The appellants were required to relocate their employees to different locations as part of their business. In addition to reimbursing direct moving costs, their relocation policy entailed paying the relocated employees a moving allowance in respect of incidental expenses (e.g., draperies, blinds and carpeting for the new premises, costs of cancelling and entering into new service contracts and the replacement of items which could not be shipped.) The appellants claimed ITCs in respect of the moving allowances on the basis of s. 174.
The Court found that, under s. 174(a)(iv), it is the supply, not the allowance used to acquire it, that must be "in relation" to the employer's activities. Noël J.A. stated (at para. 50):
If meaning is to be given to the words of subparagraph 174(a)(iv), regard must be had to the particular property or services contemplated and their intended use. Applying these criteria, property or services which are intended by the employer for the exclusive personal use of the employees and which lend themselves to such a use bear no relationship to the employer's activities. In contrast, property or services which can be used by the employees in the course of their employment activities, and which are intended for such a use, are in relation to the employer's activities.
Accordingly, as the "supplies of property or services which the allowances were intended to fund...were for the exclusive personal use of the employees" (para. 52), they did not qualify under s. 174.
Noël JA further noted obiter (at para. 54-55) that, as s. 174 deals with an "allowance," i.e., an amount for which the recipient "is under no duty to account and remains free to use...as he or she pleases," by legislative design there is no requirement for the payor of the allowance to assess the reasonability of the actual consumption or use of the property by the recipient of the allowance as would be required for a reimbursement referred to in s. 170(2)(a) and "that is why the test under paragraph 174(b) of the ETA is framed by reference to the reasonability of the allowance as a deductible expense in the hands of the employer."