Attorney General of Canada v. Hoefele, 95 DTC 5602, [1996] 1 CTC 131 (FCA)

Linden J.A.:—The sole issue raised in these five cases before this Court is whether a mortgage interest subsidy received by a taxpayer, after a relocation to a more expensive housing area, is taxable under either paragraph 6(1 )(a) or section 80.4 of the Income Tax Act.

Facts

The relevant facts are not in dispute. The five taxpayers were each required in 1991 by their employer, Petro-Canada, to relocate from Calgary to the Toronto area as part of a company-wide reorganization. The relocation was mandatory, with affected employees given the option of moving or losing their jobs. The relocation was also purely geographical and in- volved no change in employee income.

To defray higher housing costs in the Toronto region and to encourage affected employees to accept relocation, Petro-Canada instituted a relocation incentive that worked as follows: A national real estate company was consulted to determine the market price differential between similar homes in Calgary and Toronto, which at the time of relocation came to 1.55. Petro Canada then offered to pay any increase in interest charges on mortgages taken on costlier Toronto homes to a maximum set by the differential. Thus, a house that cost $100,000 in Calgary would be deemed to cost $155,000 in Toronto. The owner of such a house would be eligible for an interest subsidy paid by the employer to the extent of the interest payable on the increase in principal, that is, $55,000. The Relocation Program booklet distributed to the employees says the following about the interest subsidy:

The Company will subsidize the interest on a portion of your mortgage financing. The maximum portion that the Company will subsidize will be the differential in housing prices as determined by the Company.... The subsidy will be equal to the normal mortgage interest cost on a declining balance of your original differential in housing prices or the balance of your mortgage, whichever is the lessor [sic]...

As indicated, the mortgage interest subsidy was payable for ten years on a declining percentage basis, 100 per cent interest differential paid in the first year reducing gradually down to 50 per cent in the tenth. It would cease upon termination of employment. The subsidy was directed solely at defraying increased interest charges and it could not be applied to principal.

Also important to note is that the financing taken on the homes was to be arranged through normal methods by the relocated employees. The employer played no role assisting in this process, except that the mortgages were available only from Confederation Life, which billed Petro-Canada directly for the subsidy amount each year.

Is the mortgage interest subsidy taxable under paragraph 6(1 )(a)?

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 the 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 him in the hear in respect of, in the course of, or by virtue of an office or employment...

Four of the five Tax Court Judges decided that the interest subsidy was not a taxable benefit pursuant to paragraph 6(1 )(a). The sole question hinged on whether the receipt was a "benefit" within the meaning of paragraph 6(l)(a). The matter of whether it was "in respect of", "in the course of" or "by virtue of employment did not cause any difficulty; all agreed that the receipt was sufficiently linked to the employment.

The first issue to consider therefore, is whether there was a ’’benefit".

The classic statement of what comprises a taxable benefit derives from the Supreme Court of Canada case, R. v. Savage (sub nom. The Queen v. Savage), [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409. In that case Mr. Justice Dickson, as he then was, explained in clear and simple terms the principle which distinguishes taxable from non-taxable receipts:

If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, eg. loan or gift, then it is within the all-embracing definition of section 3. [1]

According to the Supreme Court of Canada, then, to be taxable as a "benefit", a receipt must confer an economic benefit. In other words, a receipt must increase the recipient’s net worth to be taxable. Conversely, a receipt which does not increase net worth is not a benefit and is not taxable. Compensation for an expense is not taxable, therefore, because the recipient’s net worth is not increased thereby.

Our jurisprudence has long accepted the focus on net gain as the basis for determining whether a receipt is a "benefit" and whether it is therefore taxable. In the 1967 decision of the Exchequer Court of Canada, Ransom v. Minister of National Revenue, [1967] C.T.C. 346, 67 D.T.C. 5235, Noël J. applied the net gain concept to circumstances not too dissimilar from the present. An employee was transferred by the employer company to a different city and was reimbursed by that company for losses incurred on the sale of a house. In deciding that these reimbursements were not income, Noel J. stated:

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. [2]

This is merely another way of describing the net gain idea that a receipt is not taxable if it does not improve the economic situation of the taxpayer; if it only reimburses for an amount for which an employee would otherwise be "out of pocket", it is not a "benefit". He treats relocation costs in the same way as ordinary travelling expenses. Reimbursement for out of pocket expenses incurred as a result of a move, explains Noel J., cannot be considered a benefit because it adds nothing of value to the recipient’s economic situation. He states:

It appears to me quite clear the reimbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord McNaughton in Tenant v. Smith, (1892) A.C. 162, puts nothing in the pocket but merely saves the pocket) is neither remuneration as such or a benefit "of any kind whatsoever".... [3]

The approach of Savage and Ransom was adopted by this Court in Huffman v. Canada [4] where the issue was whether a clothing expense which was reimbursed to a plain clothes police officer was a benefit. Heald J.A., quoting from the Tax Court Judge and echoing Mr. Justice Dickson in Savage, held that it was not, describing the applicable test as follows:

It is therefore necessary to consider whether the facts here show that there was a material acquisition in conferring an economic benefit on the taxpayer.

Mr. Justice Heald went on to conclude:

the taxpayer was simply being restored to the same economic situation he was in before his employer ordered him to incur the expenses.

This Court once again applied this principle in affirming the decision of Cullen J. in Splane v. R. (sub nom. Splane v. Canada), [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.), at page 6446 (affirmed 92 D.T.C. 6021 (F.C.A.)). There, a relocated employee was reimbursed for costs pertaining to an increased interest rate on a mortgage. Deciding that such reimbursement does not constitute a benefit, Cullen J. stated:

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. [5]

At another point in the case, Cullen J., in characterizing the economic effects of the receipt, [6] explained that "the plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating...."

Therefore, the question to be decided in each of these instances is whether the taxpayer is restored or enriched. Though any number of terms may be used to express this effect-for example, reimbursement, restitution, indemnification, compensation, make whole, save the pocket—the underlying principle remains the same. If, on the whole of a transaction, an employee’s economic position is not improved, that is, if the transaction is a zero-sum situation when viewed in its entirety, a receipt is not a benefit and, therefore, is not taxable under paragraph 6(1 )(a). It does not make any difference whether the expense is incurred to cover costs of doing the job, of travel associated with work or of a move to a new work location, as long as the employer is not paying for the ordinary, every day expenses of the employee.

It is clear that both our economy and our tax system favour the mobility of employees and others to areas where economic advantage beckons. Specific deductions in the Income Tax Act, for example, are available to employees who pay their own costs of moving. Parliament has thereby indicated that employment mobility should not be impeded, but rather encouraged. Indeed, such mobility rights have been enshrined in our Constitution as a Charter value and deserve judicial respect so as to prevent barriers being erected to erode it. [7] The decisions of the Supreme Court of Canada and this Court are in harmony with this value as enshrined in section 6 of the Charter insofar as reimbursement of costs of moving and relocation are not taxable as long as the employee is not better off as a result.

Although certainly not binding on this Court, Revenue Canada’s Interpretation Bulletin IT-470R, which deals with employee benefits, sets out a position reflecting the established jurisprudence. Of particular interest is paragraph 37 under "Removal Expenses" where the Bulletin reads:

37. In ordinary circumstances, if an employer reimburses an employee for a loss suffered by the latter in selling the family home upon being required by the employer to move to another locality or upon retirement from employment in a. remote area, the amount so reimbursed is not income of the employee if it is not greater than the actual loss calculated as the amount by which the cost of the home to the employee exceeds the net selling price received for it....

This same understanding is echoed in a companion Interpretation Bulletin IT-178R3 concerning moving expenses. Paragraph 4 reads in part as follows:

4. ... Where an employer pays or reimburses an employee for reasonable moving expenses which are not eligible for deduction under section 62, such reimbursement is not usually regarded as a taxable benefit conferred on the employee.

This paragraph reveals the tension between Parliament’s desire for certainty in tax matters and the continuing necessity of deciding tax issues on a principled basis. It recognizes that the moving expense deductions of section 62 are not a complete code regarding the tax treatment of costs incurred by relocating workers. The same can be said for the section 8 employment deductions: they also do not constitute a comprehensive code. Receipts not specifically mentioned in those sections must still be categorized for taxation purposes; they must still come within paragraph 6(l)(a), as explained by Ransom and Savage, to be taxable. Thus, as desirable as clearly specified rules of taxation may be, many tax issues remain to be decided on a case to case basis in accordance with general principles established in the case law. Clearly, no once and for all pronouncement can resolve all the cases, as wonderful as that would be.

Our system does not tax every dollar received by a taxpayer. [8] Receipts must be characterized as income or a "benefit" before that occurs. True, all money paid to an employee is a "benefit" in the sense that the employee is better off than if the money were not received. But, whether such a payment is legally a "benefit" according to paragraph 6(1 )(a) is an entirely different question, one that depends on the specific facts of each individual case.

To further complicate matters, the form of a transaction is important in the characterization process. To repeat something I wrote in another context (Friedberg v. Minister of National Revenue, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.), at page 2 (D.T.C. 6032), per Linden J.A.), form matters. Form may not rule, but it does matter. And because form matters, one may structure one’s affairs so as to minimize the tax payable on certain transactions. There is nothing wrong with this. Subject to provisions such as section 245, it is neither illegal nor immoral. Some of the best legal minds in Canada are devoted exclusively to this enterprise. Tax liability may sometimes be minimized if certain formal steps are followed. That is the case in this context, as well as in many others. Thus if a company gives $500 to an employee as a lump-sum payment to offset some cost or expense, but does not require receipts, the money is taxable. [9] However, if receipts for actual costs incurred are required in order to get reimbursement, the amount may not be taxable. If a company gives a lump sum payment to an employee to offset higher housing costs on relocation, the payment is taxable, if he is better off as a result. But, if such aid comes by way of a reimbursement for the loss of a favourable mortgage rate, it is not taxable. [10] So too, if a company reimburses its employees for expenses incurred by means of a general wage increase, the amount of the increase is obviously taxable. Notwithstanding that each of these varying methods of reimbursement may have a similar goal in mind, the different forms of transaction may be treated differently, that is, some may be taxed and others may not. This is in no way inequitable. This is not improper circumvention of the tax laws. The facts of each case are unique and Courts must deal with them accordingly. It is just common sense, therefore, for taxpayers to consider the tax consequence of their financial dealings and to structure them wisely so as to keep tax liability to a minimum.

Having dwelled upon the deceptively simple principles set out in Ransom and Savage, I must now wade into the murky waters of employee relocation benefits to determine whether the payments made under the interest subsidy scheme in these cases are taxable. 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. Thus, a fundamental requirement of paragraph 6(1 )(a) was unfulfilled. Where no economic gain is present, a receipt is not to be taxed. Sobier J.T.C.C. put it succinctly in the Hoefele reasons:

The appellant’s equity in the new house remained the same. The house in Toronto may be a significantly more valuable asset but the Appellant’s ownership in the asset did not increase. In Calgary, the Appellant’s equity in his home was $98,600.00. In Toronto, the Appellant’s equity position was still $98,600.00. A person’s economic position is not advanced by maintaining the same ownership in a more valuable asset. The Appellant assumed all responsibility for payments on account of increased principal. In fact, his monthly mortgage payments were greater in Toronto than Calgary. If employment ceased or the employee was relocated back to Calgary, the assistance ceased. The assistance received by the Appellant was not a colourable attempt to increase the Appellant’s remuneration; it is merely a reimbursement for an expense incurred by virtue of employment. [11]

I am in full agreement with this conclusion, for it is entirely consistent with the jurisprudence of the Supreme Court of Canada and of this Court. It is also mainly a finding of fact, something this Court cannot alter except in the rarest of circumstances.

This conclusion is, in my view, not inconsistent with the decision in Phillips. [12] The facts in that case, a lump sum payment to employees that clearly benefitted them economically by increasing their net worth, are not before us here. In Phillips, I concurred in the result on those facts. These facts are different. The employees here simply traded a house in Calgary for a similar one in Toronto. The employer defrayed some of the extra costs of doing so, without increasing any of the homeowners’ equity in the homes. Unlike the situation in Phillips, their net worth was not increased in these cases.

There is no need to reverse Splane, as urged by counsel for the Crown. Nor is there any reason to disparage or to limit Ransom. On the contrary, Splane and Ransom continue to be good law. The Ransom case was decided some 28 years ago by a distinguished jurist on the basis of an eminently reasonable principle. It has not been challenged by this Court since. The Ransom principle is consistent with Savage. It reflects common sense. It is fair. It deserves to survive. Should Parliament wish to reverse the principle, it is at liberty to do so. I see no reason why this Court should.

Is the mortgage interest subsidy taxable under subsections 80.4(1) And 6(9)?

The second issue in this appeal is whether the interest subsidy qualifies as a taxable benefit under subsection 80.4(1), which reads:

80.4(1) Whereas person or partnership receives a loan or otherwise incurs a debt because of or as a consequence of a previous, the current or an intended office or employment of an individual, or because of the services performed or to be performed by a corporation carrying on a personal services business, the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the total of

(a) all interest on all such loans and debts computed at the prescribed rate on each such loan and debt for the period in the year during which it was outstanding, and

(b) the total of all amounts each of which is an amount of interest that was paid or payable in respect of the year on such a loan or debt by

(i) a person or partnership (in this paragraph referred to as the

"emplqyer") that employed or intended to employ the individual,

(ii) a person (other than the debtor) related to the employer, or (iii) a person or partnership to or for whom or which the services were or were to be provided or performed by the corporation of a person (other than the debtor) who does not deal at arm’s length with that person or any member of that partnership, exceeds the total of

(c) the amount of interest for the year paid on all such loans and debts not later than 30 days after the end of the year, and

(d) any portion of the total determined in respect of the year under paragraph (b) that is reimbursed in the year or within 30 days after the end of the year by the debtor to the person or entity who made the payment referred to in that paragraph.

Subsection 6(9) reads as follows:

6. ...

(9) Amount in respect of interest on employee debt. Where an amount in respect of a loan or debt is deemed by subsection 80.4(1) to be a benefit received in a taxation year by an individual, the amount of the benefit shall be included in computing the income of the individual for the year as income from an office or employment.

Thus, for the 1992 and following taxation years, a receipt must be from a loan or debt incurred "because of or as a consequence of" employment. For taxation years prior to 1992 [13] , such loan or debt must have been incurred "by virtue of" employment. There is a slight difference in wording between the older and newly amended sections signifying little, if anything. Regardless, the focus of both versions is on the debt and not the receipt. It is not the benefit that must arise "because of", "as a consequence of", or "by virtue of" the employment; rather the loan or debt itself must be incurred "because of" or "as a consequence of" of "by virtue of" employment. In the present circumstances, the mortgage interest subsidy may well have been received "because of", "as a consequence of" or "by virtue of" the taxpayers’ employment. But this is not the question before us. What must be determined is whether those portions of the mortgage loans taken out by the taxpayers in respect of the Toronto homes, and to which the interest subsidy was directed, came about "because of", "as a consequence of" or "by virtue of employment.

In resolving this question, one must first note that subsection 80.4(1), whether in its older or newly amended form, requires a close connection between the loan or debt and employment, a connection much closer than that required by paragraph 6(1 )(a) as between benefit and employment. In the latter, a benefit may arise if it is received merely "in respect of" employment. The phrase "in respect of" connotes only the slightest relation between two subjects and is intended to convey very wide scope. In Nowegijick v. v. R. (sub nom. Nowegijick v. The Queen), [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, at page 39 (C.T.C. 25; D.T.C. 5045), per Dickson J, the Supreme Court of Canada stated the following concerning the words "in respect of":

The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relations 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. [14]

On the other hand, the phrases used in the amended subsection 80.4(1), "because of", or "as a consequence of", as well as in the original version, "by virtue of", require a strong causal connection. I find little or no difference between the meanings of the phrases "because of", "as a consequence of" and "by virtue of". Each phrase implies a need for a strong causal relation between subject matters, not merely a slight linkage between them.

I do not see any strong causal relationship on the facts before us here. The employees who accepted the interest subsidy all owned houses prior to being relocated. To the extent that they incurred costs in trading a house in Calgary for a like house in the Toronto region they had to take mortgages out to cover those costs. Whether this meant simply increasing the principal on an already existing mortgage or taking out a new mortgage for the extra amount is of no consequence for subsection 80.4(1). Each taxpayer had simply to do what that taxpayer had to do. Each employee owned a house before relocating and traded like for like in the relocation. Each did what was needed to finance the trade and obtained such financing largely independently of employer involvement. They each had to qualify for the loans on their own merits. And each, in the end, was given an interest subsidy, on a declining ten-year basis, to defray part of the interest increases involved. I fail to see in this scenario a loan or debt incurred "because of", "as a consequence of" or "by virtue of" employment. No employee jumped from a rental to a mortgage situation, and none traded a principal residence for a non-principal residence. Such loans or debts that were incurred in each of these cases were incurred, then, in order to retain ownership of a house, not "because of", "as a consequence of" nor "by virtue of" employment. [15]

In conclusion, the mortgage interest subsidy was therefore neither a benefit under paragraph 6(1 )(a) nor a loan or debt under subsection 80.4(1). The appeals are decided in favour of the employees. The four appeals by the Crown will be dismissed with costs. The appeal by the taxpayer will be allowed with costs and the matter will be remitted to the Minister to be reassessed in accordance with these reasons.

Robertson J.A.:-In Phillips v. Minister of National Revenue, [1994] 1 C.T.C. 383, 94 D.T.C. 6177, [16] this Court held that a $10,000 lump sum payment made by an employer to an employee, for the purpose of defraying higher housing costs at the latter’s new work location, was a taxable employment benefit within the purview of paragraph 6(1 )(a) of the Income Tax Act (the "Act"). One of the principal issues raised in these five cases is whether the payment of a mortgage interest subsidy (ranging from $3,000 to $12,000 per year) by an employer to an employee’s mortgage lender, and made for the same purpose, is also a taxable benefit. With respect to four of the decisions rendered below, each of the learned Tax Court of Canada judges concluded that the subsidies in question were immune from taxation. In large part, their legal reasoning rested on the applicability of Splane v. Canada, (1991), 92 DTC 6021 (F.C.A.), aff’g [1990] 2 C.T.C. 199, 90 DTC 6442, 36 F.T.R. 35 (F.C.T.D.) and, in turn, Ransom v. Minister of National Revenue, [1967] C.T.C. 346, 67 D.T.C. 5235, [1968] 1 Ex.C.R. 293. The decision in Phillips was distinguished on myriad grounds. The fifth judge, relying principally on the legal reasoning advanced in Phillips and the Supreme Court’s decision in The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409 concluded otherwise: see Hoefele v. Canada, [1994] 1 C.T.C. 2177, 94 D.T.C. 1878, S.C.C.P.B. 31 (T.C.C.); Mikkelsen v. R (sub nom. Mikkelsen v. The Queen (1994), 95 D.T.C. 118, 5 C.C.P.B. 14 (T.C.C.); Zaugg v. R. (sub nom. Zaugg v. Canada), [1994] 2 C.T.C. 2425, 94 D.T.C. 1882 (T.C.C.); Krall v. R. (sub nom. Krall v. Canada), [1995] 1 C.T.C. 2570, 95 D.T.C. 411 (T.C.C.); and Krull v. R. (sub nom. Krull v. The Queen), [1995] 2 C.T.C. 2204, 95 D.T.C. 206 (T.C.C.).

Linden J.A., (MacGuigan J.A. concurring), has determined that the interest subsidies in question do not qualify as a taxable benefit under either paragraph 6(1 )(a) or section 80.4 of the Act. In my respectful view, the legal reasoning and the result reached in Phillips are equally applicable to the decisions under review and, therefore, the payment of the subsidies constitutes a taxable benefit under paragraph 6(1 )(a) of the Act. Furthermore, that conclusion is consistent with the Supreme Court decision in Savage.

Paragraph 6(1 )(a) of the Act brings into employment income a "benefit of any kind whatever" received by the taxpayer "in respect of, in the course of, or by virtue of" his or her employment. The Supreme Court of Canada in Savage concluded that the meaning to be ascribed to the term "benefit" is quite broad. At 440-41 (C.T.C. 399), (D.T.C. 5414), Dickson J. (as he then was), speaking for a unanimous Court, held:

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, 83 D.T.C. 5041 this Court said, at page 5045, 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...

I agree with what was said by Evans J.A. in R. v. Poynton, [1972] 3 O.R. 727 at page 738, speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

...If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exception, e.g., loan or gift, then it is within the all-embracing definition....

(Emphasis added)

A mortgage interest subsidy may also be found to be taxable under section 80.4 of the Act and its related provisions. Section 80.4 and subsection 6(9) bring into income an amount which the Act deems a benefit. That benefit arises in circumstances where an employee receives a loan at a lower than prevailing rate of interest "because of or as a consequence of [that] employment". In short, the Act seeks to ensure that the employee pays tax on that portion of a loan which is subsidized by his or her employer. At the same time, the Act provides that if the loan qualifies as a "home relocation loan", as defined in subsection 248(4), then the employee/taxpayer may be entitled to a deduction as calculated under paragraph 110( 1 )(j) of the Act. The combined effect of these provisions is that within prescribed limits the taxpayer is not obligated to pay tax on the full amount of the subsidy.

With few exceptions, the Act ignores variations in the cost of living from one part of the country to another. One exception is section 110.7 which provides that certain travel and housing expenses can be deducted by individuals who live in a "prescribed area" of Canada. Another is subsection 6(6) (commonly referred to as the northern resident’s deduction), which provides that certain allowances received by employees at special work sites and remote locations are not to be included in income.

The relevant facts may be summarized as follows. Each of the five taxpayers was transferred from Calgary to the Toronto area by their employer, Petro-Canada. Each was entitled to financial assistance available under Petro-Canada’s relocation program which includes a monthly mortgage interest subsidy. The monthly subsidy is intended to help offset the interest costs associated with the need to take out a larger mortgage when purchasing a "comparable" but more costly home at the new work location.

As required by the employee relocation program, a third party established a mathematical differential for the difference in the cost or value of the employee’s home in Calgary and a "comparable" one in Toronto, which at the time of relocation was determined to be approximately 1.50. Once an employee’s house in Calgary was sold, the differential was multiplied by the sale price in order to establish the comparable price of a home in Toronto. The difference between the sale price of the employee’s home in Calgary and the price of a comparable home in Toronto established the maximum mortgage differential on which a mortgage interest subsidy was available. The subsidy is payable for a maximum of ten years on a declining basis (100 per cent in the first year to 50 per cent in the tenth). The following table, found at page 112 of the Applicant’s Application Record in Hoefele, supra, illustrates the extent to which the subsidy is available:

is warranted. In Phillips, the taxpayer received $10,000 from his employer to assist with the purchase of a home in Winnipeg to replace the one he had sold in Moncton after closure of the employer’s facility in that city. It was agreed that the average cost of a comparable home in Winnipeg was at least $23,000 higher than in Moncton. In concluding that the payment was a taxable benefit, this Court held that it fell outside the parameters of a tax-free benefit established in Savage, Ransom and Splane. Writing for the Court, (Stone J.A. concurring, Linden J.A. concurring in the result), I concluded at (C.T.C. 384) (D.T.C. 6178), page 688: "In my view the $10,000 did not restore the [taxpayer] to his previous financial state. Rather it increased his net worth by $10,000." Simply stated, the taxpayer in Phillips was $10,000 richer the day after the move than he was the day before. The payment did not have the effect of restoring him to his prior financial state, rather it increased his net financial worth and this is true irrespective of whether the replacement home in Winnipeg could be characterized as "comparable" to the one in Moncton.

With respect to the cases at bar, the taxpayers’ argument is, for all intents and purposes, identical to that advanced in Phillips. It is now maintained that the subsidy payments do not constitute an "economic benefit" as they do not have the effect of placing money in the taxpayers’ pockets. Rather the subsidies enabled them to purchase comparable homes and, in so doing, restored them to the financial position they were in prior to moving to the Toronto area. In other words, the subsidy payments did not have the effect of increasing the taxpayers’ net worth and should be treated no differently than a reimbursement for moving expenses. I cannot agree.

The taxpayers’ argument is flawed in that it rests on the mistaken assumption that a taxpayer is entitled to comparable housing at the new work location. The question to be asked is not whether the payments have the effect of restoring a taxpayer to the same standard of living he or she enjoyed prior to the relocation. The proper question is whether the payments have the effect of enhancing the taxpayers overall financial worth: that is to say, whether the payments confer an “economic benefit” on the taxpayers. As I pointed out in Phillips at pages 700-01 (C.T.C. 391; D.T.C. 6183):

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...overriding objective...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”.

The payments in question represent Petro-Canada’s way of compensating its employees for the higher cost of living in the Toronto area, without resorting to an increase in salaries. Such payments are a means of defraying a personal living expense and clearly confer an “economic benefit” on the taxpayers. In short, the subsidies are monetary compensation not reflected in wages or salaries, and as such are taxable benefits within paragraph 6(1 )(a) of the Act.

While the taxpayers sought to distinguish Phillips on myriad grounds, one did gain acceptance. In a few cases, it was argued successfully that while the taxpayers’ homes in Toronto may have been significantly more valuable assets than the ones in Calgary, the “equity” in each remained the same and, therefore, there could be no increase in the taxpayers’ individual net worth. In my respectful view, this reasoning fails to acknowledge the continuing effect of the interest subsidies paid by Petro-Canada. Although the taxpayers may not have been better off financially the day immediately following the relocation, as soon as Petro-Canada paid the first monthly subsidy payment to Confederation Life, the taxpayers’ financial positions were improved by that amount, and this is true irrespective of whether their standards of living remained unchanged. A brief explanation should suffice.

Because of the monthly interest subsidies, the taxpayers do not have to shoulder the full cost of acquiring a more valuable asset. The full cost includes not only the principal amount of the mortgage loan, but also accruing interest. But for the subsidies, each of the taxpayers would have been required to use after-tax dollars in order to retire the interest component of the mortgage loan. With the subsidies, the taxpayers are in a position to spend those after-tax dollars as they wish. It is in this sense that the taxpayers’ net worth increases. To reiterate what I said above, the fallacy in the taxpayers’ argument can be traced to the mistaken belief that they are entitled to comparable housing in the Toronto area. The subsidies in question may well have the effect of restoring the taxpayers to the same standards of living they enjoyed prior to moving to the Toronto area. However, in doing so, the subsidies improve the taxpayers’ financial positions.

To suggest that the subsidies go toward only the increased interest component of the mortgage and not the principal, and therefore the payments made by the taxpayers’ employer do not have the effect of increasing the taxpayers’ net worth, is simply to mask the reality of the situation. In Phillips, I alluded to the fact that a valid distinction could not be drawn between a lump sum payment which is used to reduce the principal amount of the loan and a payment which is applied directly against accruing interest. The reason being that if you reduce the principal amount of a loan, by means of a lump sum payment, you necessarily reduce the amount of interest that can accrue in the future. In other words, the form in which the payment is made should not detract from the legal reality that the taxpayers have received financial assistance to defray what is, in fact, a personal living expense.

In argument, counsel for the taxpayers acknowledged that one cannot do indirectly what cannot be done directly, but took refuge in a passage found in the concurring reasons of Linden J.A. in Phillips where it was noted that the structuring of tax-free compensation packages for employees required to relocate remained a possibility as long as it was done “legally” at page 686 (C.T.C. 394; D.T.C. 6185). Now it is argued that the PetroCanada compensation scheme represents such a structured package. So too must this argument fail. First, the conversion of a lump sum payment into a monthly interest subsidy cannot be considered professional tax planning. Form, by itself, does not prevail over substance. Second, the tax planning involved in Petro-Canada’s relocation program was premised on the belief that the subsidy is a taxable benefit and, as I see it, purposely structured so as to take advantage of the home relocation deduction.

While I have concluded that the interest subsidies are taxable benefits under paragraph 6(1 )(a), it remains to be determined whether this conclusion conflicts with either Splane or Ransom. In Phillips, I attempted to address the growing uncertainty surrounding the taxation of employee compensation and benefits in the context of relocation payments. My analysis sought to show that the jurisprudence revealed two emerging factual patterns relating to the tax treatment of payments received by employees required to relocate. One pattern involves payments to compensate for higher housing costs at the new work location. Such cases may be said to be governed by the rule in Phillips. The other pattern involves reimbursement of actual monetary losses incurred on the sale of an employee’s home. This type of case is governed by the rule in Ransom and, at this point, it is helpful to revisit it.

The rule in Ransom exempts from taxation those amounts paid to an employee to compensate for actual losses suffered by the employee upon being requested to relocate. In that case, the employee sold his home for a price less than he had paid out, thus incurring a capital loss (see Phillips at page 698 (C.T.C. 390; D.T.C. 6182). Reimbursement for actual monetary losses was held to be non-taxable because it merely restores the taxpayer to his or her previous financial position. In Phillips, counsel for the Minister argued that the $10,000 payment did not fall within the rule in Ransom as held by the trial judge. Alternatively, he argued that if the rule in Ransom applied, it could no longer be considered good law in light of the subsequent decision of the Supreme Court in Savage. None of the judges in Phillips was prepared to jettison the rule in Ransom. At page 702 (C.T.C. 391, D.T.C. 6183) I concluded:

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 conception of taxable benefits that it is, in my view, for the Supreme Court or Parliament to set aside its logic.

That being said, I was not prepared to extend the rule in Ransom for the following reasons at pages 702-04 (C.T.C. 392; (D.T.C. 6184):

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 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 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(l)(/). 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 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) 8:36, 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.

[Emphasis added.]

It is obvious to me that the rule as found in Ransom has no application to cases such as Phillips or those under review. The only decision which is potentially problematic is Splane. Unfortunately, the facts as outlined by the trial judge in that case are not comprehensive. At the time Phillips was argued, it was unclear whether, on the facts, Splane fell within the rule in Ransom or that in Phillips. Because of that factual lacuna, the binding or persuasive effect of Splane did not have to be addressed in Phillips and was purposely avoided by this Court (see Phillips at page 389 (D.T.C. 6181) page 697). That lacuna has now been filled.

The record before us includes the terms of the relocation assistance which was available to Splane, a federal government employee. We now know that he did not receive any monies for the purpose of defraying his housing costs at his new work location. Rather, he was compensated for the loss of a favourable mortgage interest rate, which loss arose on the sale of his home. At the time of the relocation, the mortgage rates were 1.75 per cent higher than that specified in Splane’s mortgage. Under the federal government’s relocation program, Splane was limited to recovering an amount equal to the difference between the rate specified in that mortgage and that available at the time of relocation, based on the principal amount of the mortgage owing at the time of its discharge over the unexpired term of the mortgage. Given these facts, it is clear to me that Splane falls within the rule in Ransom. Financially speaking, the taxpayer was no better off the day after the relocation than the day before.

In my view, Splane neither undermines nor contradicts the rule or reasoning advanced in Phillips, or vice versa. However, in light of my colleagues’ decision in these applications, the result in Phillips becomes more problematic. In my view, there is no justification for holding that Mr. Phillips must pay tax on the monies he received if the taxpayers in these applications do not. Equally disturbing to me is the reality that the majority position paves the way for other tax-free benefits intended to redress variations in the cost of living from one region of Canada to another. For the astute tax planner, today’s decision represents a window of opportunity. What is required is a fundamental re-examination of the jurisprudence surrounding paragraph 6(1 )(a) of the Act. It is no longer sensible to search for rational ways of distinguishing cases when, in fact, there is no underlying doctrinal thread that ties them together.

Strictly speaking, it is unnecessary for me to express an opinion on the applicability of section 80.4 and its related provisions. The Minister’s position is that, if the interest subsidies in question are held to be taxable under paragraph 6(1 )(a) or section 80.4, the taxpayers are entitled to the home relocation deduction under paragraph 110(l)(/) of the Act. This is so despite the fact that the taxpayers have argued that they do not come within the ambit of section 80.4 and, therefore, are not entitled to the deduction. I am prepared to comment briefly on the validity of the taxpayers’ argument, for if it goes unchallenged, I am afraid that section 80.4 may well be rendered meaningless; see V. Krishna, "Taxation of Employee Benefits" (1984) 1:35 Can. Curr. Tax C 173 at C 175.

Section 80.4 presently provides that when a "person receives a loan . . . because of or as a consequence of. . . [that] employment", that person shall be deemed to have received a benefit equal to the amount which effectively constitutes a subsidized interest rate. Prior to 1992, section 80.4 included the expression "by virtue of . . . [that] employment" but the change, in my view, is of no importance. The taxpayers’ argument is straight forward. It is submitted that they did not receive the mortgage loan from Confederation Life "because of or as a consequence of" their employment with PetroCanada but, rather because they met the former’s lending criteria. The existence of the subsidy had no bearing on the mortgage indemnity and approval requirements.

In my view, the taxpayers’ argument can be disposed of readily. But, for their employment with Petro-Canada, the taxpayers would not have received a monthly interest subsidy. But, for that subsidy, and for the fact that Petro-Canada paid that subsidy directly to Confederation Life, the taxpayers would not have received a mortgage loan in which their monthly mortgage obligations were reduced by the amount of the subsidy paid by Petro-Canada: see Hoefele, supra, Applicant’s Application Record at 94. In effect, the taxpayers received their loans at a reduced interest rate, which is exactly what section 80.4 was designed to capture.

In conclusion, I am of the view that the mortgage interest subsidies in question are taxable benefits under paragraph 6(1 )(a) of the Act and, therefore, the applications in A-484-94, A-491-94, A-547-94 and A-604-94 should be allowed, the respective judgments of the Tax Court of Canada set aside, and the cases referred back for redetermination on the basis that the taxpayers’ appeals to the Tax Court of Canada be dismissed. The taxpayers in the above noted applications are entitled to all reasonable and proper costs of this application. The application in A-123-95 should be dismissed.

Application dismissed.