Canadian Tax Haiku of the week:
Measuring by crows
Should not be used anymore
Best off going to court
Introduction
In a recent judgement, Hauser v The Queen,[1] the Tax Court of Canada (Tax Court) denied a taxpayers (Ms. Hauser) claim for a moving expense deduction under section 62 of the Income Tax Act(the Act).[2] The moving expenses provision in the Act is an issue the Tax Court has handled many times in the past[3] and is very common for taxpayers. Unfortunately, having his deduction rejected by the CRA is also very common for taxpayers as well.
While this blog deals with the calculation of distance between residences, there are many other issues which arise when dealing with moving expenses (for example, another common issue is determining what constitutes a “new residence” under the “eligible relocation” definition).
Facts
In 2012, Ms. Hauser moved in order to have a shorter commute to her new job. Ms. Hauser and the Crown submitted different routes for the Tax Court to consider. The Crown submitted the distance should be measured by a major urban road. If that method of measurement is used by the Tax Court, Ms. Hauser’s new home is only 25 kilometers closer to the new work location.[4]
Conversely, Ms. Hauser submitted the preferred route of travel was a ring road around the city, which she used to bypass detours and delays caused by the construction on the urban road. Using the ring road distances, her new home is 45 kilometers closer to the new work location.[5]
Issue
The issue in Hauser was whether the taxpayers move qualifies for the moving expense deduction in section 62 of the Act. In order to decide this, the Honourable Justice Woods had to determine the appropriate method of measuring the distance between the old home and the new work location in order to determine whether Ms. Hauser’s new home was at least 40 kilometers closer to her new work location such that the move would be an “eligible relocation” as defined in subsection 248(1) of the Act.
Statutory Framework
In order to qualify for a work-related moving expense deduction under s. 62 of the Act, the move must satisfy the requirements of an “eligible relocation.” as that term is defined in subsection 248(1) of the Act. The relevant parts of the Act are set out below:
- (1) Moving Expenses – There may be deducted in computing a taxpayer’s income for a taxation year amounts paid by the taxpayer as or on account of moving expenses incurred in respect of an eligible relocation
s. 248(1) “eligible relocation” means a relocation of a taxpayer in respect of which the following apply:
[…] (d) the distance between the old residence and the new work location is not less than 40 kilometres greater than the distance between the new residence and the new work location;
In other words, subsection 62(1) recognizes that relocation is a legitimate work-related expense. In order to prevent the provision from being abused by taxpayers who simply desire a change in residence, the provision requires that the move bring the taxpayer at least 40 kilometres closer to work.
Principles to be applied when determining whether moving expenses are deductible
The principles applied by the Tax Court were previously set out in the seminal Federal Court of Appeal decision regarding the calculation of distance for the deduction moving expenses, Giannakopoulos v MNR.[6] In Giannakopoulos, the Federal Court of Appeal rejected the concept previously followed by the Tax Court: that “distance” meant distance measured in a straight line (or “as the crow flies”).
After Giannakopoulos, it is clear that that the distance must be determined by the shortest route that one might travel to work, as long as it is a normal route used by the traveling public.[7] The use of “realistic” and “normal” implies that reason and common sense should play a part in the determination of distance. The Federal Court of Appeal held it only makes sense to measure the distance moved using real routes of travel, specifically the test should be the “shortest normal route”.[8]
However, in one Tax Court decision applying the principles fromGiannakopoulos, the Crown submitted a “38 turn slalom” to be used, which the Tax Court flat out rejected. As the Honourable Chief Justice Bowman dryly noted, this measurement was “neither realistic, nor normal, nor reasonable, nor commonsensical. … The straight line approach would at least make sense to a crow. The 40 road zigzag approach makes sense to no one.”[9] So just because there is a good case on point, spelling out what they ought to do, does not mean that the CRA is going to apply it in a realistic manner.
Decision in Hauser
The Honourable Justice Woods held that the for purposes of section 62, the determination of distance using a route that is under construction is appropriate as long as the construction project does not last an inordinate amount of time.[10]
While the legislation contemplates an arbitrary rule determined by “distance,” the concept of “normal route by the traveling public” is a judge‑made common sense approach to this requirement.[11] Justice Woods further held that it would “distort the purpose of the legislation if a temporary construction project were to permit a longer route to be used.”[12]
Tax Court considered whether the delays on the urban route lasted such a length of time that they should be taken into account from a common sense perspective.[13] Justice Woods was not satisfied by the evidence that the delays and detours lasted so long that the urban route was not an appropriate route for purposes of section 62.[14]
As a result, Justice Woods concluded that the urban ring-road was the appropriate route to measure distance for purposes of section 62, and dismissed the appeal on this basis. [15]
Conclusions
In our experience with the CRA it seems that they outright deny claims for moving expenses most of the time. However, through the objections and appeals process, if the taxpayer can demonstrate that their deductions adheres to the statutory and (when at the appeals stage) case law requirements, then it is possible to have the claim allowed by the CRA or Department of Justice before you have to even get to trial.
We recently settled a case in which we are certain that the CRA denied the entirety of a moving expense, pretty much just because they figured the amount was so small that the taxpayer would not fight it. Yeah Really, and the Crown on the case made it worse when he told us “look the CRA litigation officer does not think you are going to show up at trial” because there was only a couple of hundred dollars at stake, so “no deal”. So I told the Crown that the case waspro bono for us, and my articling student was handling it, and so “oh hell yeah!” we were going to show up. The Crown’s response was to quickly hang up and call me back 5 minutes later with a great deal for the client. It was not the entire claim, but it was enough that the client felt justified, righteous and victorious, so we took the deal.
Often when it comes to these smaller dispute, the CRA and the Crown just try to bully the taxpayer into giving up, and the only way to win is to be willing to fight …or hire someone who knows how to bluff really, really well.
By Jonathan Garbutt, Barrister & Solicitor and Raminder Pandher, Student-at-law
The above is provided on a for-your-information basis, and should not be considered as legal advice or tax advice specific to your circumstances.
[1] 2014 TCC 328 [Hauser]
[2] Income Tax Act, RSC 1985, c 1 (5th Supp) [the Act].
[3] Nagy v. The Queen, 2007 TCC 39 [Nagy] and
Lund v. The Queen, 2010 TCC 252 [Lund].
[4] Hauser, supra note 1, at para 6.
[5] Ibid at para 7.
[6] 95 DTC 5477 [Giannakopoulos].
[7] Hauser, supra note 1, at para 9.
[8] Lund, supra note 3, at para 11.
[9] Nagy, supra note 3, at para 12.
[10] Hauser, supra note 1, at para 11.
[11] Ibid at para 12.
[12] Ibid at para 13.
[13] Ibid at para 14.
[14] Ibid at para 16.
[15] Ibid at para 17.