Estate of the Late Jean-François Leduc v. Her Majesty the Queen, [1996] 1 CTC 2873

Dussault J.T.C.C.: — This appeal was heard under the Court’s informal procedure.

The appellant disputes the inclusion in Jean-François Leduc’s income for his 1992 taxation year of the amount of $1,027.60 in respect of a benefit contemplated by paragraph 6(1 )(a) of the Income Tax Act (the “Act”). That amount represented air transportation expenses for food for Mr. Leduc and his family paid directly by the employer, the Hôpital de 1’Ungava (the “hospital” or “employer”), when Mr. Leduc worked as a nurse at Tasiujaq.

The village of Tasiujaq is situated on Ungava Bay, in Quebec, roughly 100 kilometers from the nearest major centre, Kuujjuaq, in a prescribed [1] remote area for the purposes of the deduction provided for in section 110.7 of the Act. The village is not accessible by land. It is accessible by air and, from July to October, by water. The food requirements of the population of approximately 140 persons are met by a single cooperativestyle grocery store (the “Coop”).

In 1992, Mr. Leduc lived in Tasiujaq with his de facto spouse and his two children from August 25 until the end of the year.

The hospital’s nurses are governed by the Collective Agreement of the F.I.I.Q. [2] Article 34.05 of that agreement provides that employees working in certain remote areas are entitled to “Isolation Premiums and Benefits”. For 1992, Mr. Leduc received the applicable isolation premium in addition to his salary. Furthermore, as indicated on the T4 slip issued by it, the employer directly or indirectly assumed expenses totalling $6,396.28 in respect of Mr. Leduc and his family. The particulars are as follows:

- housing: $1,852.00

- travel: $3,516.68

- transportation of food: $1,027.60

These amounts were reported as income by Mr. Leduc, who moreover claimed the deduction provided for in section 110.7 of the Act, the amount so claimed being $5,451.68. The assessment by the Minister of National Revenue (the “Minister”) dated July 29, 1993, confirmed the income tax calculated by Mr. Leduc in his return. In response to the assessment, however, Mr. Leduc, through the F.I.I.Q., objected to the amount of $1,027.60 being included in his income; the Minister confirmed the assessment, hence this appeal.

I understand that other nurses were also assessed in respect of the payment of food transportation expenses by the employer and objected to the assessments.

Clause VII of article 34.05 of the F.I.I.Q. Collective Agreement respecting the transportation of food reads as follows:

Employees who are unable to secure their own food supply in sectors V and IV, in the communities of Kuujjuaq, Kuujjuaraapik, Poste-de-la-Baleine (Whapmagoostoo), Chisasibi, Radisson, Mistassini and Waswanipi, because there is no source of supply in their community shall receive payment of transportation expenses for food up to the following maximum weights:

- 727 kg per year per adult and per child 12 years of age and over;

- 364 kg per year per child less than 12 years of age.

This benefit shall be provided in one of the following forms:

(a) the Employer shall provide for transportation from the source most accessible or most economic from a transportation point of view and pay its cost directly, or

(b) the Employer shall pay employees an allowance equivalent to the cost that would have been incurred under (a).

[Translation.]

The food transportation expenses in the instant case were paid directly by the employer in accordance with (a) above.

According to the testimony of François-Luc Paré, who also worked as a nurse in Tasiujaq, the Coop mainly sold non-perishable foodstuffs. Perishable foods such as meat, fruit and vegetables were often not available or were not available in sufficient quantities. The prices of food items at the Coop were very high, two and a half times those in Montréal, because of the cost of air transportation. As a result, the hospital’s non-native employees recruited in the south of the province, such as Mr. Leduc, generally took advantage of paragraph (a) of Clause VII of article 35.04 of the F.I.I.Q. Collective Agreement in order to secure for themselves food or other essential commodities in sufficient quantity and of sufficient quality. According to Mr. Paré, the native employees opted instead for the al- lowance provided for in paragraph (b) above.

In the case contemplated by paragraph (a), the foodstuffs were ordered directly by the employee either by telephone or by facsimile from a grocery store in the Montréal area. They were picked up by the air carrier and delivered to their recipients in the designated village. The air transportation costs were billed by the carrier directly to the employer, who paid them up to an amount equal to the costs for the maximum stipulated quantities. Beyond that, costs were assumed by the employee.

It would thus appear that during the 1992 taxation year the employer paid for the transportation of 734 kilograms of food for the Leduc family. In box 40 of the T4 slip completed by the payer, the amount of $1,027.60 is indicated as a benefit in respect of the transportation of food, which represents costs of $1.40 per kilogram. According to the testimony of Bruno Fréchette, himself a nurse at the Hôpital de 1’Ungava in Kuujjuaq and a member of the union executive who addressed the issue on the employees’ behalf, the amount of $1.40 on the basis of which the benefit was calculated by the employer in fact represents the lowest average cost of transporting food to Kuujjuaq, not the actual paid cost of transportation to communities located farther north, including Tasiujaq, where the cost was allegedly $2.73 a kilogram. According to Mr. Fréchette, this method of indicating the value of the benefit was used on the T4 slip in response to an audit by the Quebec Ministry of Revenue in order to “save time”. However, that ministry, which had initially raised the issue of the taxation of transportation expenses paid by the employer, subsequently issued a directive [3] indicating that the employer was to use the actual cost of food transportation in respect of each individual employee. It would appear that the employer refused to make the calculation on that basis, alleging that it would have been impossible to recruit staff to work in the communities farther north where the cost of transportation is much higher, since the taxable benefit would then be considered too great.

I must emphasize that the question of the valuation of the benefit is not itself the subject of the instant case, as the appellant does not dispute at all the amount of $1,027.60 recorded on the T4 slip by the employer and used by the Minister to make the assessment under appeal. Nor was this question raised by the respondent. It is known that in any case the assessment cannot be increased as a result of the appeal. See inter alia, No. 526 v. Minister of National Revenue (1958), 20 Tax A.B.C. 114, 58 D.T.C. 497, at page 499 (T.A.B.); Harris v. Minister of National Revenue, [1964] C.T.C. 562, 64 D.T.C. 5332 (Ex. Ct.), at page 5337; Shiewitz v. Minister of National Revenue, [1979] C.T.C. 2291, 79 D.T.C. 340 (T.R.B.), at page 2292 (D.T.C. 341); Boyko v. Minister of National Revenue, [1984] C.T.C. 2233, 84 D.T.C. 1233 (T.C.C.), at page 2237 (D.T.C. 1237); Cooper v. Minister of National Revenue, [1987] 1 C.T.C. 2287, 87 D.T.C. 194 (T.C.C.), at page 2301 (D.T.C. 205); Cohen v. Minister of National Revenue, [1988] 2 C.T.C. 2021, 88 D.T.C. 1404 (T.C.C.), at page 2023 (D.T.C. 1406).

Lise Roy, a servicing representative with the F.I.I.Q., testified as to the origin of the collective agreement provision respecting food transportation expenses. She said that an isolation premium had initially been granted to employees represented by unions affiliated with the C.N.T.U.* [4] and was subsequently extended to all employees of the health care system, including the nurses represented by the F.I.I.Q. From my understanding of Ms. Roy’s testimony, following the signing of the James Bay Agreement and as part of the development of health and social services in Canada’s North, this premium was intended to compensate employees for the high cost of food in communities in areas not linked to the southern part of the province by land route.

Appellant’s Position

The appellant’s position is that the payment of food transportation expenses by the employer does not constitute a benefit within the meaning of paragraph 6( 1 )(a) of the Act because its purpose is to pay a necessary and essential expense which is not of a personal nature. Counsel for the appellant referred first of all to the Act approving the agreement concerning James Bay and Northern Québec, [5] which provides that, in case of conflict or inconsistency, that act shall prevail over any other act applicable to the territory described therein to the extent necessary to resolve the conflict or inconsistency. According to counsel, taxing the transportation expenses that the employer is required to pay under the F.I.I.Q. Collective Agreement would be tantamount to denying the meaning and even rejecting the application of the James Bay Agreement in which “the legislative authority, in order to promote the development of the local populations and to provide them with health, social and educational services, provided direct tax benefits as compensation for the isolation, remoteness and exorbitant transportation costs associated with remote areas”. [6]

By means of a comparative table, counsel for the appellant then established, on the basis of actual transportation costs to the employer, the effect that taxing these expenses would have on “net earnings” after tax for individuals working in various communities in Canada’s North in comparison with the net earnings of a person performing the same duties in Montréal. Commenting on the situation of a person working in Salluit, where transportation costs are the highest, she concluded that taxing exorbitant food transportation costs “completely nullifies benefits such as the annual isolation premium and the deductions for inhabitants of remote areas” [7] , so much so that “if these transportation costs were to be taxed, no one would want to go to remote areas”. [8] Counsel for the appellant continued her argument as follows:

Furthermore, it will be noted that such taxation is utterly contrary to the legislature’s intention in passing the “James Bay Agreement Act”. We will see further on that Parliament also intended to grant benefits to the people of the North to induce them to go and work in those areas permanently, as appears more particularly from the Report of the Task Force on Tax Benefits for Northern and Isolated Areas, which served as a basis for the amendments currently contained in section 110.7 of the federal statute.

Lastly, it will be noted further on from a reading of the principal decisions relating to the concept of “benefit”, that the question to be asked for the purpose of determining what constitutes a benefit is the following: is the person better off or no better off than he was before the amounts were paid?

In this case, to ask the question is to answer it. When he received the sum of 1,027.00$ from his employer, Mr. Leduc was no better off at all, but was merely compensated for expenses that he would not have incurred if he had been in Montréal.

[Translation.]

Referring next to the text of section 110.7 of the Act and to the Report of the Task Force on Tax Benefits for Northern and Isolated Areas submitted

in October 1989, [10] counsel concluded that the deduction provided for in section 110.7 did not apply at all to food transportation costs. She concluded on this point as follows:

Furthermore, it is well established that upon examination and analysis of the various documents that gave rise to all the tax incentives, nowhere does one find any reference to transportation costs for procuring foodstuffs. Since a tax statute must be interpreted restrictively, it is hard to see, with all due respect for the contrary view, how one could claim, and in particular on what legal basis one could claim, that section 110.7 would include a deduction for transportation costs with respect to the procurement of foodstuffs. Once again, the table in Schedule 1 clearly shows that section 110.7 cannot include transportation costs since the result clearly constitutes a disadvantage, not a benefit.

Furthermore, in all collective agreements signed by governmental and para-governmental organizations with the employees in the area in question these payments are viewed as non-taxable for the purposes of setting remunera- tion and incentives for attracting workers to that area.!! [11]

[Translation.]

Having stressed that “the operation consisted in the employer’s incurring an expense necessary for the employee given that there was no road [and] that the grocery store was inadequate”, [12] counsel for the appellant then referred to a number of decisions, including those in Ransom v. Minister of National Revenue, [1967] C.T.C. 346, 67 D.T.C. 5235 (Ex. Ct.); R. v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409; Huffman v. R. (sub nom. R. v. Huffman), [1990] 2 C.T.C. 132, 90 D.T.C. 6405 (F.C.A.); Splane v. R., (sub nom. R. v. Splane) 92 D.T.C. 6021 (F.C.A.) and Hoefele v. R., (sub nom. Hoefele v. Canada) [1995] 1 C.T.C. 2177, 94 D.T.C. 1878 (T.C.C.) as establishing that there had to be an enrichment or an economic benefit for one to be able to conclude that there was a taxable benefit. Thus, she relied inter alia on the following passage from the decision by Noël J. in Ransom, supra:

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.

An allowance is quite a different thing from reimbursement. It is, as already mentioned, an arbitrary amount usually paid in lieu of reimbursement. It is paid to the employee to use as he wishes without being required to account for its expenditure. For that reason it is possible to use it as a concealed increase in remuneration and that is why, I assume, “allowances” are taxed as though they were remuneration. Ransom, supra, page 361 (D.T.C. 5243 and 5244.)

In his decision in Hoefele, supra, Judge Sobier of this Court also referred to the following remarks by Noël J. in Ransom, supra:

It appears to me quite clear that reimbursement of an employee by an employer for expenses or losses incurred by reason of the employment (which as stated by Lord MacNaughton 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” so it does not fall within the introductory words of section 5(1) or within paragraph (a). It is equally obvious that it is not an allowance within paragraph (b) for the reasons that I have already given. [13]

Counsel for the appellant continued, citing a number of passages from the decision in Hoefele, supra, which distinguish between a disguised attempt to increase an employee’s remuneration and the reimbursement of actual losses or expenses incurred by a taxpayer by reason of his employment where such reimbursement improved neither his previous economic situation nor his situation relative to other employees who had not incurred the same losses or expenses, unlike the situation in Phillips. Phillips v. Minister of National Revenue (sub nom. R. v. Phillips), [1994] 1 C.T.C. 383, 94 D.T.C. 6177 (F.C.A.). On the basis of the distinction thus established through recourse to a concept of tax fairness, counsel for the appellant concluded as follows:

It therefore appears that by virtue of a certain principle of tax fairness, the employee Leduc must be considered in the same light as an employee who working under the same criteria in Montréal. To consider him otherwise would constitute a very serious tax inequity, which clearly is not acceptable either under the Act or the case law. [14]

[Translation.]

Respondent's Position

Counsel for the respondent dismissed the restrictive interpretation of the Act suggested by counsel for the appellant, as well as any special interpretation that would take into account the Act approving the agreement concerning James Bay and Northern Quebec, since only Parliament has authority in this regard. Thus, counsel for the respondent contended that the words must be given their proper meaning having regard to the context of the legislation and to the purpose of the provision in question.

In counsel’s view, the payment by Mr. Leduc’s employer of transportation expenses for food for Mr. Leduc and the members of his family constituted a benefit within the meaning of paragraph 6(1 )(a) of the Act since it was essentially a payment in respect of expenses of a personal nature. Those expenses, she contended, were not employment expenses reimbursed by an employer as, for example, where an employee is reimbursed for the price of meals when he is required to carry on his duties at a place distant from his usual place of work, but rather expenses that all individuals must normally bear. While the purpose of the expenditures made by the employer was to assist employees working in an area where the cost of food is particularly high, they nonetheless did not result from a transfer required by the employer, but were essentially designed to offset a higher cost of living with respect to personal expenses that the employee must bear. In her view, while it is well known that there are great varia tions in the country in this regard, it is also known that such variations are in no way taken into account for the purposes of determining tax on the income of Canadian taxpayers, except in the special case of the deduction granted to the inhabitants of northern areas under section 110.7 of the Acct. On this point, counsel relied on the study by James M. Dean entitled The Effect of Cost-Of-Living Differentials on Tax Liabilities in Canada”. [15] She therefore contended that the payments made by the employer were intended to offset expenses resulting from the cost of living, in other words, personal expenses, not employment expenses, and that they thus constituted a benefit contemplated by paragraph 6(1 )(a) of the Act. On this point, she distinguished the decision by the Federal Court of Appeal in Huffman, supra, where payment by the employer for civilian clothing for a police officer who used that clothing in the performance of his duties was not considered to be a benefit, despite the fact that the purchase of such clothing is normally a personal expense.

Counsel for the respondent also relied on the decision by the. Supreme Court of Canada in Savage, supra, where the expression “benefits of any kind whatever” was interpreted as having very broad meaning. She then drew a parallel with paragraph 6(1 )(b) of the Act, which stipulates that allowances for “personal or living expenses” are to be included as income except in expressly stated cases. She also referred to subsection 6(6) of the Act, which constitutes an exception to the inclusion of an amount that a taxpayer has received or enjoyed that is the value of or an allowance in respect of expenses incurred for board and lodging in the case of employment on a particular work site or in a remote area. Lastly, counsel pointed to the special deduction in section 110.7 for inhabitants of remote areas. She concluded that, for the purposes of the Act, “the rule is that benefits received for living expenses are included and the exception is the deduction of those benefits where expressly provided”. [16]

Counsel for the respondent then put forward an argument based on a concern for fair tax treatment by comparing Mr. Leduc’s situation with that of persons living in the same place, Tasiujaq, whose employer did not pay food transportation costs and who therefore had to pay transportation costs out of their after-tax income. She went on to state that Mr. Leduc’s situation also had to be compared with that of other employees of the same employer who chose to receive an equivalent allowance instead of direct payment of food transportation expenses by the employer and who were taxed on that allowance, subject, however, to specific tax breaks such as those applicable to aboriginal people. This argument was drawn from the decision by the Federal Court of Appeal in Phillips, supra at page 391 (D.T.C. 6183), where Robertson J.A. explained in the following terms his perception of Parliament’s purpose:

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”.... Two employees performing the same work for the same employer should receive the same tax treatment in respect of their employment.

Counsel then referred to the following passage from the conclusion of the judgment in Phillips, supra, at page 392 (D.T.C. 6184):

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.

She then argued that paragraph 6(1 )(a) must be analyzed in the overall context of the Act when applying it to the specific case of inhabitants of northern areas, which implies that the deduction of section 110.7 of the Act must be taken into account. To this end, counsel relied on the Federal Court of Appeal’s analysis in Phillips, supra, of the rule enunciated by the Exchequer Court in Ransom, supra, as follows at page 388 (D.T.C. 6181):

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 v. Minister of National Revenue, [1986] 2 C.T.C. 2441, 86 D.T.C. 1802 (T.C.C.). I would only observe that when calculating “actual loss”, Ransom must be applied today with due regard to section 62 of the Act (“Moving Expenses”).

Finally, counsel for the respondent contended that the deduction provided for in section 110.7 confirmed that paragraph 6(1 )(a) applied to the payment made by Mr. Leduc’s employer, which was in reality a payment to offset a higher cost of living. In her view, the relief afforded by the deduction provided for in section 110.7 was in no way restricted to offsetting the higher cost of housing, but applied also to all living expenses including those relating to the higher price of food. She indicated that nowhere in the text of section 110.7 or in the explanatory notes accompanying the proposed amendments to that provision of May 1991 [17] and June 1992, or elsewhere, including in the Report of the Task Force on Tax Benefits for Northern and Isolated Areas, supra, was there any indica- tion that the purpose of the deduction granted was to offset only higher housing costs and not all living expenses. She noted moreover that the expression “living expenses” was used in the explanatory notes.

Additional Arguments

In additional notes submitted by her, counsel for the appellant disagreed with all the claims by counsel for the respondent. More particularly, she disputed the argument that the fact that the employer had paid personal or living expenses was the relevant criterion to use in this case. Relying most notably on the decision by the Federal Court of Appeal in Splane, supra, counsel contended that the only relevant question was whether or not the taxpayer was enriched as a result of the payment. She also asserted that it mattered little whether or not the expense resulted from a transfer to the extent that it was incurred pursuant to the taxpayer’s employment.

Following the hearing and after receipt of the parties’ notes and authorities in the instant case, the Federal Court of Appeal rendered its judgment in Krull v. Canada (sub nom. Hoefele v. Canada, [1996] 1 C.T.C. 131, 95 D.T.C. 5602 (F.C.A.), This decision rendered on October 11, 1995 confirmed the Tax Court of Canada decisions in Hoefele v. R., (sub nom. Hoefele v. Canada) [1995] 1 C.T.C. 2177, 94 D.T.C. 1878, Mikkelsen v. R. (sub nom. Mikkelson v. Canada), [1995] 2 C.T.C. 2940, 95 D.T.C. 118, Zaugg v. R. (sub nom. Zaugg v. Canada) [1994] 2 C.T.C. 2425, 94 D.T.C. 1882 and Krall v. R. (sub nom. Krall v. Canada), [1995] 1 C.T.C. 2570, 95 D.T.C. 411 and reversed that in Krull v. R. (sub nom. Krull v. Canada) [1995] 2 C.T.C. 2204, 95 D.T.C. 206. I consequently invited counsel for the parties to submit additional comments if they so wished.

In her notes submitted in response to that request, counsel for the appellant reiterated the position she had previously adopted and stated that the majority decision written by Linden J.A. coincided exactly with the arguments she had already put forward. Linden J.A.’s decision was of course based on the principles stated in Ransom, supra, and Splane, supra.

For her part, counsel for the respondent mentioned in her additional comments that Linden J.A. had emphasized the fact that each case must be analyzed on its own facts and that the point at issue in that case was to determine whether a benefit had been conferred in circumstances in which employees had been forced to move in order to keep their employment. Counsel therefore distinguished between that situation and the one in the instant case and restated the argument already submitted to the effect that the employer in this instance had merely paid a personal expense of Mr. Leduc’s.

I shall return to the decision in Hoefele et al., supra, in the course of the analysis which follows.

Analysis

In recent years, the Supreme Court of Canada has frequently had to rule on the principles of interpretation applicable to tax matters. See inter alia Stubart Investments Ltd. v. R. (sub nom. Stubart Investments Ltd. v. The Queen), [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Johns-Manville Canada Inc. v. R. (sub nom. Johns-Manville Canada Inc. v. The Queen), [1985] 2 S.C.R. 46, [1985] 2 C.T.C. Ill, 85 D.T.C. 5373, Imperial General Properties Ltd. v. R., [1985] 2 S.C.R. 288, [1985] 2 C.T.C. 299, 85 D.T.C. 5500 and Symes v. R. (sub nom. Symes v. Canada), [1993] 4 S.C.R. 695, [1994] 2 C.T.C. 40, 94 D.T.C. 6001. In Québec (Communauté urbaine) v. Corporation Notre-Dame de Bon-Secours (sub noms. Notre-Dame de Bon-Secours (Corp) v. Québec (Communauté urbaine); Corp. Notre-Dame de Bon-Secours v. Québec (Communauté urbaine), [1994] 3 S.C.R. 3, [1995] 1 C.T.C. 241, 95 D.T.C. 5017. Gonthier J., writing for the Court, restated the principal that “the interpretation of tax legislation should be subject to the ordinary rules of construction”. [reported at Krull, supra]^ [19] Gonthier J. referred to the fundamental rule stated by Driedger [reported at Krull, supra] [20] ® and since approved on numerous occasions. That rule is as follows:

..the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [Reported at Krull, supra] [21] *

Gonthier J. continued:

The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. [22]

The teleological approach advocated by the Supreme Court of Canada surely does not allow of an interpretation of the provisions of the Act based on a context other than that in which the Act was developed or on a context which is that of another statute, nor does it allow one to give the words used in stating a general rule not just a strict interpretation but a restrictive one, as counsel for the appellant would like. In my view, the context of the James Bay Agreement has nothing to do with the interpretation of a general rule stated in the Act, a rule whose purpose is to tax benefits in kind and other benefits received or enjoyed by a taxpayer by virtue of his employment over and above his remuneration.

The purpose of paragraph 6(1 )(a) of the Act is to include in a taxpayer’s employment income:

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 ...

There is no doubt that this rule states the principle of inclusion of all benefits received by a taxpayer in respect of his employment, except those benefits expressly mentioned. Moreover, in Savage, supra, the Supreme Court of Canada held that the phrase “benefits of any kind whatever” was “clearly quite broad” in its meaning and applied to every acquisition which confers an economic benefit and does not constitute an exemption. [reported at Krull, supra] [23] ^

In the Federal Court of Appeal’s recent decision in Blanchard v. R., (sub noms. Blanchard v. Canada; R. v. Blanchard), [1995] 2 C.T.C. 262, 95 D.T.C. 5479.

Linden J.A. analyzed the same phrase as follows:

Paragraph 6(1 )(a) is an all-embracing provision. It provides that all “benefits of any kind whatever” are to be included as employment income if they were received “in respect of, in the course of, or by virtue of an office or employment”. The section casts a wide net, incorporating two broadly worded phrases. The first is “benefits of any kind whatever.” The scope contemplated by this phrase is plain and unambiguous: all types of benefits imaginable are to be included. Speaking for the majority in The Queen v. Savage, Dickson J. (as he then was) stated that paragraph 6(1 )(a) was “quite broad” and covered any “material acquisition which confers an economic benefit.” [1983] 2 S.C.R. 428 at 441, quoting from R. v. Poynton, [1972] 3 O.R. 727 at 738, per Evans, J.A. [reported at Krull, supra] [24]

And further on, he added:

Paragraph 6(1 )(a) leaves little room for exceptions, but a few have surfaced in the jurisprudence. First, reimbursements paid by an employer to an employee for expenses incurred by that employee are not taxable. They are not benefits. They do not put anything in the taxpayer’s pocket, but merely save the pocket of the taxpayer. Ransom v. The Queen 67 D.T.C. 5235, at page 5244 per Noël J. In other words, they are merely payments in an overall zero-sum transaction. Speaking to the facts underlying the case, Cullen, J. in Splane v. The Queen stated at page 6445:

The plaintiff moved at the request of his employer, incurred certain expenses in the move, and suffered a loss. The reimbursement of these expenses cannot be considered as conferring a benefit within the terms of the Act. The plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating to the Edmonton office.

Reimbursements for costs actually incurred are, therefore, not caught by paragraph 6(1 )(a).

Second, a benefit that is wholly “extraaneous” or “collateral” to one’s employmaent, that is, one that is received in one’s “personal capacity” only, may fall outside paragraph 6(1 )(a). McNeil! v. R. (sub nom. McNeill v. The Queen), [1986] 2 C.T.C. 352, 86 D.T.C. 6477; R. v. Phillips, [1994] 1 C.T.C. 383, 94 D.T.C. 6177, at page 6180. This exception is very narrow and is available only where there is no connection or link to the employment relationship. [25]

No great effort is required here to link the payment of the food transportation expenses to Mr. Leduc’s employment since it was a payment made pursuant to the provisions of the F.I.I.Q. Collective Agreement. That link was not disputed by counsel for the appellant, who moreover viewed it as the performance of an obligation of the employer under the terms of that agreement, which, according to her, meant that such a mandatory payment for a necessary or essential expense of an employee does not constitute a benefit for that employee.

While reimbursement by an employer for an actual loss suffered by an employee or for an additional expense incurred as a result of a transfer has not been considered to be a benefit within the meaning of paragraph 6(1 )(a) (see Ransom, supra, Splane, supra and Hoefele et al., supra), the payment of a lump sum or other sum not of this directly compensatory nature, including a payment to reflect a higher cost of living, has been considered to be an improvement in the taxpayer’s economic situation or an enrichment, and thus, to be a taxable benefit (see Phillips, supra).

In Phillips, supra, Robertson J.A. of the Federal Court of Appeal, while reiterating his approval of the exception stated in Ransom, supra, nevertheless refused to broaden its scope:

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)(j). 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) 8:56 at 8:59; and R.B. Thomas and T.E. McDonnell, supra, at 941-2. 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 [reported at Krull, supra]. [26] .26

[Emphasis added. I

In Krull, supra, Linden J.A. of the Federal Court of Appeal, writing for the majority, referred to the Supreme Court of Canada judgment in Savage, supra, and described the concept of “benefit” in the following terms:

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. [reported at Krull, supra, page 5604]

[Emphasis added. ]

Having analyzed the principles stated in the case law on the issue, including the restriction formulated in Ransom, supra, he writes as follows regarding the question to be decided:

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. [27]

[Emphasis added.]

Although at first glance this formulation of the concept of benefit may appear fairly restrictive, since it would include only amounts received that increased a taxpayer’s “net worth”, the end of the last sentence of the passage cited introduces an additional element, the payment by an employer of “ordinary, every day expenses” of an employee, which would clearly be considered as also constituting a benefit.

One may consider the simple example of an employer who decided to pay only part of an employee’s remuneration in cash and who undertook to pay or reimburse certain of his personal expenses such as those for housing, food, transportation, the children’s education and so on. It is difficult to see how the claim could be made that such employee was not enriched or did not receive a benefit as a result of the payment or reimbursement of expenses that have traditionally been considered personal or living expenses, and thus, essentially consumer expenditures.

This manner of approaching the question from a broader perspective, taking into account not only elements representing a gain, an enrichment or an increase in “net worth” for the taxpayer, but also elements intended to compensate for his consumer expenditures, simply brings us back to the economic concept of income, which, despite numerous exceptions, remains the basis of our tax legislation in this area. [28]

If paragraph 6(1 )(a) of the Act specifically mentions the value of the board and lodging that an employee has received or enjoyed as a taxable benefit by virtue of his employment, the reason is simple: the employer is in that case paying a personal expense or consumer expenditure of the employee. Where, as in the instant case, the employer pays food transportation expenses for an employee and his family, he is offsetting or subsidizing part of an expense which, in my view, is of the same nature. In short, the employer is paying part of the employee’s higher personal or living expenses instead of directly increasing his remuneration in order to allow for them. It seems to me then this is precisely the limit that the Federal Court of Appeal wanted to impose in Phillips, supra, per Robertson J.A., who stuck to this limit in his dissent in Krull, supra. Expenses for the purpose of procuring food are definitely necessary and even essential. However, they do not differ by their nature from those normally incurred to procure housing. The employer in the instant case conferred a benefit on Mr. Leduc by providing him with housing. He could not reasonably do otherwise having regard to the remoteness of the place of employment, where the employee obviously could not procure housing of his choosing. This type of benefit is clearly contemplated by paragraph 6(1 )(a) to the extent that no evidence was adduced to show that the exception provided for in subsection 6(6) could have applied. Similarly, the employer undertook, through direct payment or payment of an equivalent allowance, to bear the cost of transporting food because of the high price of food and the difficulties in securing adequate supply in Tasiujaq.

The prices of foodstuffs or other consumer goods are set everywhere on the basis of a number of factors and it is clear that the cost of transportation is one of them. It is also well known that the prices of those goods vary greatly from one end of the country to the other. Even if it is recognized that food transportation costs are extremely high, and, once again, vary greatly in northern communities, they are nonetheless necessary living expenses for everyone. In this sense, I find that the payment of transportation expenses for food for Mr. Leduc and his family constituted partial compensation for a personal or consumer expenditure and that, as such, that payment constituted a benefit within the meaning of paragraph 6(1 )(a) of the Act.

The argument based on the employer’s obligation under the Collective Agreement with the F.I.I.Q. has no relevance for the purpose of determining the true nature of the payment. Indeed, the employer was also required to pay the salary agreed upon, but that does not alter its nature as income.

The argument drawn from the comparison with Mr. Leduc’s previous situation or with persons performing the same duties in Montréal cannot be accepted either. First, the payment here was not reimbursement of expenses incurred as a result of an employee’s transfer, but rather the payment of expenses relating to the procurement of food for all employees working in the areas mentioned. Second, the argument further underscores the fact that the payment of transportation expenses by the employer was designed to offset or lessen the impact of the higher cost of living. As to the comparisons drawn from the table submitted by counsel for the appellant, they definitely show significant variations in transportation costs at various locations, but here again, are irrelevant for determining the true nature of the payment. I would add moreover that they are based on assumptions certain elements of which were unsubstantiated by any evidence and which in any case I do not have to address, since only the facts relevant to the instant case can be considered for the purposes of reaching a decision.

All goods, including all consumer goods, cost much more for all inhabitants of remote areas, particularly those of Canada’s North. Parliament nevertheless perceived the difficulties involved in applying the general rules of subsection 6(1) in certain circumstances where an employee works at a specific job site or in a remote place and it enacted the exception appearing in subsection 6(6). The more acute problems of persons living in northern or intermediate areas have also been considered on more than one occasion and were made the subject of the special provisions of section 110.7 with a view to providing an adequate and fair solution to those problems. Clearly the deduction based on objective criteria provided for in that section does not necessarily meet the personal expectations of individuals facing a cost of living which is not only high but which varies greatly from region to region and from locality to locality. While the solution may seem imperfect, it is the one that Parliament has chosen. It is not up to me to extend its scope indirectly by interpreting restrictively the general rule stated in paragraph 6(1 )(a).

In Pezzelato v. R. (sub nom. Pezzelato v. Canada, [1995] 2 C.T.C. 2890 (T.C.C.), my colleague Judge Bowman described the difficulties he experienced in stating a logical and coherent proposition enabling him to reconcile Ransom, supra, and Splane, supra, on the one hand, and Phillips, supra, and Blanchard, supra, on the other hand, and concluded that this is an impossible exercise “unless one applies distinctions that are arbitrary or irrelevant”. [reported at Krull, supra] [29] I do not claim to have succeeded in this regard in the present analysis, particularly when one adds to the four decisions cited above that of the Federal Court of Appeal in Hoefele et al., supra. I nevertheless feel I have complied both with the principle stated in Phillips, supra, to the effect that a payment or reimbursement by an employer to offset a higher cost of living constitutes a benefit, and with the restriction stated by the majority in Hoefele et al., supra, the most recent decision on the subject, to the effect that a reimbursement by an employer of an expense incurred by an employee in respect of his employment does not constitute a benefit to the extent that it does not represent payment of ordinary, everyday expenses according to the meaning I believe I must give to those terms, that is to say, expenses that all persons must bear for their sustenance wherever they may work and wherever they may live in this country.

I will close by referring to a comment by my colleague Judge Bowman, also from Pezzelato, supra, page 2899:

If employers wish to ensure that their employees do not suffer a tax burden resulting from the conferral of benefits, they should gross up the benefit by the tax cost, including the tax on the amount of the gross-up. After all, the employer can deduct it.

The employer in the instant case probably did not deduct transportation expenses simply because he was presumably not liable for income tax. The first part of Judge Bowman’s remark is nevertheless valid. I would add that the perception that employers and employees have that a payment, a reimbursement or an allowance is or is not taxable does not alter its treatment for the purposes of the Act.

The appeal is dismissed.

Appeal dismissed.