BETWEEN:
and
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Appeal heard on September 13, 2005, and oral reasons for judgment rendered from the bench on September 14, 2005, at Ottawa, Ontario.
Before: The Honourable Justice Lucie Lamarre
Appearances:
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed without costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to take into account the fact that the amount of the benefit to be included in the appellant's income for the 1998 taxation year pursuant to paragraph 6(1)(a) and subsections 6(19) and 6(21) of the Act is $91,870 and not $200,000, as conceded by the respondent.
Signed at Ottawa, Canada, this 18th day of October 2005.
"Lucie Lamarre"
BETWEEN:
JOHN F. THOMAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on September 14, 2005, at Ottawa, Ontario.)
[1] The issue in the present case is whether the appellant received in 1998 a benefit in respect of, in the course of, or by virtue of his employment with J.D. Irving Ltd., which should have been included in his income pursuant to paragraph 6(1)(a) of the Income Tax Act ("Act"), and if so, whether such benefit is subject to subsections 6(19) to 6(23) of the Act.
[2] Alternatively, did the appellant receive from J.D. Irving Ltd. in 1998 a retiring allowance that, as such, he ought to have included in his income pursuant to subparagraph 56(1)(a)(ii) of the Act ?
[3] The parties filed an Agreed Statement of Facts which reads as follows:
a) The Appellant's employment commenced with J.D. Irving Ltd. in the City of Saint John, New Brunswick, on or about March, 1997;
b) The Appellant chose the land and built his residence with absolutely no interference or input from his employer;
c) In June 1997, the Appellant constructed his personal residence at what became 112 Westmount Drive, in the City of Saint John, New Brunswick;
d) The residence was located approximately 8 kilometres from downtown Saint John, a city with a population of approximately 69,500 in 1998;
e) In June, 1998, the Appellant's employment with J.D. Irving Ltd. was terminated;
f) J.D. Irving Ltd. agreed to purchase the Appellant's residence for an amount being the reimbursement of costs paid for the house. In addition, J.D. Irving Ltd. agreed to and did pay the Appellant's salary for six months and reimbursed the Appellant for expenses incurred upon his move to Ottawa;
g) The Appellant provided supporting documents for the cost of the land and the home he built totalling $850,369.81;
h) The property and the house were sold to J.D. Irving Ltd. on September 3, 1998, for $850,369.81;
i) The fair market value of the property sold to J.D. Irving Ltd. as at September 3, 1998, was established by a real estate appraiser to be $758,500;
j) Upon termination of his employment with J.D. Irving Ltd., the Appellant was not required by his employer to relocate his residence; and
k) The Appellant did not work thereafter for J.D. Irving Ltd.
[4] A letter of agreement signed on November 8, 1996, was filed as Exhibit A-1. It confirmed that the appellant would assume the position of president of Saint John Shipbuilding Limited "on or about March 1997". The letter stated that the employer would reimburse the appellant for reasonable moving expenses so that he would be "kept whole" in his move from Ottawato Saint John.
[5] The appellant explained that the idea was that he would move to Saint John, New Brunswick, to assume his new position without having to pay for anything related to the move. The employer co-ordinated activities in relation to the sale of the appellant's house in Ottawa. In Saint John, the appellant purchased a 7.5 acre riverfront lot with an eye to severing that property in the future and selling off smaller building lots. The property was chosen because of the prestige associated with that neighbourhood as well as the fact that the area had been zoned for professional home offices, which, the appellant suggested, also enhanced the value of the property.
[6] At no point during the negotiations before the start of his employment did the appellant discuss with J.D. Irving Ltd. the termination of that employment and his return to Ottawa.
[7] When the appellant's employment was terminated in June 1998, the employer negotiated the terms of the appellant's departure. The employer agreed to purchase the house built in Saint John for an amount equal to the appellant's cost and let the appellant stay in the house until the month of October 1998, at which time he and his wife moved back to Ottawa. The appellant continued receiving his full salary from the employer until December 1998. Back in Ottawa, he did not work until the month of June 1999, when he started working as a self-employed business consultant.
[8] The appellant said that he moved back to Ottawa because there were no work opportunities for him in Saint John, and all his ties and contacts were in Ottawa.
[9] In a letter dated November 26, 2002, sent to the Canada Customs and Revenue Agency (Exhibit A-2, Tab 5) at the request of the appellant, the employer stated that it was understood that, in the event the employment was terminated, the employer would cover any additional costs incurred by the appellant as a result of his relocation back to Ontario.
[10] The respondent is of the view that the amount of $91,870, being the difference between the amount of $850,370 received from the employer on September 3, 1998, as payment for the purchase of his house and the value of the house at the time of the sale (September 3, 1998), namely $758,500, should be included in income,[1] pursuant to paragraph 6(1)(a) of the Act.
[11] The relevant portion of paragraph 6(1)(a) reads as follows:
6. (1) Amounts to be included as Income from office or employment - 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) value of benefits - the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit . . .
[12] The appellant's position is that he did not receive a benefit of $91,870 in respect of his employment. He argues that he received not $91,870 but $850,370, and that this amount was paid by his employer in accordance with a separate agreement under which the employer was to reimburse him for the costs that he incurred in purchasing the land and building the house on it. In his view, this agreement was not part of the employment contract. The appellant further argues that he never received any economic benefit from the transaction.
[13] In my view, the amount received by the appellant was received in respect of his employment. As was said in Nowegijick v. The Queen et al., 83 DTC 5041, the expression "in respect of" must be given a very broad interpretation. Here, it is not relevant that the arrangement made with the employer upon termination of his employment was not part of the initial employment contract. What is relevant, though, is that it was because of the appellant's employment that the employer agreed to compensate him by reimbursing him the cost of the property. It is quite obvious that had the appellant not been its employee the employer would never have agreed to compensate the appellant at the time of the termination of his employment for the costs he had incurred in building the house in which he resided while working in Saint John.
[14] With respect to the question of whether the appellant received or enjoyed a benefit, it is for the appellant to satisfy this Court that the payment received by him did not confer an economic advantage upon him (see M.N.R. v. Phillips, [1994] 2 F.C. 680). Here, I am not quite convinced that the appellant did not receive an economic benefit. An economic benefit will be conferred if what is received increases the recipient's net worth (see A.G. of Canada v. Hoefele et al., 95 DTC 5602, at 5604 (F.C.A.), referring to The Queen v. Savage, [1983] 2 S.C.R. 428, 83 DTC 5409 (S.C.C.)). As a matter of fact, I am not convinced that the appellant received only the amount that he was out of pocket by reason of his employment (Ransom v. M.N.R., 67 DTC 5235) and that his economic position was not improved through the payment at issue (see A.G. of Canada v. Hoefele et al., supra, at pages 5606-07). The appellant said that in Saint Johnhe built a house in one of the most prestigious areas of the city, an area with resale potential. This shows that the appellant clearly had resale value in mind, which suggests to some extent that he was speculating on the future value of the land for his own purposes. This in turn tends to indicate that the purchase of that property was not an expense required by the employer but was more in the nature of a personal consumption expense. Nevertheless, upon termination of his employment, the employer agreed to reimburse the appellant the exact cost of the property ($850,370), without verifying the market value at the time. As a matter of fact, the fair market value of the property as appraised was significantly lower than the cost base. At the time just before the sale, the appellant was in a loss position in respect of his bad investment. Being indemnified for that investment by his employer undoubtedly represents, in my view, an economic benefit.
[15] The employer's decision to cover the loss on the house could very well have been motivated by a desire to settle the matter of the appellant's departure by providing a mutually acceptable arrangement to deal with a premature termination of employment. I am unable to infer from the evidence that the appellant's overall financial worth was not enhanced by this settlement. As was said in Savage, supra, the meaning to be ascribed to the term "benefit" is quite broad, and in my view, it encompasses the situation here.
[16] With respect to the argument that the appellant did not receive a benefit of $91,870 because he did not in fact receive $91,870 (or did not suffer a real loss of $91,870) but actually received $850,370, which amount was paid to uphold an agreement between the appellant and the employer, I will resort to subsections 6(19) to 6(23) of the Act to resolve that issue.[2] I agree with the respondent that there is a housing loss of $91,870, as defined in subsection 6(21). Indeed, the definition of "housing loss" in subsection 6(21) is an objective one and even though the amount of $850,370 was paid, pursuant to an agreement with the employer, the amount of $91,870 falls squarely within the definition of housing loss in subsection 6(21), which reads as follows:
(21) Housing loss - In this section, "housing loss" at any time in respect of a residence of a taxpayer means the amount, if any, by which the greater of
(a) the adjusted cost base of the residence at that time to the taxpayer or to another person who does not deal at arm's length with the taxpayer, and
(b) the highest fair market value of the residence within the six-month period that ends at that time
exceeds
(c) if the residence is disposed of by the taxpayer or the other person before the end of the first taxation year that begins after that time, the lesser of
(i) the proceeds of disposition of the residence, and
(ii) the fair market value of the residence at that time, and
(d) in any other case, the fair market value of the residence at that time.
[17] Under subsection 6(19), an amount paid at any time in respect of a housing loss, which is not an eligible housing loss, to a taxpayer in respect of, in the course of or because of an office or employment is deemed to be a benefit received by the taxpayer at that time because of the office or employment.
[18] Subsection 6(19) reads as follows:
(19) Benefit re housing loss - For the purpose of paragraph (1)(a), an amount paid at any time in respect of a housing loss (other than an eligible housing loss) to or on behalf of a taxpayer or a person who does not deal at arm's length with the taxpayer in respect of, in the course of, or because of, an office or employment is deemed to be a benefit received by the taxpayer at that time because of the office or employment.
History: Subsec. 6(19) added by 1999, c. 22. subsec. 2(2), applicable
(a) to 2001 et seq., in respect of an eligible relocation of an individual in connection with which the individual begins employment at a new work location before October 1998; and
(b) in any other case, after February 23, 1998.
[19] An eligible housing loss is defined in subsection 6(22) as follows:
(22) Eligible housing loss - In this section, "eligible housing loss" in respect of a residence designated by a taxpayer means a housing loss in respect of an eligible relocation of the taxpayer or a person who does not deal at arm's length with the taxpayer and, for these purposes, no more than one residence may be so designated in respect of an eligible relocation.
[20] An eligible relocation is defined in subsection 248(1) of the Act as follows:
"eligible relocation" means a relocation of a taxpayer where
(a) the relocation occurs to enable the taxpayer
(i) to carry on a business or to be employed at a location in Canada (in section 62 and this subsection referred to as "the new work location"), or
. . .
(b) both the residence at which the taxpayer ordinarily resided before the relocation (in section 62 and this subsection referred to as "the old residence") and the residence at which the taxpayer ordinarily resided after the relocation (in section 62 and this subsection referred to as "the new residence") are in Canada, and
(c) the distance between the old residence and the new work location is not less than 40 kilometres greater than the distance between the new residence and the new work location.
[21] I agree with the respondent that the housing loss here is not an eligible housing loss as the evidence does not disclose that the housing loss occurred to enable the appellant to carry on a business or take new employment in Ottawa. Rather, the appellant's housing loss was incurred in relation to his loss of employment in Saint John. He did not sell his house to his employer because he was relocated to Ottawa, but did so because his employment was terminated. The decision to relocate to Ottawahad nothing to do with the payment by the employer of the housing loss. In my view, the facts in this case do not point in the direction of an eligible housing loss.
[22] I therefore conclude that the amount of $91,870, which is the amount calculated as being the housing loss under subsection 6(21) of the Act, is deemed to be a benefit received by the appellant in 1998 because of his employment pursuant to subsection 6(19) of the Act. The question raised concerning the fact that the appellant did not receive an amount of $91,870, but actually received $850,370, is of no importance here because the deeming provision establishes the exact amount of the benefit.
[23] On that same issue as to the exact amount received by the appellant, but in the context of determining whether subparagraph 56(1)(a)(ii) of the Act applies so that the amount of $91,870 is taxable as a retiring allowance, the appellant said that he did not receive $91,870 but $850,370 and that one cannot apply to the retiring allowance provisions a calculation made under subsections 6(19) to 6(23) of the Act. In his view, subparagraph 56(1)(a)(ii) of the Act does not provide for such a calculation. As I have already concluded that the amount of $91,870 is to be included in income pursuant to paragraph 6(1)(a) and subsections 6(19) and 6(21) of the Act, it is not necessary to further analyse this issue raised by the appellant.
[24] In conclusion, the appeal is allowed without costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to take into account the fact that the amount of the benefit to be
included in the appellant's income for the 1998 taxation year pursuant to paragraph 6(1)(a) and subsections 6(19) and 6(21) of the Act is $91,870 and not $200,000, as conceded by the respondent.
Signed at Ottawa, Canada, this 18th day of October 2005.
"Lucie Lamarre"
Lamarre, J.
COURT FILE NO.: 2004-3353(IT)G
STYLE OF CAUSE: John F. Thomas v. Her Majesty the Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: September 13, 2005
REASONS FOR JUDGEMENT BY: The Honourable Justice Lucie Lamarre
DATE OF JUDGMENT: October 18, 2005
APPEARANCES:
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Counsel for the Appellant: |
Paul Lefebvre
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Counsel for the Respondent: |
Charles Camirand |
COUNSEL OF RECORD:
Firm: Weaver, Simmons LLP
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario
[1] As per the Reply to the Notice of Appeal, the respondent initially took the position that the fair market value of the property as at September 3, 1998, was $650,000. The appellant was therefore assessed on an amount of $200,000. The respondent now concedes that the benefit to be included in income, if this Court concludes that there was a benefit, should not exceed $91,870.
[2] It is agreed by the parties that subsections 6(19) and 6(23) were in force for the taxation year at issue, in the context of the particular situation in this case.