion in the English cases but based on much narrower language. Our Act contains the stipulation, not found in the English statutes referred to, "benefits of any kind whatever...in respect of, in the course of, or by virtue of an office or employment". The meaning of "benefit of whatever kind" is clearly quite broad....

To constitute a benefit the taxpayer must have realized a material economic advantage from the employer; the benefit need not possess the quality of remuneration but must have been received "in respect of" the employment relationship. Once it has been determined that the amount was received in respect of the employment it must be examined to see if it is an “economic advantage".

The essence of a benefit was described by Mr. Justice Cullen of the Federal Court-Trial Division in Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.); aff'd [1991] 1 C.T.C. 406, 92 D.T.C. 6021 (F.C.A.). In that case, Mr. Justice Cullen identified the issue as follows at page 201 (D.T.C. 6444):

However, the crucial issue is whether this taxpayer received an economic benefit that is taxable....

He then commented at page 204 (D.T.C. 6446):

The taxpayer gained no extra money in his pocket. Instead the payments only allowed him to maintain the same position as that which he occupied prior to his transfer, and prevented him from having accepted the lateral transfer position at a loss.

Having concluded that certain types of reimbursements received by the taxpayer were not taxable, at page 201 (D.T.C. 6444) he said:

What is important for taxation purposes is the fact that the expenses were incurred by virtue of the taxpayer’s employment.

Finally, after reviewing the jurisprudence he commented at page 202 (D.T.C. 6445) that:

This case again reinforces the idea that actual losses are not taxable, but that which cannot be demonstrated to be an actual expense or loss will be taxed.

From these principles it can be synthesized that payments received by the employee are not taxable as benefits to the extent that they are reimbursements for disbursements incurred by virtue of the employment relationship and that the reimbursements are for demonstrable losses incurred by the employee. These principles evolved out of Ransom, supra, a case where an employer reimbursed an employee for losses arising from the sale of his house as a result of a transfer to a new location by the employer.

Mr. Justice Noël, in Ransom, supra, commented that, in his view, no difference existed between an expenditure or a loss. At page 360 (D.T.C. 5243), he said:

There can, I believe, be no difference in principle between the reimbursement of an expense or of a loss nor, in my view, can anything turn on the fact that the loss or expense which is the subject matter of the present reimbursement covers the value of a capital asset.

It has been suggested that Savage, supra, overruled the principle in Ransom, supra. That question was clearly addressed by Mr. Justice Cullen in Splane, supra, wherein he said at page 201 (D.T.C. 6444):

The defendant attempted to distinguish the Ransom case, supra, on several grounds. Mr. Gibson suggested that Ransom, supra, was no longer good law, in view of the Supreme Court Decision of Savage, supra. In that case, the taxpayer received $300 award for passing an insurance course, which was held to be a taxable benefit under paragraph 6(1 )(a) of the Act. Mr. Gibson submitted that this case supports the conclusion that the Act has chosen very broad language in this regard. I have previously stated my agreement with that proposition and have no difficulty on that point. However, the crucial issue in this case is whether this taxpayer received an economic benefit that is taxable. Ransom, supra, has often been relied upon in the courts since Savage, supra, and generally the case has not been discredited. Even very recent decisions of both the Federal Court-Trial Division and the Federal Court of Appeal have adopted Ransom, supra, as good law in the area of reimbursement.

Recently, in Phillips, supra, Mr. Justice Robertson decided that a $10,000 lump sum payment to an employee in respect of higher housing costs was taxable. At page 392 (D.T.C. 6184), Mr. Justice Robertson identifies two aspects of the payment that led him to conclude it is taxable benefit. He said:

It is apparent on the facts before us that the respondent’s net worth qua employee increased. Even if the $10,000 payment is taxable, he gains considerable disposable income. The compensatory payment effectively represents a temporary wage increase not available to all employees. Second, he gains an advantage over fellow employees resident in the community with higher housing costs.

In Phillips, supra, the employer attempted to increase the employee’s salary under the guise of a reimbursement. The payment was made directly to the employee subject to the single condition that he buy a house. The employee was free to use the payment for whatever he wished and need not apply it against the purchase price of a new house. The facts in that case are distinguishable from those in the present appeal.

Analysis

When an actual loss has been suffered by virtue of employment, a payment received as a reimbursement will not be taxable. An actual loss occurs when an employee is subject to an economic disadvantage by virtue of employment.

In Funnel v. M.N.R., [1991] 1 C.T.C. 2498, 91 D.T.C. 787 (T.C.C.), after reviewing the relevant jurisprudence, Judge Brulé commented at page 2502 (D.T.C. 789) that:

It is the concept of actual loss suffered by virtue of the employment that is the common thread of all these cases, or to put in other words, the restoration of the economic situation enjoyed by the taxpayer before undertaking a loss or expense by virtue of employment.

This case reinforces the concept that reimbursements for actual losses are not taxable, but that which cannot be demonstrated to be an actual expense or loss will be taxed. In order to receive a tax free reimbursement, the taxpayer must suffer a triggering loss or incur an eligible expense and not receive moneys in the guise of reimbursement.

When the taxpayer was forced to move to Toronto from Calgary, his economic situation was detrimentally affected. No one would deny this. In an attempt to ease the transition and offset losses and expenses incurred by the employee by virtue of the relocation, the employer offered assistance. If the payments made by the employer merely serve to protect the employees’ fiscal position and are not a disguised method of increasing the employees remuneration, then they are not taxable benefits. If the payments make the employee better off, then they are taxable.

Based upon the jurisprudence there can be no difference between a reimbursement for a loss sustained and a reimbursement for an expenditure. In neither case has the employer put money in the employee’s pocket. Indeed, the facts in Splane, supra, indicate that the non-taxable reimbursement was for an expenditure, namely an increased interest expense. The resolution of the issue is a matter of evidence. Can the alleged loss be demonstrated and it matters not, whether it flows from a capital loss Or an expenditure?

It is indisputable that an additional monetary expenditure for housing was incurred and this was occasioned by virtue of employment. Similarly, no one would deny that housing costs in Toronto are not greater than those in Calgary. Certainly it follows that any reimbursement with respect to increased housing costs, as a result of an employer’s forced move, simply protects the employee’s pocket. Nonetheless, one must be wary of subjective perceptions as they obscure the line that divides non-taxable reimbursements from taxable benefits. It is a matter of degree.

There has been a suggestion that equitable principles require these amounts to be included in the taxpayer’s income. Concern has been raised that, vis-à-vis employees already situated in Toronto, the appellant has gained an advantage. However, conversely, vis-à-vis employees who were not required to move from Calgary he is worse off. Horizontal equity demands that persons in like situations be taxed in a like manner. Neither of these groups are in like situation not having been required to move. The reasoning why this type of reimbursement should not be taxed is that it simply makes the taxpayer whole. He does not receive personal advantage.

A similar view was expressed in Greisinger v. M.N.R., [1986] 2 C.T.C. 2441, 86 D.T.C. 1802 (T.C.C.), which involved a taxpayer who was transferred from Calgary to Edmonton and received a $140,000 loan from his employer in order to purchase a new home until his house in Calgary was sold. The taxpayer was unable to sell his home and thus commuted from Calgary to Edmonton at his own expense. In light of the circumstances, the employer forgave $60,000 of the loan. The Court ultimately held that this reimbursement was not subject to tax. The Court did note however that the taxpayer must establish his actual losses, and any surplus over actual demonstrated loss was a benefit from employment that was subject to taxation. In disposing of the matter Judge Brulé commented at page 2444 (D.T.C. 1805):

The rationale why this reimbursement should not be taxable is that there must be harmony and balance between the employee that is transferred to another city and the employee that is not. Indeed, the first may suffer losses as the second is in a stable position. A company, in order to render those transfers more economically favourable, will compensate its employee. Consequently, an economical balance has been created and for this reason, this reimbursement should not be taxed....

The facts in this appeal are similar to, albeit not the same as those in Splane, supra, where a taxpayer moved at the employer’s request and was reimbursed for additional mortgage interest there due to the increase in the rate of interest, the test set out above was applied with the result that the trial judge held at page 203 (D.T.C. 6445) that:

No economic benefit of any significant value was conferred upon this plaintiff. The plaintiff moved at the request of his employer, incurred certain expenses in the move, and suffered a loss. The reimbursement of these expenses cannot be considered as conferring a benefit within the terms of the Act. The plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating to the Edmonton office.

I believe the same is true in this case. The appellant’s equity in the new house remained the same. The house in Toronto may be significantly more valuable asset but the appellant’s ownership in the asset did not increase. In Calgary, the appellant’s equity in his home was $98,600. In Toronto, the appellant’s equity position was still $98,600. A person’s economic position is not advanced by maintaining the same ownership in a more valuable asset. The appellant assumed all responsibility for payments on account of increased principal. In fact, his monthly mortgage payments were greater in Toronto than Calgary. If employment ceased or the employee was relocated back to Calgary, the assistance ceased. The assistance received by the appellant was not a colourable attempt to increase the appellant’s remuneration, it is merely a reimbursement for an expense incurred by virtue of employment.

For these reasons, the appeal is allowed, with costs on a party and party basis, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount paid on behalf of the appellant was not a benefit under the provisions of paragraph 6(1 )(a) of the Act.

Appeal allowed.