Moving In And Out Of Canada: Proposed Amendment To Definition Of "Eligible Relocation" May Restrict Deduction For Moving Expenses

Subsection 62(1) of the Income Tax Act (the "Act") provides that, subject to certain conditions and limits, a taxpayer may deduct moving expenses that are paid by the taxpayer in respect of an "eligible relocation," which is defined in section 248 of the Act. Under the existing definition of "eligible relocation," a Canadian taxpayer who relocates from Canada to a foreign country, or between locations outside of Canada, for work can generally take advantage of subsection 62(1).  However, a proposed amendment to the definition of "eligible relocation" may significantly curtail the ability of these taxpayers to deduct their moving expenses.

Definition of "Eligible Relocation"

Currently, subsection 248(1) defines eligible relocation as a relocation of a taxpayer where:

1. the relocation occurs to enable the taxpayer:
   
   
   1. to carry on a business or to be employed at a location in Canada (in section 62 and this subsection referred to as "the new work location"), or
   2. to be a student in full-time attendance enrolled in a program at a post-secondary level at a location of a university, college or other educational institution (in section 62 and in this subsection referred to as "the new work location");
      
      
2. both the residence at which the taxpayer ordinarily resided before the relocation (in section 62 and this subsection referred to as "the old residence") and the residence at which the taxpayer ordinarily resided after the relocation (in section 62 and this subsection referred to as "the new residence") are in Canada; and
3. the distance between the old residence and the new work location is not less than 40 kilometers greater than the distance between the new residence and the new work location except that, in applying subsections 6(19) to (23) and section 62 in respect of a relocation of a taxpayer who is absent from but resident in Canada, this definition shall be read without reference to the words "in Canada" in subparagraph (a)(i), and without reference to paragraph (b).

For a relocation to be eligible, subparagraph 248(1)(a)(i) of the Act requires that the taxpayer be employed or carry on a business at a location in Canada, and paragraph 248(1)(b) requires that the taxpayer ordinarily reside at the old and new residences, which must both be located in Canada. However, the definition of "eligible relocation" in subsection 248(1) also provides an exception to these requirements. If a taxpayer is absent from but remains a resident of Canada, the employment location can be outside of Canada, and paragraph 248(1)(b) is not operative.

According to the Canada Revenue Agency ("CRA"), in paragraph 19 of IT-178R3 – "Moving Expenses," "a taxpayer who is, throughout all or part of a taxation year, absent from Canada, but resident in Canada for tax purposes, is not subject to the "in Canada" requirements... [in subparagraph 248(1)(a)(i)]," and paragraph 248(1)(b) does not apply to that taxpayer.

Therefore, the current definition of "eligible relocation" in subsection 248(1) allows a taxpayer who remains a resident of Canada to deduct eligible moving expenses for moves out of Canada, or between locations outside of Canada, assuming that the taxpayer meets the other requirements of subsection 248(1) and subsection 62(1) of the Act.

This current definition of "eligible relocation" actually favours taxpayers who move out of Canada, or between locations outside of Canada. Unlike taxpayers who move within Canada, taxpayers who relocate from Canada to a foreign country, or between locations outside of Canada, do not have to satisfy the "ordinarily resided" requirement in paragraph 248(1)(b) so long as they are absent from but remain residents of Canada.

Interestingly, the definition of "eligible relocation" appears to discriminate against individuals who move into Canada from foreign countries. A taxpayer who moves into Canada will not necessarily be able to meet the requirement that both the new and old residences at which the taxpayer ordinarily resides be located in Canada pursuant to paragraph 248(1)(b). In addition, the taxpayer will not be able to benefit from the exception in subsection 248(1). This exception is available only if the taxpayer "is absent from but resident in Canada." Once a taxpayer moves to and settles in Canada for a given taxation year, that taxpayer is obviously not absent from Canada. Indeed, CRA adopted the position that immigrants coming to Canada would generally not be able to deduct moving expenses as these immigrants would not be moving between locations in Canada.¹

Moreover, CRA seems to adopt a more restrictive, and seemingly incorrect, interpretation of the definition of "eligible relocation." In Form T1-M E (11) – "Information About Moving Expenses," CRA stated that one of the requirements for a taxpayer moving from Canada to claim a deduction for moving expenses is that the taxpayer must ordinarily reside in both the old and new residence or location. Consequently, where a taxpayer moves abroad for work but still ordinarily resides in Canada, CRA will likely deny a deduction for moving expenses. The meaning of "ordinarily resided" and what it means to be a resident of Canada will be discussed further in the article.

CRA's position in Form T1-M E (11) is inconsistent with the current definition of "eligible relocation" in subsection 248(1). According to subsection 248(1), so long as a taxpayer who moves abroad remains a resident of Canada, subsection 248(1) does not require that the taxpayer move from a place where the taxpayer ordinarily resided to live in another place where the taxpayer ordinarily resides. 

This inconsistency between CRA's position and the current definition of "eligible relocation" likely motivated the proposed amendment to the definition of "eligible relocation." The proposed amended definition is as follows:

"eligible relocation" means a relocation of a taxpayer in respect of which the following apply:

1. the relocation occurs to enable the taxpayer
   
   
   1. to carry on a business or to be employed at a location (in section 62 and this definition referred to as "the new work location") that is, except if the taxpayer is absent from but resident in Canada, in Canada; or
   2. to be a student in full-time attendance enrolled in a program at a post-secondary level at a location of a university, college or other educational institution (in section 62 and in this definition referred to as "the new work location");
      
      
2. the taxpayer ordinarily resided before the relocation at a residence (in section 62 and this definition referred to as "the old residence") and ordinarily resided after the relocation at a residence (in section 62 and this definition referred to as "the new residence");
3. except if the taxpayer is absent from but resident in Canada, both the old residence and the new residence are in Canada; and
4. the distance between the old residence and the new work location is not less than 40 kilometers greater than the distance between the new residence and the new work location.

In the explanatory note to the proposed amendment, the Department of Finance stated that the purpose of the amendment is "to clarify that, in order to claim these [moving] expenses, an individual who is absent from, but resident in, Canada must, like other individuals, ordinarily reside before the relocation at the old residence and after the relocation at the new residence."²

Despite the explanatory note by the Department of Finance, the proposed amendment may be a significant revision rather than a simple clarification of the definition of "eligible relocation."  Under the proposed amendment, without exception, a taxpayer must have ordinarily resided at the old residence and ordinarily reside at the new residence to be able to deduct moving expenses.

"Ordinarily Resided" and "Ordinarily Resident"

The terms "resident" and "ordinarily resided" are not defined in the Act. Instead, the common law provides the definition of when an individual or taxpayer "ordinarily resided" at a place or location. The criteria used by the courts to determine whether a taxpayer "ordinarily resided" at a location in the context of deducting moving expenses is substantially the same as the criteria used to determine whether a taxpayer is a "resident" or "ordinarily resident" in Canada for tax purposes.

For example, in Sears v. R.,³ the Tax Court of Canada ("TCC") determined that a taxpayer who moved from New Brunswick to Alberta cannot deduct his moving expenses because he remained ordinarily resident in New Brunswick. The TCC found that the taxpayer maintained strong ties to New Brunswick and that the taxpayer's lifestyle in Alberta is more akin to an occasional or casual residence. According to the TCC, the relevant factors in determining ordinary residence include the duration of stay in the new location, type of accommodations, whether community connections were maintained or severed, social and economic ties to old or new location, location of taxpayer's family, and the transfer of mail. In developing this list of factors, the TCC canvassed court cases dealing with whether a taxpayer is resident of a foreign country, or of Canada, and subject to the tax laws of Canada. 

In general, the determination of where a taxpayer ordinarily resides at a given time is a question of fact that requires an examination of all relevant facts and circumstances. According to CRA, "the courts have generally taken the view that ... a person is ordinarily resident in the place where, in the settled routine of his or her life, he or she regularly, normally, or customarily lives and should be contrasted with special or occasional or casual residence."⁴

Contradictions

Based on CRA's and the courts' definition of "ordinarily resided" or "ordinarily resident," the proposed amendment to the definition of "eligible relocation" will be problematic for individuals or taxpayers who move to and from Canada and wish to deduct moving expenses. It will be difficult for such individuals to satisfy paragraphs 248(1)(b) and (c) of the proposed amendment.

As required by paragraph 248(1)(b) under the proposed amendment, in order for a taxpayer to deduct moving expenses when moving to a foreign country, a taxpayer must be ordinarily reside in Canada prior to the move, and ordinarily reside in the foreign country after the move. In addition, paragraph 248(1)(c) under the proposed amendment requires both the old and new residence to be in Canada unless the taxpayer is absent from but resident in Canada. This is where the proposed amendment becomes problematic for taxpayers. 

Under common law,⁵ an individual can only be ordinarily resident in one place. In other words, if an individual is ordinarily resident in Canada, that individual cannot also be ordinarily resident in another country. Therefore, an individual who moves from Canada to a foreign country cannot simultaneously satisfy both paragraphs 248(1)(b) and (c) of the proposed amendment. An individual may satisfy paragraph 248(1)(b) by ordinarily residing in Canada prior to the move and ordinarily residing in the foreign country after a move. However, based on CRA's and the courts' definition of "ordinarily resided," by ordinarily residing in a foreign country after the move, an individual will no longer be a resident of Canada. Consequently, paragraph 248(1)(c) becomes illogical. 

As demonstrated above, an individual who satisfies paragraph 248(1)(b) will not be "absent from but resident in Canada," and will thus be required by paragraph 248(1)(c) to have both the old and new residences be located in Canada, which is an impossibility for an individual moving overseas. Conversely, if an individual is "absent from but resident in Canada," this individual would not be required to have both the old and new residences be located in Canada, and paragraph 248(1)(c) would be satisfied. However,  as a resident of Canada living overseas, this individual cannot also ordinarily reside in the respective foreign country thereby abrogating paragraph 248(1)(b).

Furthermore, if an individual ordinarily resides in a foreign country after moving from Canada, that individual will no longer be required to report or pay any Canadian taxes on income earned from that foreign country. Therefore, there is likely no opportunity for that individual to claim a deduction in Canada for expenses incurred in moving from Canada to the foreign country.

The proposed amendment to the definition of "eligible relocation" does not offer any relief to individuals moving into Canada. Under the proposed amendment, individuals moving into Canada would likely still not be able to deduct any of their moving expenses. 

Concluding Remarks

With respect to the deduction of moving expenses, given the preferential treatment of taxpayers who move out of Canada and between locations outside of Canada, it is understandable that the Department of Finance would want to amend the definition of "eligible relocation" to ensure that all taxpayers are treated equally. Unfortunately, the effect of the proposed amendments may be to allow only individuals or taxpayers who move between locations in Canada to deduct their moving expenses.

Of course, CRA and the courts may resolve this problem by taking the position that "ordinarily resided" in the context of deducting moving expenses is defined differently than "ordinary resident" in the context of determining the residence status of a taxpayer. For example, if "ordinarily resided" in the context of subsection 62(1) only meant that an individual has a house or residence in a particular country, then many of the problems identified above would be resolved. Regardless, CRA's position and the common law currently do not support this approach.

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Footnotes

1. CRA Document 2000-0054614 "Moving expenses – immigrants", November 29, 2000.

2. Explanatory Notes to Legislative Proposals Relating to Income Tax and Sales and Excise Taxes, Department of Finance, October 2011.

3. 2009 TCC 344

4. CRA Document 2003-0012645 "Eligible relocation – ordinarily resided", July 10, 2003.

5. For example, see Rennie v. Minister of National Revenue, [1990] 1 C.T.C. 2141 (T.C.C.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.