Décary J.A.:
1 The applicant is a federal public servant employed by the Department of Foreign Affairs and International Trade (the Department). He is part of the group of employees known as rotational employees, who must perform their duties both in Ottawa and at Canada's missions abroad and who may spend half to two thirds of their careers abroad. A rotational employee who begins to work for the Department is immediately informed that he or she must accept [TRANSLATION] “the principle of rotational employment inherent in such work” and be prepared [TRANSLATION] “to accept any assignment that the Department considers useful or necessary, either in Ottawa or at any of Canada's diplomatic or consular missions abroad”.
2 Rotational employees face a significant problem when it comes to obtaining French-language primary and secondary education for their children. There is no equivalent abroad of the French-language public education available in Quebec and Ontario; children who begin or continue their education in French in Quebec or Ontario or who wish to begin or continue it abroad have no real choice but to attend, both in Canada and abroad, one of the network of French-language institutions under the French Agence pour l'enseignement français à l'étranger. That network includes about 400 lycées or schools in 127 countries (according to 1995 figures) and, in all those countries, uses the curriculum of the French Ministry of Education. That curriculum is very different from what is offered in the Quebec and Ontario systems. The only institution in the National Capital Region that is part of this network of French-language institutions and is able to provide the children of rotational employees with continuous French-language education is the Lycée Claudel, an institution located in the city of Ottawa.
3 Accordingly, because their children, when abroad, must attend an institution that is part of the network of French-language institutions, rotational employees who have returned to Ottawa or are in Ottawa pending an assignment abroad prefer to send their children to the Lycée Claudel. The evidence shows that it is difficult, and often impossible, to enrol a child in one of the network's institutions abroad if the child has not already begun or continued his or her education in Canada at an institution that is part of the network.
4 The problem, of course, is that the Lycée Claudel in Ottawa is a private institution, that an education there is not free and that the cost is very high. Thus, it cost the applicant $9,735.00 in 1991 to send his two children there, whereas he would not have had to spend anything if his children had attended public school in Gatineau, Quebec, where he lived.
5 To remedy this financial disadvantage for the Department's rotational employees, the Treasury Board Secretariat has adopted the following directive.
33.01 The provisions of this directive are available to career foreign service employees as defined in FSD 3.01(a) and to RCMP Liaison Officers, while serving in the headquarters city, in order to ensure continuity in French language education for their dependent children while serving outside Canada.
33.02 The deputy head may authorize payment of the cost of tuition, prescribed textbooks (up to the equivalent of Ontario Grade 12/OAC) and school supplies (up to the equivalent of Ontario Grade 8) incurred at the Lycée Claudel in Ottawa in respect of:(a) children who were registered in the French lycée system during the assignment of the employee abroad;
(b) children who commence primary schooling in the first year of the lycée system during the assignment of an employee in Ottawa following an assignment abroad; and
(c) children who are enrolled in the Lycée Claudel where an employee has not been offered an initial assignment outside Canada.
33.03 Payment authorized in accordance with Section 33.02 shall normally be limited to the two-year period immediately following:(a) the employee's assignment to Ottawa from abroad, and/or
(b) the date on which the employee commences rotational employment.
33.04 Exceptions to the limitations prescribed by Section 33.03 may be considered on an individual basis by the deputy head of the employing department, who may approve extensions of up to one year at a time as a result of operational requirements. This deputy head discretion would also extend to situations where an employee is assigned to or from Canada during the academic year.
6 In practice, parents who send their children to the Lycée Claudel in Ottawa pay the cost themselves and are then reimbursed by the Department. If they remain in Ottawa for more than two consecutive years, they are told that “you are required to furnish a letter from your assignment officer stating that you have not been offered a posting or that you did not refuse a posting. Reimbursement can only be authorized upon receipt of this letter”.
7 In his assessment for the 1991 taxation year, the Minister of National Revenue (the Minister) included in the applicant's income the $9,735.00 the applicant had received in 1991 from his employer, the Government of Canada, to reimburse him for the expenses he had incurred to send his children to the Lycée Claudel in Ottawa. The Minister initially characterized the amount received by the applicant as an “allowance”, which made paragraph 6(1)(b) of the Income Tax Act (the Act) applicable, but later changed his mind and is now arguing that the amount is a reimbursement of actual expenses incurred by the applicant and hence a benefit received by the applicant by virtue of his employment within the meaning of paragraph 6(1)(a) of the Act. The introductory portion of that paragraph reads as follows:
6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue or an office or employment....
8 After an exhaustive review of the case law, the Tax Court of Canada Judge confirmed the notice of assessment. His conclusion reads as follows:
From the foregoing analysis, I am inclined to conclude that the reimbursement by the Government of Canada of the appellant's expenses with respect to his children's education falls within the “fiscal scope” of paragraph 6(1)(a) of the Act. This conclusion is based on the following factors:(a) these expenses have to do with a personal matter, i.e. the education of an employee's children;
(b) they were incurred as a result of the appellant's decision to enrol his children in a French-language education system, even though that decision was entirely understandable in the circumstances;
(c) they were incurred in anticipation of the appellant's being posted outside Canada.
All things considered, the relationship between these expenses, which were reimbursed by the Government of Canada, and the appellant's employment, although a close one, does not seem to me to be close enough to place the reimbursement of those expenses beyond the fiscal scope of paragraph 6(1)(a) of the Act. Furthermore, the appellant has not shown that the reimbursement of the expenses here in issue did not, under certain circumstances, provide him with an economic benefit....
9 With respect, we are of the view that this conclusion is inconsistent with the finding of fact made earlier by the Judge, namely:
First of all, the tuition fees of an employee's dependent children are indisputably expenses of a personal nature. In paying those expenses, parents are discharging a personal obligation which, in principle, is incumbent upon them in their capacity as parents. The reimbursement of those expenses by an employer at first glance constitutes a benefit within the meaning of paragraph 6(1)(a) of the Income Tax Act. However, there is something particular about this expense in this case. These fees were paid by the appellant as a result of the condition regarding the rotational nature of his position. That condition was inherent in the appellant's employment with the Government of Canada. His children's attendance at the Lycée Claudel was the only realistic option if the appellant decided that his children were to continue their education in a French education system when outside Canada.
(emphasis added)
10 Once the only realistic option available to an employee, because of the rotational nature of his or her employment, is to enrol his or her children in the only institution in Ottawa that offers the French education system recognized throughout the world, it can no longer be concluded that there is an insufficient relationship between the expenses incurred by the employee and the employee's employment.
11 The ultimate decision is, of course, made by the employee, but in reality the decision is imposed on the employee by the very nature of the employment. The employer has itself recognized the exceptional situation faced by its rotational employees. In the fulfilment of his legal duty to ensure that his children receive an education, and for the perfectly legitimate purpose of ensuring continuity in that education, the applicant was for all practical purposes compelled by the requirements of his employment to decline the free education available in the public system and to pay the cost of a private education system, a cost the Department's non-rotational employees do not have to pay.
12 The Minister made much of the choice open to the applicant not to take his children abroad with him or to enrol them in public school when his duties kept him in Ottawa. This is not a realistic argument. The Minister of National Revenue seems in this regard to be going directly against the policy of the Department of Foreign Affairs and International Trade. The applicant's choice in this case is dictated by the interests of his children, which require that they accompany their parents abroad and that their parents' relocation compromise, slow down or disturb their education as little as possible. The Minister also argued that the expenses were incurred not because of an actual change in the applicant's place of work, but in anticipation of an uncertain event, namely the posting of the applicant abroad. However, the evidence shows that the applicant's status as a rotational employee makes his posting abroad unavoidable and that if he is not posted within two years or if he refuses a posting, the steps necessary to prevent any abuse have been taken by the Department in section 33.03 of the directive referred to above.
13 We therefore conclude that the relationship between the reimbursed expenses and the applicant's employment is sufficient to exclude the reimbursement from the tax field of paragraph 6(1)(a).
14 To determine whether a reimbursement is a benefit within the meaning of paragraph 6(1)(a), it must be ascertained whether the applicant's net worth increased following the payment or, rather, whether the payment simply restored the taxpayer to the position he would have been in had it not been for the expenses incurred because of the requirements of his employment. This principle was expressed as follows by our colleague Linden J.A. in Canada (Attorney General) v. Hoefele:
Therefore, the question to be decided in each of these instances is whether the taxpayer is restored or enriched. Though any number of terms may be used to express this effect—for example, reimbursement, restitution, indemnification, compensation, make whole, save the pocket—the underlying principle remains the same. If, on the whole of a transaction, an employee's economic position is not improved, that is, if the transaction is a zero-sum situation when viewed in its entirety, a receipt is not a benefit and, therefore, is not taxable under paragraph 6(1)(a). It does not make any difference whether the expense is incurred to cover costs of doing the job, of travel associated with work or of a move to a new work location, as long as the employer is not paying for the ordinary, every day expenses of the employee.
15 In the case at bar, the reimbursement by the Government of the cost of the applicant's children's education at the Lycée Claudel in Ottawa in no way increased the applicant's net worth; the reimbursement put him in the same position as if he had not been compelled by the nature of his employment to send his children there.
16 The application for judicial review will be allowed, the Tax Court of Canada's decision set aside and the case referred back to the Tax Court of Canada with the instruction that the taxpayer's appeal must be allowed and the matter referred back to the Minister of National Revenue so that he can reassess the taxpayer on the basis of these reasons.
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