Otto John Rath v. Minister of National Revenue, [1978] CTC 2425, [1978] DTC 1327

The Assistant Chairman:—When Dr Rath (the “appellant”) filed his 1974 income tax return he claimed as “other deductions” in computing his net income for that year, the sum of $52,869.19. This amount was explained somewhat in a form attached to that return captioned “Claim for Moving Expenses”. The total amount shown as such expenses was $81,040.19, with an amount shown opposite “amount paid or payable by employer, or reimbursed” of $28,171, leaving a balance of $52,869.19. The computations made by the appellant were made, according to him, after discussions with officers in the District Taxation Office at Ottawa, Ontario. Dr Rath did move to Ottawa in the year 1974 and it appears the move was somewhat disastrous for him. Dr Rath, a medical practitioner, had been in 1973 and still is employed by the Department of National Health and Welfare. In 1973 his place of employment and residence was in Edmonton, Alberta, where he had been so employed and resided for several years. In the summer of 1973 the appellant was given educational leave for approximately one year. He, his wife, and family of four, went to Berkeley in the State of California, in the United States of America, to follow his educational pursuits. They took with them, I believe, a substantial quantity of furniture as well as clothing, sheets, and other personal effects, and at the same time left some furniture in their home in Edmonton. I believe they rented those premises partly furnished.

In the early summer of 1974, while in California still on educational leave, Dr Rath was advised that he was being transferred to Ottawa to another position with the Department of National Health and Welfare. His Department made arrangements to ship his furniture, clothing, equipment, etc (which I shall refer to hereinafter as “furniture”) by moving van to Ottawa from California. He and his wife found that the maximum insurance coverage by the mover was only $10,000. They shopped for further insurance but the result was that none could be obtained as they did not know where the furniture was expected to be stored on its arrival in Ottawa, nor the type of building, how modern, the type of sprinkler system, if any, it would have, and many other relevant details essential to an insurer before he would insure the furniture while stored. The furniture left California by van in June or July of 1974 for Ottawa.

The appellant and his family, in early summer, returned home to Edmonton. As for accommodation on their trip to Edmonton, their 2- week stay in Edmonton, and their trip to Ottawa, they used a trailer. In Ottawa, I believe, they stayed in a motel until they moved into their home. While in Edmonton for the short stay, Dr Rath returned to his office and wound up his affairs before leaving for his new appointment. ‘At the same time his employer, as had been done in California, arranged, through the appellant or by itself, for a moving van to move the furnishings still in the appellant’s Edmonton home to Ottawa. The Edmonton furnishings arrived in Ottawa after the appellant had purchased his home and they went directly into his new residence.

Such was not the case with the furniture coming from California. It arrived in Ottawa long before the appellant and, consequently, was placed in storage at the Allied Van Lines’ warehouse on Carling Avenue in the City of Ottawa. On July 20, 1974, while so stored, all the furniture which came from California was destroyed by fire. The appellant and his wife learned to their sorrow that the total insurance coverage on that furniture was $10,000 by the mover and $12,000 by their employer. In due course, after listing the furniture destroyed and placing their value on it and filing the requisite documents with the insurance adjuster, they were paid a total of $22,000. Steps were taken immediately to commence to replace the furniture destroyed. All was not replaced immediately in 1974 as there was a practical limitation as to the amount of funds available. Substantial replacements were made both in 1974 and in 1975 and it was pointed out in evidence that to date (March 1978) all furniture had not been replaced.

Before filing his income tax return for the 1974 taxation year the appellant ‘saw officials of the Department of National Revenue, Taxation, and informed them of the events which have just been recounted. He was advised that he could claim his net loss and he did claim that amount plus legal fees his employer had not reimbursed ($52,869.19). It appears that all costs incurred by the appellant as a result of the move except those legal fees and the net fire loss were reimbursed by his employer. He filed his 1974 return as advised and by a notice received in the fall of 1975 (Exhibit A-5) was informed: “your claim for moving expenses has been reduced by $38,729.35. Your claim is limited to the income earned in 1974 at the new location. The amount disallowed may qualify as a deduction on your 1975 income tax return.” The appellant accepted the position taken by the respondent and, when he filed his 1975 income tax return, he claimed as “other deductions” the total of $38,943.27. On his income tax return, opposite this item, appears the words ‘‘Moving expenses 1974 ($38,729.35 + 213.92) carrying charges Sched 4D ($213.92) See attached Notice of Assessment 1974 Income Tax.” He apparently was assessed as filed. Unfortunately for the appellant the “moving expense” item had not yet been finally resolved. In March of 1977 he received a reassessment for each of the 1974 and 1975 taxation years and all moving expenses previously allowed were now disallowed. Needless to say, the reassessments also informed the appellant that he was now indebted to the Crown for over $20,000 including interest. The appellant objected to the reassessments and, following notification by the Minister that he confirmed the reassessments, the appellant appealed to this Board. The appellant contends that his loss was a moving expense and so, pursuant to subsection 62(1) of the Income Tax Act after tax reform, it is deductible in computing his income. The Minister takes the position that the loss was not a moving expense and, even if it were, the expense was not within the ambit of subsection 62(1) of the said Act as the move was not from a residence in Canada to a residence in Canada, but rather a residence in the United States to a residence in Canada.

Subsections 62(1) and (3) of the said Income Tax Act read as follows:

62.(1) Where a taxpayer

(a) has, at any time,

(i) ceased to carry on business or to be employed at the location or locations, as the case may be, in Canada at which he ordinarily so Carried on business or was so employed, or

(ii) ceased to be a student in full-time attendance at an educational institution in Canada that is a university, college or other educational institution providing courses at a post-secondary school level,

and commenced to carry on a business or to be employed at another location in Canada (hereinafter referred to as his “new work location’’), or

(b) has, at any time, commenced to be a student in full-time attendance at an educational institution (hereinafter referred to as his “new work location’) that is a university, college or other educational institution providing courses at a post-secondary school level,

and by reason thereof has moved from the residence in Canada at which, before the move, he ordinarily resided on ordinary working days (hereinafter referred to as his “old residence”) to a residence in Canada at which, after the move, he ordinarily so resided (hereinafter referred to as his “new residence”), so that the distance between his old residence and his new work location is not less than 25 miles greater than the distance between his new residence and his new work location, in computing his income for the taxation year in which he moved from his old residence to his new residence or for the immediately following taxation year, there may be deducted amounts paid by him as or on account of moving expenses incurred in the course of moving from his old residence to his new residence, to the extent that

(c) they were not paid on his behalf by his employer,

(d) they were not deductible by virtue -of this section in computing the taxpayer’s income for the preceding taxation year,

(e) they would not, but for this section, be deductible in computing the taxpayer’s income,

(f) the aggregate of such amounts does not exceed

(i) in any case described in paragraph (a), the taxpayer’s income for the year from his employment at his new work location or from carrying on the new business at his new work location, as the case may. be, or

(ii) in any case described in paragraph (b), the aggregate of amounts required to be included in computing his income for the year by virtue of paragraphs 56(1)(n) and (o), and

(g) any reimbursement received by him for such expenses has been included in computing his income for the year.

(3) In subsection (1) “moving expenses” includes any expense incurred as or on account of

(a) travelling costs (including a reasonable amount expended for meals and lodging), in the Course of moving the taxpayer and members of his household from his old residence to his new residence,

(b) the cost to him of transporting or storing household effects in the course of moving from his old residence to his new residence,

(c) the cost to him of meals and lodging near the old residence or the new residence for the taxpayer and members of his household for a period not exceeding 15 days,

(d) the cost to him of cancelling the lease, if any, by virtue of which he was the lessee of his old residence, and

(e) his selling costs in respect of the sale of his old residence.

Before considering the submissions of counsel, another observation must be made. All the furniture which was shipped by the appellant from California to Ottawa was destroyed by fire. The appellant and his wife valued that furniture at $74,808.19. There was an insurance recovery of $22,000. Accepting the appellant’s valuation, the appellant had a loss as a result of the fire of $52,808.19, plus unreimbursed legal fees of $61, making a total loss of $52,869.19. The amounts claimed as moving expenses in 1974 and 1975 total the amount of the “total loss’’, $52,869.19. An underwriter received a copy of the appellant’s valuation and replied in part as follows:

We acknowledge your list consisting of household items, jewellery, medical equipment, office equipment and stamp collection to which we have taken the liberty of placing a value of $54,141.13.

The appellant replied to that underwriter, again in part, as follows:

Although we have been advised that the carrier’s maximum liability is $10,000.00 and the maximum liability of the Government Employee Transit policy is $12,000.00, we cannot agree to the liberty you took of placing a value of $54,141.13 on our loss.

Mrs Rath, as well as the appellant, gave evidence and explained how the valuation was prepared. One underwriter told her that depreciation should be charged while, if I recall the evidence correctly, another said not to. She was also told to make allowance for the sales tax of 7%. Mrs Rath stated that $22,000 was spent to get the necessities of life virtually immediately and, as refunds were received (I believe from the Department of National Revenue as a result of the original assessments), further articles were acquired. Her estimate was that to date over $50,000 had been spent replacing the furniture destroyed and, even at that, all of it had not been replaced. In 1974, in excess of $22,000 was so spent.

The submission by the appellant’s counsel as to the claim for moving expenses is that the appellant, in the course of moving from one job to another, incurred a loss and that that loss is within the ambit of the allowance permitted by subsection 62(1). His submission is that that section is to assist people who incur costs in moving or in the course of moving and, as such, should receive a liberal interpretation. He specifically referred to the fact that subsection (3) of section 62 is not a definition section for the phrase “moving expenses”, but rather is a subsection indicating what is included in the phrase “moving expenses”. He specifically made reference to paragraph 62(3)(b) where it states that moving expenses include “the cost . . . of storing house hold effects”. At that stage the move is finished, but, as far as status is concerned, the person there involved is still “in the course of moving” and in the instant case, when the appellant’s furniture was destroyed, he was still in the course of moving and so the deduction he claimed should be allowed.

Counsel for the Minister took two basic positions: firstly, the facts of the case do not bring the appellant within subsection 62(1) in that the amounts claimed as moving expenses were not incurred in moving “from the residence in Canada . . . to a residence in Canada” as it was a move from California to Canada; and, secondly, the amounts claimed were not moving expenses under the normal meaning of the words or by definition within subsection 62(3) of the said Act, and nothing or virtually nothing was spent in 1974 over the insurance recovery and not a great deal more in 1975.

Both counsel made reference to the decision of Mr Justice Addy in the case of Jack R Gold v Her Majesty the Queen [1977] CTC 616; 77 DTC 5430, but for different purposes. In that case the appellant moved with his family from Montreal, Quebec to Ottawa, Ontario in 1975. At the time of the move his son was a high school student in Montreal, and it was to his advantage that he complete his high school education in Montreal before proceeding to college. The appellant was reimbursed by his employer for the move, which included moving the, son to Ottawa. In the fall of 1975 the son returned to Montreal to continue his academic pursuits and his father paid his room and board and other incidental expenses while he went to school. The father claimed the amount paid for room and board and incidentals as a moving expense, but the Minister disallowed the claim. This Board, when Gold appealed to it, dismissed his appeal. On his appeal to the Federal Court, that Court also dismissed it. Counsel for the appellant agrees with this decision as those expenses were not incurred “in the course of moving” as the moving was a “fait accompli” when those expenses were incurred. The respondent’s counsel pointed out a portion of the reasons of Addy, J as the basis on which this section should be considered. After quoting subsection 62(3) on page 618 [5431], Addy, J states:

From this subsection it seems abundantly clear that the words “moving expenses” mean the expenses incurred in physically moving and in actually changing residence and certain other very specific expenses relating directly to the actual move and reinstallation and do not mean an amount to compensate for incidental disturbances or damages not related to the actual move and reinstallation in the new residence.

Counsel specifically pointed out a phrase in Mr Justice Addy’s reasons: “. . .. and certain other very specific expenses relating directly to the actual move .. and submitted as an example, it could be that storage charges (see paragraph 62(3)(b)) would not have been a moving expense had they not been specifically included in that paragraph.

With that approach, counsel for the Minister referred to two decisions of this Board on the question of residence, namely, Chester J Webb v MNR, [1974] CTC 2320; 74 DTC 1237, and Raymond Scott v MNR, [1975] CTC 2294; 75 DTC 231, both decisions of Chairman Flanigan. Both of those appellants were members of the armed forces of Canada. In the Webb case he was transferred from Germany, where he had been stationed, back to Canada, and in the Scott case from Kingston, Ontario, to Washington, District of Columbia, USA. In each case the claim was for moving expenses over and above those reimbursed by his employer, and in each of those cases the appellant argued that, even though he was out of Canada physically, because of a specific provision of the Income Tax Act, he was deemed to be a resident of Canada and thereby liable to taxation. Therefore, for the purposes of subsection 62(1) they should be considered at all times to be in Canada and therefore their move was a move from one residence to another, both in Canada. Both appeals were dismissed by the chairman.

In the Webb case he stated at page 2321 [1239] as follows:

There is no doubt whatsoever in my mind that section 62 was meant to include, and does include, only those persons who were physically resident within the confines of Canada at the time the move was made and at a time when the section was in effect, as it refers to moving from one residence in Canada to another residence in Canada.

In the Scott case at page 2295 [232], his remarks in part were:

With great respect to the interpretation by the appellant of the Reasons for Judgment in the Webb,case, I think that he has overlooked the comments made by me on page 2321 11239]:

“There, is no doubt whatsoever in my mind that section 62 was meant to include, and does include, only those persons who are physically resident within the confines of Canada at the time the move was made and at a time when the section was in effect, as it refers to moving from one residence in Canada to another residence in Canada.”’

What the appellant in this case has failed to recognize is that the Section allowing a deduction to a taxpayer, namely section 62, for costs incurred in the moving of his residence which were not reimbursed by his employer, clearly indicates that the move must be from a location in Canada to another location in Canada.

The submission by counsel for the Minister was that there was no difference between the present case and the Webb and Scott cases. One came from Germany to Canada, and the other from Canada to the United States. The appellant, as far as his California furniture was concerned, came directly from California to Ottawa even though he may have come from Edmonton to Ottawa. He was only there a couple of weeks after having been in California for close to a year.

As to what is deductible, subsection 62(1) contains the words “.., . there may be deducted amounts paid by him . . .”. It is clear that the appellant claimed his loss after applying the insurance proceeds. This not to be allowed according to the respondent’s counsel—only the amounts paid. His argument follows that in 1974 the appellant could, at a maximum, only claim—assuming the replacement of his furniture is a moving expense—the amount paid in excess of the insurance recovery. In 1975 that amount could be an amount up to the value of the furniture destroyed, less the insurance recovery and the allowance in 1974.

What is the appellant claiming as a deduction pursuant to subsection 62(1) of the Income Tax Act, and why is he claiming it? As I view the latter question, the appellant is making his claim, not because he expended money to acquire replacement furniture, but because his insurance protection on the furniture destroyed did not equal the value of that furniture. Had it been equal to that value, there would have been no claim for a deduction—and then, what is his claim? His claim is for the loss he suffered because of the fire. That was a loss by fire which arose as a result of insufficient insurance—it was not an expenditure because he was moved by his employer from one city to another. He suffered a loss because of the fire as his insurance recovery was less than the value of the furniture destroyed, and he had an expenditure, not because he moved from one place to another, but because he decided at his option to replace the furniture destroyed with other furniture. The submission by counsel for the appellant that the appellant was still “in the course of moving” when the furniture was destroyed would mean that its loss, or purchase of replacement furniture, would be a moving expense if it were destroyed before it was moved into his new home, but the same loss or replacement expense would not be such a moving expense if the destruction took place minutes after he was in his new home. I cannot see such an expenditure being within the ambit of the words “moving expenses” in subsection 62(1) or the inclusive words referred to in subsection 62(3). Having concluded that neither the net loss, after insurance recovery, which the appellant suffered as a result of the fire, nor the amount spent for new furniture—whether or not it includes the spending of the insurance recovery—is a moving expense, there is no need for me to consider the respondent’s submission that it was not a move from a residence in Canada to a residence in Canada.

It is unfortunate that the appellant must bear more grief. Everything he has done has been done honestly and openly and he was completely frank with the Department as to what had transpired. It was thought by some officers of that Department that he was entitled to his claim and he made it with complete disclosure. His income tax return was not just accepted, it was commented upon and he was given a refund. The same approach was made in 1975, with the same result. However, his fate was that the matters would not rest as they were. The claims were disallowed, tax was assessed and demanded, together with interest. I must say, I believe the assessments, as finally made, were correctly made, which means the appellant must pay the tax assessed. When all these circumstances are considered, it would appear that demanding interest as well, is adding more than insult to injury.

Judgment will go dismissing the appeal.

Appeal dismissed.