[1994] 2 .F.C. 680
A-362-93
Her Majesty the Queen (Appellant)
v.
William R. Phillips (Respondent)
Indexed as: M.N.R. v. Phillips (C.A.)
Court of Appeal, Stone, Linden and Robertson JJ.A.—Winnipeg, February 9; Ottawa, March 14, 1994.
Income tax — Income calculation — Appeal from F.C.T.D. decision sustaining T.C.C. decision $10,000 payment to taxpayer by employer to defray higher housing prices when relocating from Moncton to Winnipeg not taxable — Payment made pursuant to agreement between employer and unions entered into after announcement CNR’s Moncton Shops closing — Income Tax Act, s. 6(1)(a) bringing into employment income value of other benefits of any kind received by virtue of employment — Trial Judge holding payment not benefit, but reimbursement for expenses incurred as consequence of employment — As agreement requiring taxpayer to continue to work for CNR, payment received as employee — Review, exposition of case law on taxation of benefits, allowances — Payment conferring economic advantage as enabling taxpayer to acquire more valuable asset.
This was an appeal from the trial judgment dismissing the appeal from the Tax Court’s decision that a $10,000 payment to the respondent from his employer to defray higher housing prices encountered when relocating from Moncton to Winnipeg was not taxable. The respondent was employed by Canadian National Railway (CNR) at its Moncton Shops when CNR announced that the facility would close in 1987. An agreement was reached between CNR and the various unions whereby 60 new positions were created in Winnipeg and a $10,000 relocation payment was established for employees who (a) owned a house in Moncton; (b) transferred from Moncton to Winnipeg; (c) sold the Moncton house; (d) purchased a house in Winnipeg; and (e) reported for work in Winnipeg. The respondent sold his Moncton house and the same year purchased a house in Winnipeg for $28,000 more. Having satisfied the conditions of the agreement he received $10,000. Income Tax Act paragraph 6(1)(a) brings into employment income “the value of … other benefits of any kind whatever received or enjoyed … in respect of, in the course of, or by virtue of an office or employment”. Paragraph 6(1)(b) requires the inclusion of all amounts received as an allowance for personal or living expenses. The Trial Judge concluded that the $10,000 was not taxable under Income Tax Act, paragraph 6(1)(a) or (b). He rejected the depiction of the payment as a taxable benefit, characterizing it as a non-taxable partial reimbursement for expenses incurred as a consequence of employment.
The principal issue was whether an employee who has been relocated is required to include as “income from employment” an amount received from his employer to offset higher housing prices at the new location. This depended upon whether the respondent received the $10,000 as an employee; and whether the $10,000 was a non-taxable reimbursement of an expense incurred as a consequence of employment, or whether it conferred an economic advantage on the respondent.
Held, the appeal should be allowed.
Per Robertson J.A. (Stone J.A. concurring): The respondent received the $10,000 payment in his capacity as employee. An economic advantage received by an employee from his employer will be deemed a benefit within the meaning of paragraph 6(1)(a) unless the employee can demonstrate that the payment was not a benefit in respect of employment, but made in his or her capacity as a person. The terms of CNR’s agreement with the respondent clearly defeated the characterization of the $10,000 as a gift or a loan. Collateral contracts are only a means of providing evidence of subjective intent. A collateral contract must be considered in the context of the employment relationship to determine whether a payment is received in the capacity of person or employee. That the parties chose to effect a post-contractual modification supported by consideration did not diminish the employment relationship, but facilitated the continuing employment. As one of the terms of CNR’s agreement with the respondent was that he remain in CNR’s employ, the respondent received the payment as an employee. Although the question of whether a payment is a gift, loan or the result of considerations extraneous to the employment relationship may be approached with reference to the employer’s intention or the purpose of the payment, CNR’s motivation in making the payment was not the deciding factor. The agreement with the respondent was motivated by a desire to provide a mutually acceptable solution to a labour dispute. Labour negotiations and relocation compensation schemes are integral aspects of the employer/employee relationship, especially in an economy where the downsizing of the work force has become common.
Ransom v. Minister of National Revenue established that reimbursement by an employer for the loss suffered by an employee in selling a house following a job transfer is not taxable to the extent that the payment reflects the employee’s actual loss. Relocation compensation packages are intended to address the financial repercussions of employee relocation on two levels: losses suffered on the sale of the employee’s house, and expenses incurred in purchasing a replacement property. Two kinds of losses can arise upon the sale of an employee’s house: a capital loss and a loss associated with the discharge of a mortgage with an interest rate lower than prevailing market rates. Such losses must be distinguished from the expenses occasioned by a new mortgage with both a higher interest rate and a principal amount which reflects the higher housing prices at the new work location. The tax treatment of compensation directed only to the loss of a favourable mortgage rate on the sale of a house is governed by The Queen v. Splane. It was reasonable to infer that the Court in Splane was dealing with a capital loss as contemplated by Ransom, which was not the case herein.
The rule in Ransom has no application in a case concerning an expenditure involved in replacing a house as opposed to a capital loss. This interpretation was compelled by the Supreme Court’s decision in Savage, the concept of tax equity underlying section 6, and the structure of the Act as a whole. Section 6 seeks to limit tax avoidance relating to monetary and non-monetary compensation not reflected in wages or salaries. It also ensures that employees who receive their compensation in cash are on the same footing as those who receive compensation in some combination of cash and kind. Two employees performing the same work for the same employer should receive the same tax treatment in respect of their employment. This was the true rationale underlying Ransom and the reason why relocation compensation directed towards losses suffered on the sale of a house should not be taxable while that directed towards expenditures incurred in purchasing a replacement is. The payment represented a temporary wage increase not available to all employees. The respondent also gained an advantage over fellow employees resident in the community with higher housing costs.
In R. v. Savage, the Supreme Court accepted that a taxable benefit must be conferred on the taxpayer in his capacity as an employee. It rejected the understanding that to be received in this capacity, the payment must be in exchange for services performed by the employee. R. v. Savage did not overrule Ransom per se. Ransom was only set aside in respect of its conclusion that taxable benefits must have been received in exchange for services performed by the employee. Although the Act has undergone extensive revisions since Ransom was decided, none have contradicted Ransom. Moreover Ransom has been applied by the Court of Appeal on several occasions, such that it has become so enmeshed in our concept of taxable benefits that it is for the Supreme Court or Parliament to set aside its logic.
The extension of the Ransom principle as a stop-gap cost-of-living equalizer may also negate the effect of other provisions of the Act, but perhaps the most persuasive rationale for limiting its application lies in the myriad expenses which its extension could exempt from taxation i.e. new cars or appliances, in provinces with higher costs of living. The $10,000 payment was a taxable benefit unless the respondent could satisfy this Court that it did not confer an economic advantage upon him. “Economic benefit” should not be assessed on the basis of subjective criteria and the taxation of benefits should not depend on the perceptions of individual taxpayers. As the $10,000 payment enabled the respondent to acquire a more valuable asset, it was an economic benefit.
Per Linden J.A.: There was no need in this case to try to limit the effect of The Queen v. Splane. It was not necessary to opine that there should be a difference in treatment between additional interest payments because of an increase in interest rates, and additional interest payments because of an increase in the principal amount of the mortgage. That issue was before neither this Court, nor the Court in Splane. Courts should tread gingerly through this confused area of the law and decide only the cases that come before them. They should guard against imposing absolute consistency where it does not exist. The legislation on benefits and allowances is inconsistent and appears to favour certain classes of taxpayers over others. Even so, Parliament, not the courts, should make these tax policy decisions.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 5(1), 6(1)(a) (as am. by S.C. 1980-81-82-83, c. 140, s. 1), (b), (3)(c), 62 (as am. by S.C. 1977-78, c. 1, s. 27; 1980-81-82-83, c. 140, s. 31; 1984, c. 45, s. 21; 1985, c. 45, s. 26), 80.4 (as enacted by S.C. 1977-78, c. 1, s. 35; as am. by 1980-81-82-83, c. 140, s. 44; 1984, c. 45, s. 25; 1985, c. 45, s. 38; 1986, c. 6, s. 40), 110(1)(j) (as enacted by S.C. 1986, c. 6, s. 55; as am. by 1987, c. 46, s. 38), 110.7 (as enacted by S.C. 1986, c. 55, s. 33).
CASES JUDICIALLY CONSIDERED
APPLIED:
R. v. Savage, [1983] 2 S.C.R. 428; [1983] CTC 393; (1983), 83 DTC 5409; 50 N.R. 321; Greisinger (E.) v. M.N.R., [1986] 2 C.T.C. 2441; (1986), 86 DTC 1802 (T.C.C.); Cutmore (R. H.) et al. v. M.N.R., [1986] 1 C.T.C. 2230; (1986), 86 DTC 1146 (T.C.C.).
DISTINGUISHED:
McNeill v. Canada, [1987] 1 F.C. 119; [1986] 2 C.T.C. 352; (1986), 86 DTC 6477; 5 F.T.R. 133 (T.D.); Segall (S.) v. The Queen, [1986] 2 C.T.C. 364; (1986), 86 DTC 6486 (F.C.T.D.); Ransom, Cyril John v. Minister of National Revenue, [1968] 1 Ex.C.R. 293; [1967] CTC 346; (1967), 67 DTC 5235; The Queen v. Splane, R. O. J. (1991), 92 DTC 6021 (F.C.A.); affg (1990), 90 DTC 6442 (F.C.T.D.).
CONSIDERED:
The Queen v. Lao, V. (1993), 93 DTC 5251 (F.C.T.D.); affg (1990), 91 DTC 330 (T.C.C.); Phaneuf Estate v. R., [1978] 2 F.C. 564; [1978] CTC 21; (1977), 78 DTC 6001 (T.D.).
REFERRED TO:
R. v. Poynton, [1972] 3 O.R. 727; (1972), 29 D.L.R. (3d) 389; 9 C.C.C. (2d) 32; [1972] CTC 412; 72 DTC 6329 (C.A.); Blanchard (E. J.) v. Canada, [1992] 2 C.T.C. 403; (1992), 92 DTC 6585 (F.C.T.D.); Sheldon, G. K. v. Minister of National Revenue (1988), 88 DTC 1392 (T.C.C.); Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R. 241; Lor-Wes Contracting Ltd. v. The Queen, [1986] 1 F.C. 346; [1985] CTC 79; (1985), 85 DTC 5310; 60 N.R. 321 (C.A.); Huffman (G. R.) v. Canada, [1990] 2 C.T.C. 132; (1990), 90 DTC 6405 (F.C.A.); affg [1989] 1 C.T.C. 32; (1988), 89 DTC 5006 (F.C.T.D.).
AUTHORS CITED
Bradley, J. D. “Measuring Employee Benefits” in Canadian Tax Foundation. Report of Proceedings of the Forty-Third Tax Conference. Canadian Tax Foundation, 1991.
Canada. Royal Commission on Taxation. Specific Types of Personal Income (Study No. 16) by Sherbaniuk, D. Ottawa: Queen’s Printer, 1967.
Canada. Task Force on Tax Benefits for Northern and Isolated Areas. Report of the Task Force on Tax Benefits for Northern and Isolated Areas. Ottawa: Supply and Services Canada, 1989.
Hansen, B. G. “The Taxation of Employees” in Hansen, B. G. et al. eds. Canadian Taxation. Toronto: De Boo, 1981.
Krishna, V. “Employee Benefits” (1984), 1:2 Can. Curr. Tax C 7.
Krishna, V. “Taxation of Employee Benefits” (1986), 1:35 Can. Curr. Tax C 173.
Thomas, R. B. “Some Benefit!” (1988), 36 Can. Tax J. 398.
Thomas, R. B. and T. E. McDonnell. “A Hole That You Could Drive a Moving Van Through” (1990), 38 Can. Tax J. 937.
APPEAL from trial judgment (The Queen v. Phillips, W. R. (1993), 93 DTC 5247 (F.C.T.D.); affg Phillips, W. R. v. Minister of National Revenue (1990), 90 DTC 1274 (T.C.C.)) dismissing the appellant’s appeal from a decision of the Tax Court of Canada. Appeal allowed.
COUNSEL:
Donald G. Gibson and Henry A. Gluch for appellant.
Joel A. Weinstein and Anita R. Wortzman for respondent.
SOLICITORS:
Deputy Attorney General of Canada for appellant.
Aikins, MacAulay & Thorvaldson, Winnipeg, for respondent.
The following are the reasons for judgment rendered in English by
Linden J.A.: I agree with the result arrived at by Mr. Justice Robertson and with much of the reasoning leading to that conclusion. However, there are a few items with which I disagree. I feel it is necessary to comment only on some of them.
In particular, as a member of the panel of this Court which decided The Queen v. Splane, R. O. J.,[1] I feel it is incumbent upon me to say that there is no reason, in this case, by means of hypothetical example, to reach out in order to try to limit the effect of its holding. Here we are dealing with a cash payment upon relocation of $10,000 used in the purchase of a house, whereas in Splane the issue revolved around the reimbursement of additional interest payments necessitated because of relocation. It is not necessary, in deciding this case, to opine that there should be a difference in treatment between additional interest payments because of an increase in interest rates and additional interest payments because of an increase in the principal amount of the mortgage. That issue was not before this Court, nor was it before the Court in Splane. Because that precise question may well come before this Court in the future, I believe it is inadvisable to try to decide that issue prematurely in this case, where it is not before the Court for decision.
This area of the law—both legislation and case law—is so confused and so inconsistent that Courts should tread gingerly through it, deciding only the cases that come before them, not cases that are not up for decision. While I certainly support all reasonable efforts to render more consistent the case law in this area, we must guard against imposing absolute consistency where it does not exist and where, perhaps, it cannot ever be achieved, at least not by the courts. The reason for these inconsistencies is not judicial frailty; rather, it is Parliament’s failure to resolve consistently these intricate, subtle and complex issues of benefits and allowances. The legislation appears to favour certain types of expenditures over others, and certain groups, such as legislators and diplomats, over others, such as railway workers and corporate employees. Despite this, it is preferable for Parliament to make these tax policy decisions, not the courts, except in those cases where we are required to do so.
Another matter I wish to comment upon is this—I see nothing wrong with “structuring tax free compensation packages for employees required to relocate to urban centres where costs of living are appreciably higher,” as long as that is done legally.
There are two points to be made. First, tax planning is something that occupies some of the best legal talent in the land. While it may be desirable to some that every dollar received by every taxpayer be taxable, that is not our tax system (at least not yet). It is still possible in Canada for someone to receive something and not be required to pay tax on its value. If an employer can assist an employee to relocate and structure that assistance legally in such a way as to avoid or minimize taxation, that is perfectly permissible.
Second, mobility of employees to areas of Canada where opportunity beckons is something to be encouraged, not impeded. That is why the Income Tax Act [S.C. 1970-71-72, c. 63] makes specific provision to exempt some of the costs of relocation. Unfortunately, the legislation contains gaps so that, in cases such as this one, little guidance can be gleaned from the legislative provisions because of their generality. It is the task of the Court to fill in these gaps, in harmony with the legislation and our prior decisions, but only where we are required to do so. Our domain does not include the making of tax policy. Hence, we should avoid deciding issues that need not be decided, leaving them for Parliament to resolve.
A further point I wish to raise is the elusive matter of what is the “value of the benefit” being taxed here. Counsel both agreed that the $8,500 figure set out in the T4 slip prepared by the CNR was what was at stake in this case. In cogitating about this case, however, I could not help but wonder why the entire $10,000 payment is not being taxed here. Or should the tax be on the increased value of property because of the $10,000 contribution at the time of closing (a different figure possibly)? Or should it be the increased purportionate value at the end of the year? What if the value of the property was less at the end of the year, something that is very likely these days? Was the $8,500 figure arrived at by CNR an honest assessment of the reduced value of the $10,000 portion of the purchase price as at the end of the year? Or was it just an arbitrary figure? Incidentally, how much of this amount did CNR deduct from its income—was it $8,500, $10,000 or some other figure? These are all questions that, troublesome as they may be, will have to be confronted in future cases, for under paragraph 6(1)(a) [as am. by S.C. 1980-81-82-83, c. 140, s. 1] it is not the “amount” that is taxed (as in 6(1)(b)) but the “value of the benefit,” something that may be quite different. We cannot and should not decide these questions here; they are for Parliament or future cases—but one cannot help but question whether it should be left to employers unilaterally to fix the figure, as appears to have been done here, with the consent of the parties.
Lastly, it seems to me that Parliament has decided to treat living expenses and board and lodging costs differently in situations where employees work at one location and where they must travel or where they must be relocated to do their job. An elaborate, though not complete, system has been erected by Parliament, mentioning certain items but not others. It would be better if situations, such as this one and the other unlisted matters, were either included specifically on the list or specifically excluded from it by Parliament, so that the courts will not be required to divine the legislative will from generalities that are not very helpful.
* * *
The following are the reasons for judgment rendered in English by
Robertson J.A.: This is an appeal from a decision of a trial Judge [(1993), 93 DTC 5247] dismissing the appellant’s appeal from a decision of the Tax Court of Canada. The principal issue is whether an employee who has been relocated is required to include, as “income from employment,” an amount received from his or her employer to offset higher housing prices at the new work location.
In a decision dated January 25, 1990, the Tax Court found that a $10,000 payment received by the respondent from his employer to defray higher housing prices encountered when relocating from Moncton to Winnipeg, was not taxable ((1990), 90 DTC 1274). On appeal, by way of trial de novo, the Trial Judge reached the same conclusion by characterizing the payment as a non-taxable reimbursement for expenses incurred as a consequence of employment ((1993), 93 DTC 5247). The appellant argued before this Court that the $10,000 payment is tantamount to a housing subsidy or a cost of living allowance and therefore taxable either as a “benefit” or an “allowance” under paragraph 6(1)(a) or 6(1)(b) respectively of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended (the Act).
With great respect to the learned Trial Judge, I cannot accede to his legal characterization of the payment in question. In my view, the $10,000 did not restore the respondent to his previous financial state. Rather it increased his net worth by $10,000. The following analysis leads to the conclusion that the $10,000 falls outside the legal parameters for tax-free benefits established in R. v. Savage, [1983] 2 S.C.R. 428; Ransom, Cyril John v. Minister of National Revenue, [1968] 1 Ex.C.R. 293; and The Queen v. Splane, R. O. J. (1991), 92 DTC 6021 (F.C.A.), affg (1990), 90 DTC 6442 (F.C.T.D.).
I
The respondent taxpayer was employed as a carman by Canadian National Railway (CNR) at its Moncton shops when CNR announced that the facility would close in 1987. The planned closure affected the livelihoods of 1200 employees and presented a substantial setback to that community. Following a number of emotional protests, demonstrations and calls for political intervention, an agreement was reached between CNR and the various unions involved. The respondent was a member of one of the unions which ratified the agreement.
The agreement created 60 new carman positions in Winnipeg and established a $10,000 relocation payment for employees who: (a) owned a house in Moncton; (b) transferred from Moncton to Winnipeg; (c) sold the Moncton house; (d) purchased a house in Winnipeg; and (e) reported for work in Winnipeg. No restrictions were placed on the use of the $10,000 payment.
The Trial Judge canvassed the respondent’s reasons for declining to transfer to another Moncton facility known as the Gordon Yard instead of moving to Winnipeg. First, he would not have been performing the same work in Gordon Yard. Second, employment at that location involved shift work which was not required in Winnipeg. Finally, the respondent believed that Winnipeg provided greater long-term job security. No issue was taken with whether the respondent was “required” by CNR to move. In these circumstances, it is evident that the notion of personal choice is a chimera.
The Trial Judge concluded that CNR was motivated by two considerations to pay each of the Moncton carmen $10,000: first, it reduced CNR’s overall operating costs by facilitating the closure of its Moncton shops; and second, the payments helped offset Winnipeg’s higher housing prices. It is agreed that the average cost of a detached bungalow in Winnipeg in 1987 was at least $23,000 higher than the cost of a detached bungalow in Moncton.
The respondent sold his Moncton house for $63,000. It is significant to the analysis which follows that he did not sell it at a loss. In the same year he purchased a house in Winnipeg for $91,000 (a difference of $28,000). Having satisfied the conditions of the agreement, he received $10,000.
Within this factual framework, the Trial Judge concluded that the $10,000 payment was not taxable under either paragraph 6(1)(a) or 6(1)(b) of the Act. In rejecting the depiction of the payment as a taxable benefit, he reasoned, at page 5251:
There is no evidence in the present case to support a finding that the payment in question meets the criteria of a benefit. The Crown’s contention that Mr. Phillips did not have to move to Winnipeg, and having done so, did not have to purchase a house, has no merit. To maintain his current employment status with CNR, which included performing work as a carman and which was of a secure and long-term nature, Mr. Phillips was required to relocate from Moncton to Winnipeg. He incurred expenses in doing so, most significantly in terms of increased housing prices. As those expenses arose in consequence of his employment, his employer undertook to partially indemnify him against them. I cannot see that he has acquired any profit from the reimbursement of those expenses whatsoever. As in Splane, Mr. Phillips was merely restored, although only partially, to the financial state he was in before he moved.
In short, the Trial Judge characterized the payment as partial indemnification against expenses incurred as a consequence of the respondent’s employment. He rejected the argument that it was a taxable allowance on the same grounds.
I note that the Trial Judge’s reasons in the case under appeal were also applied by him in a companion case, The Queen v. Lao, V. (1993), 93 DTC 5251 (F.C.T.D.); affg (1990), 91 DTC 330 (T.C.C.). The facts in that case resemble those before us except that the employee in Lao had been hired on the condition that he relocate, bringing into issue the effect of paragraph 6(3)(c) of the Act. As in Phillips, the payment was held not taxable. I understand that Lao is also under appeal.
II
The scheme of the Act as it relates to taxable income is deceptively straightforward. Subsection 5(1) directs the taxpayer to include in employment income conventional remuneration, such as “salary” and “wages”, received in a taxation year. Section 6 seeks to capture in employment income various ancillary or “fringe” benefits, whether or not they are strictly monetary. Paragraphs 6(1)(a) and 6(1)(b) are relevant to this appeal:
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 of an office or employment, except …
(b) all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except …
It is common ground that none of the exceptions in these paragraphs is relevant to the case at bar.
III
Paragraph 6(1)(a) brings into employment income “the value of … other benefits of any kind whatever received or enjoyed … in respect of, in the course of, or by virtue of an office or employment”. The early jurisprudence held that this provision only applied to benefits received as remuneration in exchange for employment services. In Phaneuf Estate v. R., [1978] 2 F.C. 564 (T.D.), Thurlow A.C.J. (as he then was) stated, at page 572:
While the language of the statutes differ, the test expressed by Viscount Cave L.C…. appears to me to express, as well as it can be expressed, the essence of what falls within the taxing provision of the Income Tax Act. Is the payment made “by way of remuneration for his services” or is it “made to him on personal grounds and not by way of payment for his services”? It may be made to an employee but is it made to him as employee or simply as a person. Another way of stating it is to say is it received in his capacity as employee, but that appears to me to be the same test. To be received in the capacity of employee it must, as I see it, partake of the character of remuneration for services. That is the effect that, as it seems to me, the words “in respect of, in the course of or by virtue of an office or employment” in paragraph 6(1)(a) have.
In Savage, supra, the Supreme Court accepted that a taxable benefit must be conferred on the taxpayer in his or her capacity as an employee. It rejected, however, the understanding that to be received in this capacity, the payment must be in exchange for services performed by the employee. Speaking for the majority, Dickson J. (as he then was) stated, at page 440:
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; in the present case the cash payment of $300 easily falls within the category of “benefit”. Further, our Act speaks of a benefit “in respect of” an office or employment. In Nowegijick v. The Queen, [1983] 1 S.C.R. 29 this Court said, at p. 39, that:
The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.
The above passages dictate that paragraph 6(1)(a) be given a broad interpretation. Nonetheless, the reasoning in Savage provided for guarded exceptions, all of which are rooted in the employee/person dichotomy. Referring to R. v. Poynton, [1972] 3 O.R. 727 (C.A.), Dickson J. concluded, at page 441:
I agree with what was said by Evans J.A. in R. v. Poynton, [1972] 3 O.R. 727 at p. 738, speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:
I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they respresent [sic] a form of remuneration for services rendered. 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 s. 3.
And further on the same page:
[T]here was no element of gift, personal bounty or of considerations extraneous to Mrs. Savage’s employment.
An economic advantage received by an employee from his or her employer will be deemed a benefit within the meaning of paragraph 6(1)(a) unless the employee can demonstrate that the payment was not a benefit in respect of employment, but made in his or her capacity as a person. Framed in this manner, the test is able to embrace conveniently the categories of gifts, loans and other contractual arrangements.
The question of whether a payment is a gift, loan or the result of considerations extraneous to the employment relationship is often approached with reference to the employer’s intention or the purpose of the payment. The terms of CNR’s agreement with the respondent clearly defeat the characterization of the $10,000 as a gift or a loan. In my view, it is also apparent that if an employee receives a payment on the condition that he or she continues to work for the employer, as is the case before us, then that payment can hardly be said to have stemmed from considerations extraneous to the employment relationship.
Collateral contracts, like all contracts, are only a means of providing objective evidence of subjective intent. By itself, a collateral contract cannot therefore be conclusive of whether a payment is received in the capacity of person or employee. To focus on the existence of a collateral contract to the exclusion of its context—the employment relationship—is to allow the form of the document to prevail over its substance.
The fact that the parties in the case at bar chose to effect a post-contractual modification supported by consideration does not in any way diminish the employment relationship in question. On the contrary, the employees’ continuing employment was facilitated. Considering that one of the terms of CNR’s agreement with the respondent is that he remain in CNR’s employ, I fail to see how it can be said that the respondent received the payment other than as an employee. This is not to suggest that the “collateral contract theory” will necessarily be inapplicable in all cases; see Blanchard (E. J.) v. Canada, [1992] 2 C.T.C. 403 (F.C.T.D.); McNeill v. Canada, [1987] 1 F.C. 119 (T.D.); Segall (S.) v. The Queen, [1986] 2 C.T.C. 364 (F.C.T.D.); but compare Sheldon, G. K. v. Minister of National Revenue (1988), 88 DTC 1392 (T.C.C.).
Putting aside the form-substance issue, the respondent sought to persuade us that CNR’s motivation in making the payment was somehow relevant to the issue at hand—that it, in effect, manifested a consideration extraneous to the employment relationship. This approach would be understandable if the facts before us involved a $10,000 payment to an employee whose uninsured house was destroyed by fire. All but the extreme sceptic would likely concede that the employer was motivated primarily by altruism. It is difficult to appreciate how motivation could be the deciding factor on the facts before us.
It is indisputable that CNR’s agreement with the respondent was motivated primarily by a desire to protect and promote both parties’ economic interests by providing a mutually acceptable solution to a labour dispute. Any secondary motivations for entering the agreement are irrelevant. The unvarnished reality is that labour negotiations and relocation compensation schemes are, today, integral aspects of the employer/employee relationship. This is especially true in an economy where the downsizing of work forces has become commonplace. The closure of the Moncton shops, while tragic for its employees, is by no means an extraordinary occurrence.
Applying the law as outlined in Savage, I am driven to the inescapable conclusion that the respondent received the $10,000 payment in his capacity as employee. That determination, however, does not dispose of the appeal. The appellant had to consider whether the $10,000 payment was a non-taxable reimbursement of an expense incurred as a consequence of employment and whether it conferred an economic advantage on the respondent. With respect to the first question, both the respondent and the Trial Judge were convinced that the $10,000 payment fell within the rule recognized in Ransom, supra.
IV
In Ransom, the taxpayer was required to move from Sarnia to Montréal. The employer, acting pursuant to its policy, reimbursed the taxpayer $2,809 for the loss he incurred on the sale of his house. Noël J. concluded that this reimbursement did not economically benefit the taxpayer but merely restored him to the same position he would have been in had he not incurred the loss by virtue of his employment. The payment in question was held to be neither a “benefit” nor an “allowance” and therefore not taxable.
The rule in Ransom is straightforward. Reimbursement by an employer for the loss suffered by an employee in selling a house following a job transfer is not taxable to the extent that the payment reflects the employee’s actual loss; see also Greisinger (E.) v. M.N.R., [1986] 2 C.T.C. 2441 (T.C.C.). I would only observe that when calculating “actual loss”, Ransom must be applied today with due regard to section 62 [as am. by S.C. 1977-78, c. 1, s. 27; 1980-81-82-83, c. 140, s. 31; 1984, c. 45, s. 21; 1985, c. 45, s. 26] of the Act (“Moving expenses”).
The potential dangers of applying an abstract rule of law to variegated factual circumstances is highlighted by the wholesale application of Ransom to employee relocation cases. A review of the relevant jurisprudence reveals that relocation compensation packages are intended to address the financial repercussions of employee relocation on two levels: the losses suffered on the sale of the employee’s house and the expenses incurred in purchasing a replacement property. Payments made to compensate for increased housing costs on the purchase of a replacement property are the subject of this appeal. I turn now to the matter of identifying specifically the types of losses which fall within each category, as reflected in the jurisprudence.
Losses Incurred on a Sale
As a general proposition, relocation payments which reimburse the employee for actual losses incurred on a sale are immune from taxation. This is the thrust of the legal rule articulated in Ransom and, as will be explained, in Splane, supra.
Two kinds of losses can arise upon the sale of an employee’s house: a capital loss and a loss associated with the discharge of a mortgage with an interest rate lower than prevailing market rates. It is necessary to distinguish these losses from the expenses occasioned by a new mortgage with both a higher interest rate and a principal amount which reflects the higher housing prices at the new work location.
For example, if an employee had a $50,000 outstanding mortgage at 10 per cent and relocated to purchase a house requiring a $70,000 mortgage at 15 per cent, only the five per cent differential on the $50,000 can truly be considered a loss. Assuming that the $20,000 difference in principal is attributable solely to higher housing costs at the new work location (a task which itself is fraught with uncertainty), interest rate compensation with respect to that amount must be classified as reimbursement for an expense incurred in the purchase of a replacement house.
The tax treatment of compensation directed only to the loss of a favourable mortgage rate on the sale of a house is, in my view, governed by Splane. Unfortunately, the Trial Judge’s recital of the facts in that case is not comprehensive. This Court affirmed the Trial Judge’s decision with brief oral reasons.
We do know that in Splane, the taxpayer sold his Ottawa house for $63,000 and purchased one in Edmonton for $65,000. We also know that his employer reimbursed him for the costs of the l.75 per cent higher mortgage rate on the replacement house. The facts, however, do not disclose whether the principal amount of the new mortgage loan exceeded that owing under the original mortgage. The Trial Judge relied on Ransom as persuasive authority in reaching the following conclusion that the payments were not taxable (at page 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.
In light of these comments, I think it reasonable to infer that the Court in Splane was dealing with a capital loss as contemplated by Ransom. I acknowledge, however, that it is also plausible that the compensation in Splane was directed at the acquisition costs of the new residence. In any case, the circumstances in Splane are not before this Court today. Fortunately, the facts at bar are less ambiguous.
Expenses Incurred in Acquiring a New House
Compensation may be awarded for two kinds of expenses incurred in acquiring a new house. The first is a larger capital outlay on the employee’s part as a result of on-average higher housing prices at the new work location. The other relates to higher financing costs with respect to that portion of the mortgage principal attributable to higher housing costs as explained above. It is recognized that paragraph 62(3)(f) of the Act deals explicitly with the tax treatment of certain acquisition expenses—legal fees and transfer taxes—but the Act goes no further.
The companion cases of McNeill, supra, and Segall, supra, illustrate the types of expense included in this category. In those cases, the taxpayers were air traffic controllers living in Quebec during a period of continual disputes between anglophone and francophone controllers. The employer offered to provide the taxpayers a time-limited “Accommodation Differential Allowance” if they transferred to Ottawa. It is true that McNeill and Segall are distinguishable from the case before us in that the payments were made to the employees in their capacities as persons rather than employees. However, it is interesting to note that the employees were only compensated for the mortgage rate differential on the difference between the appraised value of the property at the old work location and the assessed value of similar accommodation at the new location.
V
The case under appeal is distinguishable from Ransom in one salient respect: CNR’s compensation scheme made no provision for losses incurred on the sale of the respondent’s house. Yet it is one matter to distinguish Ransom on the facts and quite another to determine whether that distinction is, in law, valid. The appellant argues that if no valid distinction exists in law then Ransom must be regarded as having been wrongly decided.
On what legal basis can one conclude that relocation compensation directed toward losses suffered on the sale of a house is not subject to tax while that directed toward expenses incurred in purchasing its replacement, is? The answer to that question lies in the legal rationale underlying Ransom. Once that rationale is isolated, it is apparent that it has no application to relocation compensation directed at defraying higher housing costs at a new work location.
Ransom Revisited
It cannot be denied that the wisdom of Ransom has been questioned not only by the appellant but by at least one commentator; see B. G. Hansen, “The Taxation of Employees” in B. G. Hansen, V. Krishna & J. A. Rendall, eds. Canadian Taxation (Toronto: De Boo, 1981) 117, at pages 133-135. Others have queried whether McNeill and Segall may have overextended Ransom by inviting taxpayers to treat personal living subsidies as tax-free benefits; see R. B. Thomas, “Some Benefit!” (1988), 36 Can. Tax J. 398, at page 400; and R. B. Thomas and T. E. McDonnell, “A Hole That You Could Drive a Moving Van Through” (1990), 38 Can. Tax J. 937, at page 938. Not surprisingly, the appellant argues that the $10,000 payment is nothing but a de facto subsidy for a personal living expense.
The foundation of the appellant’s argument doubtless rests upon the following excerpt from Noël J.’s reasons in Ransom, where he draws an analogy between travelling expenses and a capital loss on the sale of a house, at page 310:
In a case such as here, where the employee is subject to being moved from one place to another, any amount by which he is out of pocket by reason of such a move is in exactly the same category as ordinary travelling expenses. His financial position is adversely affected by reason of that particular facet of his employment relationship. When his employer reimburses him for any such loss, it cannot be regarded as remuneration, for if that were all that he received under his employment arrangement, he would not have received any amount for his services. Economically, all that he would have received would be the amount that he was out of pocket by reason of the employment.
Noël J.’s analogy seems to conflate all travelling expenses incurred in respect of employment and suggests that compensation for all out-of-pocket expenses be tax-free. Yet there are at least two disparate types of “travelling expenses.” There are, for example, those incurred travelling to and from work and those incurred when an employer sends an employee on a business trip.
It could be argued on behalf of the Minister that a capital loss incurred when selling a house is to be treated as a personal or living expense. Like the transportation costs of travelling to and from work, these expenses are matters of personal choice unrelated to employment. It could be maintained with some force that losses associated with a general decline in housing market prices or attributable to the employee’s folly in paying “too much” for “too little” should not be accorded special tax treatment. This position is weakened, of course, when the capital loss is a consequence of the forced and hasty disposition of a house.
The taxpayer could counter that a capital loss suffered on the sale of a house is akin to travelling expenses of an employee dispatched on a business trip by his or her employer. Such an employee has little choice but to incur an expense. For this reason, reimbursement is not viewed as a benefit but as righting a potential injustice. It accords with the equitable principle of restitutio in integrum. Similarly, a general decline in housing markets, of itself, results only in a paper loss to the employee. It is not until the employee is required by the employer to relocate that a capital loss is thrust upon him or her. Thus, any reimbursement received from the employer in respect of a capital loss should be a tax-free benefit.
The merits of these competing arguments can only be properly assessed by reference to the object and purpose of section 6, as understood through the “words in context” canon of statutory interpretation: see Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, Estey J., at pages 575-578; and Lor-Wes Contracting Ltd. v. The Queen, [1986] 1 F.C. 346 (C.A.), MacGuigan J.A., at page 352.
It is well recognized that any decision to include or exclude benefits from employment income impacts significantly on government’s ability to raise revenue: see Royal Commission on Taxation, Specific Types of Personal Income (Study No. 16) by D. Sherbaniuk (Ottawa: Queen’s Printer, 1967), at page 32; and V. Krishna, “Employee Benefits” (1984), 1:2 Can. Curr. Tax C 7. 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.
Another primary and, for the purposes of this appeal, overriding objective of section 6 is to ensure that “employees who receive their compensation in cash are on the same footing as those who receive compensation in some combination of cash and kind;” see B. G. Hansen, supra, at page 127; and V. Krishna, “Taxation of Employee Benefits” (1986), 1:35 Can. Curr. Tax C 173. Two employees performing the same work for the same employer should receive the same tax treatment in respect of their employment. This is simply one manifestation of our concept of tax equity and, in my view, is the true rationale underlying Ransom. I am not the first to reach this conclusion. In Greisinger (E.) v. M.N.R., supra, Brulé T.C.J. astutely reasoned, at page 2444:
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.
This explanation accords with Parliament’s intent that employees receive equal tax treatment in respect of their employment incomes. Every employee incurs some expense travelling to and from work. This is a necessary cost of being available for employment. Not every employee however, is required by his or her employer to travel or relocate to perform his or her office. It is simply not equitable for one of two employees to bear that capital loss; see also Huffman (G. R.) v. Canada, [1990] 2 C.T.C. 132 (F.C.A.); affg [1989] 1 C.T.C. 32 (F.C.T.D.).
Once policy considerations are brought into play, it is admittedly proper to ask whether it is the prerogative of Parliament alone to decide whether or not a particular kind of “reimbursement” should or should not be taxed. I would respond by noting that nothing in the Supreme Court’s reasons in Savage indicates that Ransom was overruled per se. Ransom was cited and quoted, but only set aside in respect of its conclusion that taxable benefits must have been received in exchange for services performed by the employee.
In the 27 years since Ransom was decided, the Act has undergone extensive revisions which touch on the issues under consideration. None, however, contradicts or represents a threat to the rule in Ransom. Some even complement it; see, for example, paragraph 62(3)(d) of the Act, which addresses the loss suffered by a tenant/employee in cancelling a lease. Moreover, Ransom has been applied by this Court on several occasions. In my opinion, Ransom has become so enmeshed in our concept of taxable benefits that it is, in my view, for the Supreme Court or Parliament to set aside its logic.
The Limits of Ransom
Just as the appellant sought to convince us that Ransom should be deemed to have been wrongly decided, so would the respondent have us extend Ransom to embrace CNR’s $10,000 payment to him. While I support the rule in Ransom, it has no application in a case concerning an expenditure as opposed to a capital loss. This interpretation is compelled both by the Supreme Court’s decision in Savage, the concept of tax equity underlying section 6 and the structure of the Act as a whole.
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. I find it difficult to accept that the respondent has a valid claim to a $10,000 tax-free benefit which can be used in the purchase of a house, while other Winnipeg employees are forced to expend after-tax dollars in order to gain entry into the housing market.
The extension of the Ransom principle as a stop-gap cost-of-living equalizer may well also negate the effect of other provisions of the Act. Parliament has explicitly recognized and addressed potential injustices relating to dramatic cost-of-living variations from one part of the country to another: see Report of the Task Force on Tax Benefits for Northern and Isolated Areas (Ottawa: Supply and Services Canada, 1989). Section 110.7 [as enacted by S.C. 1986, c. 55, s. 33] of the Act, for example, entitles taxpayers in prescribed areas of Canada to make special deductions with respect to housing and travel expenses in computing taxable income. Similarly, section 80.4 [as enacted by S.C. 1977-78, c. 1, s. 35; as am. by 1980-81-82-83, c. 140, s. 44; 1984, c. 45, s. 25; 1985, c. 45, s. 38; 1986, c. 6, s. 40] brings into income the benefit accrued when an employer loans an employee funds at lower than the prevailing interest rate, subject to a deduction created in paragraph 110(1)(j) [as enacted by S.C. 1986, c. 6, s. 55; as am. by 1987, c. 46, s. 38]. The potential impact of extending Ransom prompted one commentator to query whether it could offer an opportunity to circumvent the policy underlying the imputed interest rules in section 80.4 of the Act: see V. Krishna, “Taxation of Employee Benefits”, supra, at page C 175. After all, a $10,000 payment can as easily be used to prepay interest as to reduce the principal amount of a mortgage loan.
Perhaps the most persuasive rationale for limiting the application of Ransom lies in the myriad expenses which its extension could exempt from taxation. The respondent effectively argues that any payment received from an employer to compensate an employee for higher housing costs in a new work location only serves to make the employee whole. As we have seen, this rationale is flawed. Moreover, nothing bars the extension of this same faulty reasoning to other purchases, such as new cars or appliances, in provinces with higher costs of living.
I also observe that the problem of compensation directed at tax equalization is apparently of concern to tax lawyers familiar with the U.S. multi-national practice of “grossing up” salaries of executives transferred to Canada: see J. D. Bradley, “Measuring Employee Benefits”, Report of Proceedings of the Forty-Third Tax Conference (Canadian Tax Foundation, 1991) 8:56, at page 8:59; and R. B. Thomas and T. E. McDonnell, supra, at pages 941-942. What of the employee who moves to a province with higher marginal rates of taxation? Why should he or she not be able to claim a tax-free benefit as well, assuming the employer is willing to provide such compensation? In my opinion, it is evident that the decision below creates a window of opportunity for those intent on structuring tax-free compensation packages for employees required to relocate to urban centres where costs of living are appreciably higher.
When the above concerns are contemplated in light of the clear wording of paragraph 6(1)(a) of the Act, the reasoning in Savage and Parliamentary intent, it seems plain that the $10,000 payment is a taxable benefit unless the respondent can satisfy this Court that it did not confer an economic advantage upon him. This marks the respondent’s final effort to gain a $10,000 tax-free benefit and his real complaint.
VI
The respondent relies on the finding of the Tax Court Judge that his house in Winnipeg is inferior to the one in Moncton and argues that he is still out-of-pocket from being required to pay $28,000 “more” for “less.” Leaving aside the fact that such a finding is clearly irrelevant on an appeal from a de novo decision, I note that the Trial Judge made no similar finding, most likely for compelling reasons.
Comparative analyses of floor space and house amenities comprise personal value judgments. To contrast a storey-and-a-half house in Moncton with a Winnipeg bungalow by reference to “ball park figures” regarding on-average housing costs is valuable to the consumer but unacceptable as a legal benchmark for determining so-called actual loss. There is an obvious reason why an employer would only partially compensate employees for higher housing costs. House selection is as dependent on personal taste and lifestyle as it is on cost. After all, location is the touchstone for determining value in real estate.
The foregoing criticisms are not intended to detract from the respondent’s conviction that he received “less” for “more.” What is important for him and the other CNR employees who await the outcome of this decision to recognize is that “economic benefit” cannot be assessed on the basis of subjective criteria and that the taxation of benefits cannot be made to depend on the perceptions of individual taxpayers. The Tax Court’s decision in Cutmore (R. H.) et al. v. M.N.R., [1986] 1 C.T.C. 2230 (T.C.C.), illuminates this point.
In Cutmore, the taxpayer’s employer decided that all senior executives should have their income tax returns prepared by tax specialists at its expense. The employer’s purpose was to avoid any embarrassment and loss of reputation that might arise from improperly prepared returns. The taxpayer argued that this free service should not be deemed a taxable benefit as he was more than capable of completing competently his own return. The payment was nonetheless taxed.
Once the subjective value argument is dismissed, it is quite evident that the $10,000 payment enabled the respondent to acquire a more valuable asset. CNR did more than save his pocket—it put money into it. Of course, the respondent will doubtless suffer short-term hardships which inevitably accompany job relocation. However, grasping for a tax-free benefit is neither an appropriate nor meaningful way of acknowledging the true costs of employment relocation.
VII
Having decided that the $10,000 payment to the respondent is a taxable benefit under paragraph 6(1)(a) of the Act, I need not consider whether it is also a taxable allowance under paragraph 6(1)(b). The appeal should be allowed, the judgment of the Trial Division dated May 6, 1993, set aside and the Minister’s reassessment restored. As proposed by the appellant, the Minister shall pay all reasonable and proper costs of the respondent.
Stone J.A.: I agree.