Date: 20000525
Docket: 97-991-IT-I
BETWEEN:
BERT TARINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Ottawa, Ontario, on March 6, 1998)
Mogan, J.T.C.C.
[1] This appeal is in respect of the 1991 taxation year. In that year, the Appellant moved from the city of Kingston, Ontario to the city of Ottawa in connection with his employment and, at that time, he received a certain amount from his employer. When issuing an income tax assessment for 1991, the Minister of National Revenue included the amount in the Appellant's income. The Appellant has appealed from that assessment claiming that the amount is not income. The Appellant has elected the informal procedure.
[2] There has been a delay in bringing this appeal to a hearing because, in the intervening years (1991 to 1997), both this Court and the Federal Court of Appeal have decided a significant number of cases dealing with similar issues and fact situations where a taxpayer either was required to move in connection with his employment or otherwise lose his job, or voluntarily moved. In each case, the employee received some kind of payment from the employer and the question was whether the amount received from the employer in connection with the move was taxable. The Federal Court of Appeal has delivered two significant decisions in recent years which have clarified this question.
[3] The Appellant is an employee with the Ontario Ministry of Transport. In 1990, while working in Kingston, he applied for a transfer to a different type of job in Ottawa. The Appellant was successful in the job competition and was required to move to Ottawa. At the time of the move, the Appellant and his wife owned a house in Kingston which was free and clear of any mortgages. Upon moving to Ottawa, they sold their house in Kingston and bought a new house in the Ottawa area. As a result of those transactions, the Appellant received a certain payment from the Ontario Ministry of Transport which I shall describe later.
[4] In 1990, the Appellant, his wife and family lived in a house in the downtown area of Kingston. Their lot was approximately 55’ x 132’ in size and the house itself was approximately 1,800 square feet. The house was sold sometime in the latter part of 1989 for a price of approximately $189,000. The Appellant and his family moved to Ottawa and decided to live in the community of Manotick, about 20 kilometres south of Ottawa. He and his wife purchased a home at a cost of $275,000 on a lot that was about one-quarter acre in size. Therefore, the setting of the two dwellings was quite different with a city centre location in Kingston and a location beyond the suburbs of Ottawa in Manotick.
[5] At that time, there was a policy in place for provincial government employees and, in particular, within the Ministry of Transport which permitted the payment of an amount to an employee in connection with this kind of move. That policy is described in Exhibits A-1 and R-1. Exhibit A-1 is a Ministry Directive entitled “Relocation Expenses, Enhanced Relocation Plan” dated December 13, 1990, although it was made effective as of December 6, 1989. The Directive contains a description of the type of payment that is available to an employee.
[6] Exhibit R-1 is entitled “Relocation Expenses: A Manager’s Guide” and was entered by a witness for the Respondent, Frieda Ménard, an employee of the Ontario Ministry of Transportation. She is an employee service co-ordinator in the human resources branch, familiar with the administration of the relevant policy for employees. Exhibit R-1 contains the following paragraphs which, in my view, have a bearing on the issue in this appeal. Under the heading “Enhanced Relocation Plan” Exhibit R-1 states:
The Enhanced Relocation Plan was introduced in 1984 (revised in 1989) to assist ministries in recruiting staff into major urban areas with high housing costs. The plan is applied at the sole discretion of the deputy head and is based on a housing cost differential. The plan is not intended to reimburse the total cost of a relocation to a higher-cost-of-living area. Rather, it is designed to assist in attracting needed human resources to higher-cost-of-living areas by softening the impact of a relocation.
Under the heading, “Extent of Assistance” Exhibit R-1 further states:
The extent of the financial assistance for a relocation, up to the maximum permissible amount, is determined by negotiation between the deputy head and the employee. Negotiations should commence during the recruiting process once the deputy head decides that assistance is to be extended.
The negotiated assistance is to be based on the difference between the actual costs of rented or owned accommodation at the new location and the former location, or more appropriate, between actual costs and the value of "comparable" accommodation. The term "comparable" takes into consideration the size, type and location of the accommodation.
According to the evidence, because the Appellant owned a home in Kingston which was sold to buy a home in Ottawa, the employer decided to apply this policy and used as a basis the cost of comparable accommodation in Ottawa.
[7] Exhibit A-2 is a report dated January 9, 1991 by Canada Trust Realty addressed to the Ministry of Transportation and Communication regarding a neighbourhood comparison study for the Appellant, comparing the cost of housing in Kingston and in Ottawa. Briefly, the report states that with the sale price of the house in Kingston being $189,875, Canada Trust determined that the cost of a comparable dwelling in Ottawa would be $220,000. Therefore, the report identified the housing differential as being $30,125 and the prime interest rate at October 17, 1990 as being 13.75%.
[8] According to the evidence of the Appellant’s wife, which evidence was confirmed by Ms. Ménard, the prime rate of interest of 13.75% (or prime plus 1%), was applied to the amount of $30,125, to determine the enhanced relocation benefit. That amount was then reduced annually by 20% so that over a five-year period the benefit would reduce to zero. Therefore, 13.75% of $30,125 is in the range of $4,160, which would be the amount in the first year, reducing by 20% over five years.
[9] Exhibit R-1 contains a provision whereby, rather than receiving the annual amount over five years reducing 20% each year, the employee could receive a lump sum payment in the first year equal to the present value of the five annual amounts. This “lump sum payment” is summarized on page 2 of Exhibit R-1 as follows:
A lump sum payment would amount to the present value of the total assistance that otherwise would be paid over five years. The calculation may be made by using present value tables and the prevailing bank prime interest rate. ...
The Appellant elected the lump sum amount using the prime interest rate as determined by Canada Trust. He received $11,313 in 1991. That amount was added to the Appellant’s reported income for the 1991 taxation year by the Minister.
[10] The Appellant’s claim is that the amount should not to be included in income because (i) he moved in connection with his work; (ii) he incurred an additional housing cost; and (iii) this amount of $11,313 was a reimbursement for his initial housing cost. The Appellant reviewed portions of the Federal Court of Appeal decision in The Queen v. William R. Phillips, 94 DTC 6177. That case is against the Appellant, however, because the Federal Court decided that a similar amount received by Mr. Phillips was taxable.
[11] Counsel for the Respondent referred me to the decision of the Federal Court of Appeal in a group of five cases, Attorney General of Canada v. Hoefele, et al, 95 DTC 5602. In those appeals, there were five taxpayers in five different circumstances whose appeals were heard together by the Federal Court in an attempt to clarify the law in this area. Four of those taxpayer appeals had been allowed by this Court but the fifth one had been dismissed. The Federal Court of Appeal decided that the amounts received by the taxpayers in Hoefele were not taxable because they were basically reimbursements for expenses incurred in connection with a move; those amounts did not enrich the taxpayers from a property point of view. The Court stated at page 5606:
... As was stated above, four of the five Tax Court judges who considered these five cases decided that the mortgage interest subsidy is not a taxable benefit. The primary reason for this, they indicated, was that the mortgage interest subsidy scheme established in these cases did not increase the mortgagors' equity in their homes. No economic gain accrued to any of the taxpayers as a result of the subsidy. Their net worth was not increased. ...
[12] In Hoefele, the employer in each appeal required an employee to move from a low cost housing area to a higher cost housing area and agreed to subsidize part of the interest payments on an increased mortgage if the employee bought a house which caused the employee to take a higher mortgage on the new house than existed on the old house. They were unique situations because the employer set out the plan in a directive to employees (as in Exhibit R-1 in this appeal), but required the employees to borrow money from an identified lender, a particular trust or insurance company. The employer made the payments directly to the lender on a reducing scale over a 10-year period. Therefore, the benefit was a direct subsidy of the interest on the mortgage.
[13] In my view, the decision in Hoefele is easily distinguished from this appeal. I will dismiss this appeal because of the circumstances in which the subsidy was made available to the Appellant. Although the Appellant was required to purchase a house in the Ottawa area and was required to provide proof of that purchase by showing the purchase and sale agreement, it is clear from the evidence of both Ms. Ménard and the Appellant’s wife that the amount in issue ($11,313) had nothing to do with the mortgage on the new house. The amount in issue related only to the housing cost differential (the difference in value between the house in Kingston and a comparable dwelling in Ottawa) and the prime interest rate. Once Canada Trust established that housing cost differential of about $30,000, the employer agreed to pay, the prime interest rate on that differential for the first year (reduced by 20% in each of the following four years) without regard to the actual dwelling which the Appellant purchased or the size of the mortgage on it.
[14] I asked Ms. Ménard this question: if the Appellant had the good fortune to receive a great inheritance just before he moved and bought a lavish dwelling for cash with no mortgage on it, would he have received the same amount from the Ministry of Transport; and she said “yes”. She said that the employer's policy was not dependent upon whether the Appellant had a mortgage or whether the mortgage was greater or less than the mortgage on his old house in Kingston. It was just an amount based on the housing cost differential and the prime interest rate.
[15] In my opinion, this is a taxable subsidy. It is not an attempt to reimburse the employee for an annual expense incidental to accepting employment at a new location as in Hoefele. In that case, there was an identifiable annual expense related to an increased mortgage and the employer attempted to subsidize the higher interest expense on a sliding scale over 10 years to ease the burden of purchasing a dwelling in a city with higher housing costs.
[16] In this appeal, when the Appellant decided to move, or if the employer had decided to move the Appellant, from a lower housing cost municipality to a higher housing cost municipality, so long as the Appellant owned a house in the first location and purchased a house in the second location, he was entitled to this subsidy without regard to whether he had a mortgage or not, or whether his mortgage on the new house was higher than his mortgage on the old house.
[17] In the facts of this appeal, the Appellant did not apply the lump sum to any interest payments, but used it to pay down the mortgage. Therefore, his situation is similar to the Phillips’ case where it could be said that Phillips’ net worth was increased by permitting him to apply the whole lump sum to reduce the mortgage on his house which increased his equity in the house and increased his net worth. The facts of this appeal are different from Hoefele but similar to the Phillips’ decision which makes the relocation benefit taxable. For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of May, 2000.
"M.A. Mogan"
J.T.C.C.