7 May 1991 Income Tax Severed Letter - Detailed discussion of relocation and 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.

SPEECH ON RELOCATION EXPENSES

TO: XXX CANADIAN INCOME TAX CONFERENCE

DATE: MAY 15, 1991

SPEAKER: B.W. DATH Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

RELOCATION EXPENSES

INTRODUCTION

In recent years it has become common practice for employers to pay or reimburse employees for a variety of costs associated with relocating the employee and household. Such payments by the employer may include items that are normally considered personal expenses.

CASE LAW

Perhaps a review of the relevant case law will give an overview of where the Department is on taxation of relocation payments.

RANSOM 1967

Ransom [[1967] C.T.C. 346] is usually where we start when we talk about this subject. Mr. Ransom moved from Winnipeg to Montreal at the request of his employer and due to market conditions suffered a loss on the sale of his former residence. His employer compensated him for the loss and the Department said that the compensation was taxable. However the Exchequer Court referring to an English case held that "the reimbursement puts nothing in the employee's pocket but merely saves his pocket" and found the payment was not taxable. In addition, Justice Noel provided a definition for an allowance as compared to a reimbursement.

The Department has followed this decision and has not sought to tax reimbursements on actual losses suffered on an employer requested move.

MCNEILL AND SEGALL 1986

Two of the significant cases on moving expenses are the McNeill [[1986] 2 C.T.C. 352] (86 DTC 6477) and Segall [[1986] 2 C.T.C. 2364] (86 DTC 6486) cases.

The taxpayers were air traffic controllers at Dorval Airport and were offered a transfer outside of Quebec to Ottawa International Airport due to disputes between the anglophone and francophone controllers. They received a relocation allowance made up of an Accommodation Differential and a Social Disruption Allowance. The Department considered that both these allowances were taxable.

The Federal Court _ Trial Division found that the social disruption allowance was taxable but that the accommodation differential was not a benefit received "in respect of, in the course of, or by virtue of the taxpayer's employment". The Court also found that the payment was motivated primarily by considerations extraneous to the employment, namely, public and labour relations considerations.

COMMENT

In view of the reasons for the Court's decision (and possibly the political overtones) the McNeill and Segall cases were not appealed to the Federal Court of Appeal. The Department has undertaken to clarify the scope of these decisions and has proceeded to litigate cases involving similar issues.

RECENT COURT DECISIONS

There were a number of cases heard in 1990 at the Tax Court level. The Department is appealing the adverse decisions to the Federal Court _ Trial Division.

In the case of William R. Phillips v. M.N.R. [[1990] 1 C.T.C. 2372] (90 DTC 1274) the issue is whether an allowance received by an employee of CN, to partially compensate for a difference in housing cost, is taxable as income from office or employment.

In 1987, CN closed their facility in Moncton and the taxpayer was relocated to Winnipeg. CN paid the taxpayers moving expenses and in addition paid a sum of $10,000 for selling his home in Moncton and purchasing one in Winnipeg.

The home in Winnipeg cost $28,000 more than he received from the sale of his Moncton residence.

In allowing the appeal, the Tax Court of Canada found that the amount was not income from employment since it did not "put any money in the taxpayer's pocket". The Court relied on the decisions in Ransom and McNeill.

The Department is of the view that Mr. Phillips has $10,000 more in equity in his Winnipeg home than he would have had therefore he has received a taxable benefit.

In the case of Orrin J. Splane v. The Queen [[1990] 2 C.T.C. 199] (90 DTC 6442), the taxpayer was the Senior Court Registrar of the Federal Court of Canada who, at the request of his employer, moved from Ontario to Alberta.

The interest rate on the mortgage loan to buy his Alberta home was 14.25% compared to a 12.25% interest rate for the mortgage on his old home.

In accordance with the Treasury Board policy, the taxpayer received a Mortgage Interest Differential of $1,123 (1985) and $856 (1986).

The Court found that the amounts were not taxable and allowed the appeal on the basis that:

_ No economic benefit of any significant value was conferred. The taxpayer moved at the employer's request, incurred certain expenses and suffered a loss.

_ The reimbursement of expenses could not be considered a benefit since the taxpayer was simply restored to the same economic situation he was in before he moved.

_ The payment had none of the qualities of a taxable allowance. It was not a predetermined sum paid in advance for which he did not have to account. The expenditures were reimbursed upon presentation of receipts and, consequently, a non-taxable reimbursement.

The Department views this as a personal expense paid by the employer and therefore taxable. Most employers avoid this type of situation by participating in the employee's borrowing and thereby bring the benefit under section 80.4. Through the use of the available deduction under 110 1 j or even the prescribed rate a 2% contribution by the employer would likely escape tax.

In the case of Vincent Lao v. M.N.R. [[1991] 1 C.T.C. 2718] (March 22, 1990), the taxpayer was hired by Equipment Planning Associates in late 1984 as a management consultant. One of the provisions of his employment contract required the taxpayer to relocate from Edmonton to Toronto. The employment contract also called for the payment of an allowance to compensate for higher housing prices in Toronto. In 1985 he relocated and received an allowance of $22,500.

The Tax Court found that the amount was not taxable and allowed the appeal on the basis that:

_ the payment was not an allowance but partial reimbursement of increased housing costs;

_ the payment could not reasonably be regarded as consideration for entering into the contract of employment, notwithstanding that he found that the amount was part of the remuneration package;

_ the taxpayer did not receive a benefit, as he was in no better position.

In contrast in the case of R. Volpe v. M.N.R. [[1990] 2 C.T.C. 2321] (90 DTC 1707), the taxpayer entered into an agreement in 1983 with his new employer which required him to move from Edmunton to Moncton to be closer to his new job. Under the terms of the agreement, the taxpayer received $27,000 to compensate for a market value loss (not an actual loss) incurred on the sale of his house in Edmunton.

The judge dismissed the appeal finding that the payment was taxable since it resulted from an obligation under the agreement with the employer, and was received as consideration for accepting the office within the provisions of paragraphs 6(3)(b) and (c) of the Act.

In the case of G. Lee v. M.N.R. (July 3, 1990), the taxpayer was relocated from Kingston to Whitby in 1985. In accordance with his employers policy, the taxpayer received an incidental expense allowance based on one month's salary which was in addition to actual moving expenses reimbursed by the employer.

The judge, referring to the Savage decision, dismissed the appeal finding that the allowance was taxable under paragraph 6(1)(a) of the Act.

DEPARTMENT'S CURRENT POSITION

In summary the Department's arguments in pursuing these adverse decisions are that:

_ The amount are either unaccountable allowances for personal and living expenses or an increase in the taxpayer's equity in the property.

_ The allowances do not fall under any of the exceptions specified in paragraph 6(1)(b) of the Act.

_ By attempting to take into account variations in the cost of living, the courts have introduced into the law an inequity between taxpayers living in a particular location, i.e., a 20% increase in salary to compensate for higher living costs would be taxable while the receipt of a housing allowances representing 20% of his salary would not be taxed.

_ The courts failed to draw the distinction between a reimbursement and an allowance as stated in Ransom. In addition, they failed to distinguish between an expenditure of a personal nature and one incurred on behalf of the employer.

_ The payment of a personal expenditure confers an economic advantage on the employee and is a benefit or allowance for personal or living expenses within the meaning of paragraph 6(1)(a) or (b) of the Act.

_ The courts have failed to apply the meaning of "in respect of an office or employment" which must be given the widest possible scope as interpreted by the Supreme Court of Canada in Savage [[1983] C.T.C. 393] (83 DTC 5409).

_ Any form of housing assistance constitutes a benefit or allowance for personal or living expenses. The Act provides relief in this regard, i.e., northern residence deduction, home relocation loan within the meaning of paragraph 110(1)(j) of the Act, and moving expenses.

_ The Ransom and McNeill/Segall cases can be distinguished on their facts.

Paragraph 6(1)(a) & (b)

The Act stipulates that, except for specific exemptions (usually group plans), benefits of any kind whatever received by an individual in respect of employment are to be included in income. It also specifically refers to the following benefits:

_ A benefit received or enjoyed by an individual in respect of, or by virtue of, an office or employment _ paragraph 6(1)(a).

_ An allowance for personal or living expenses or an allowance for any other purpose _ paragraph 6(1)(b).

As stated in Interpretation Bulletin IT-470R, where an employer reimburses an employee for eligible expenses incurred by him in respect of his relocation, this reimbursement is not a taxable benefit to the employee.

Administratively, the Department accepts, as a non-taxable reimbursement, allowances not exceeding $650. (The amount in the Guide is $500 however this has now been increased to $650.) However, the allowance must be for expenses incurred as a result of the move and the employee must certify in writing that incidental expenses have been incurred at least to the extent of the allowance or $650, whichever is less.

Nonaccountable moving allowances provided to employees will usually constitute an allowance for personal or living expenses and are taxable as such pursuant to paragraph 6(1)(b). However, employers may pay a lump sum nonaccountable moving allowance to cover any combination of eligible expenses and, where the employee can substantiate that all or part of the allowance was used to cover the cost of eligible items, the amount accounted for is not required to be included in income.

Where payments from the employer are required to be included in an employee's income he may be entitled to a deduction under Section 62 of the Act for moving expenses.

The general rule is that you may deduct moving expenses from your income if:

• (1) You move in order to earn salary, wages or self-employment income in a new location in Canada (even if you will be working with the same employer); AND
• (2) Your move results in your new residence being at least 40 kilometres closer than your former residence to your new place of work or business.

Generally the employee should meet the tests in section 62 where its desired to pay him a non taxable reimbursement on relocation. (However in the case of a non taxable reimbursement we have provided favourable opinions in other circumstances; for example, a move to a business location out of the country.)

MOVING EXPENSES

Eligible expenses are:

• (1) travelling costs from your former to your new residence. These include meals and lodging for yourself and your family while en route;
• (2) transportation and storage costs for moving your household effects from your former to your new residence;
• (3) the cost of 15 days of temporary board and lodging near your former or your new residence;
• (4) the cost of cancelling an unexpired lease on your former residence;
• (5) the cost of selling the former residence, including advertising, notarial or legal fees, real estate commissions and mortgage penalties. The cost of selling your former residence does not include expenses incurred to make the residence more saleable;
• (6) transfer tax and legal fees associated with the purchase of a new residence provided you have sold or are selling your old residence.

NON TAXABLE ITEMS ON RELOCATION

• (1) disconnection charges and fees for telephone, t.v. aerial, water, space heaters, air conditions, barbecues, automatic garage door openers and water heaters;
• (2) lease cancellation fees;
• (3) mortgage discharge penalties;
• (4) mortgage interest, property taxes, heat, hydro, insurance and grounds maintenance costs to maintain the former residence after the move provided that reasonable efforts to sell it are being exercised;
• (5) long distance phone charges related to the disposition of the old residence;
• (6) loss on the sale of the old residence as stated in paragraph 37 of IT-470R. The loss on the sale is calculated as the original purchase price + capital additions - net selling price;
• (7) interest costs on bridge financing in the purchase of the new residence, provided that all reasonable efforts are exercised to dispose of the old residence;
• (8) reasonable interim living expenses at the new location while awaiting occupancy of permanent accommodation at the new location;
• (9) legal fees and land transfer tax for the purchase of a new residence;
• (10) adjustments and alterations to furniture and fixtures from the old residence to accommodate them in the new residence, including plumbing and electrical changes in the new residence for this purpose;
• (11) connection and installation charges for utilities, appliances and fixtures which existed at the old residence;
• (12) automobile licence, inspection and drivers permit fees where such items were owned at the former location;
• (13) the cost of revision to a will necessitated by the move;
• (14) moving costs of personal items and household effects including automobile, boat or trailer;
• (15) the cost of house hunting trips to the new location including child and pet care expenses;
• (16) expenses for moving an employee and household out of a remote place after the work has been completed.