Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2019: part 8

Table of Contents

The moving expense deduction (MED) provides tax relief for taxpayers whose eligible relocation costs are not otherwise reimbursed. The deduction exists to recognize costs necessary to generate income and to encourage labour mobility across Canada. It may be claimed by workers, the self-employed and students, within the parameters established by the Income Tax Act.[2]

This paper presents an evaluation of the MED. Beyond minor technical changes to refine eligibility, and an enlarging of the expenses available for deduction, the MED has remained much as it was when it came into force in 1972. Thus, the paper focuses on usage of the deduction and the characteristics of claimants in the context of a changing labour market, using administrative data spanning 2002-2016. In particular, mobility among MED claimants is considered across both spatial and occupational dimensions.

The paper begins by providing background information on the MED and a discussion of the decision to move. This is followed by an overview of the relevance of the measure, an analysis of its effectiveness, a discussion of equity considerations, and an examination of the MED’s efficiency.

The MED may be claimed for “eligible relocations”, the scope of which is defined in the Act.[3] First, eligible relocations refer to those which permit the taxpayer to carry on a business, be employed, or be a student in full-time attendance at a post-secondary level. Second, eligible relocations must be effected between an old residence and a new residence, in which the taxpayer ordinarily resided and subsequently ordinarily resides, respectively. This does not preclude moves into or out of Canada, nor moves made between two locations outside of the country, provided the claimant is considered a resident of Canada. Third, the relocation must reduce the distance to the new work location by at least 40 kilometres.[4]

The Act specifies that deductions may only be claimed for those moving expenses which are not otherwise reimbursed and which were not claimed in a previous tax year.[5] It also imposes limits on the total amounts which are deductible: for workers or the self-employed, deductible expenses may not exceed income earned at the new location (inclusive of income in respect of the Wage Earner Protection Program Act); for students, the limit is set to the sum of the value of taxable scholarships, bursaries, etc. and research grants for that taxation year. Moving expenses need not be claimed in the year in which they were incurred.[6]

The moving expenses which are eligible for deduction include: travel costs for the taxpayer and his or her household (including meals and lodging); the cost of transporting and storing household items; and costs related to the cancellation of a lease, or selling costs where the taxpayer owned the old residence. Budget 1998 extended this set to include certain costs of maintaining the previous residence and various incidental costs (e.g., changing the address on documents, utility hook-ups).[7]

In the Sjaastad (1962) model, moving—or, more generally, migration—is conceived as an investment in human capital which entails both costs and returns.[8] The costs of migration fall into two categories:

The returns to migration are parallel to the costs. Gains to the real earnings stream may result from a nominal increase in salary, a reduction in costs associated with employment (such as decreased commuting time), a lower cost of living, or any combination thereof. The first two elements, in particular, correspond to an increase in allocative efficiency, i.e., an improvement in the use of inputs across the economy. Non-money returns are captured by the extent to which the migrant derives psychic benefit from the new environment.

The net present value of a job relocation is then the difference between the returns and the costs, and must be positive for the move to occur. In this context, moving expenses—the out-of-pocket money costs—reduce the net present value of the new job alternative. By lowering these costs, the MED is expected to induce some workers at the margin to relocate.

The evaluation proceeds according to four criteria. The relevance of the MED is assessed first. Tax return data are then analyzed to provide more information to assess whether the deduction has been effective. Matters of equity are addressed afterwards, and finally the efficiency of the measure is considered.

The Summary of 1971 Tax Reform Legislation announced the MED in a context of concern for providing tax relief for lower-income Canadians, but also in a bid to “recognize the growing mobility of Canadians and their changing patterns of family life.” To this end, a variety of other deductions were introduced alongside the MED, namely for child care, employment, and away-from-home expenses.

The objective of the MED, presented elsewhere in this report, is dual: “This measure recognizes the expenses involved in moving to a new job and thus facilitates labour mobility by allowing taxpayers greater flexibility in pursuing new employment and business opportunities anywhere in Canada.” The recognition of expenses is a structural feature of the tax system and helps to define a taxpayer’s ability to pay. In the case of the MED, it is considered that when a move is necessary to the generation of employment income, the individual has borne a cost and is at a disadvantage relative to a situation in which he or she did not relocate. By recognizing and partially offsetting such expenses, the tax expenditure works towards neutrality between the decision to earn income in the current location or in a new location.

The federal government plays a role in facilitating labour mobility, in particular through efforts with its provincial and territorial counterparts to reduce interjurisdictional barriers to the free movement of labour.[9] At the aggregate level, labour mobility contributes to economic growth by permitting an efficient allocation of productive inputs; at the individual level, an improved matching process between workers and employers leaves both parties better off.

Labour mobility is present along two dimensions: spatial and occupational. Spatial mobility describes the extent to which workers have physical access to, or information about, employment opportunities (Rogers, 1997); occupational mobility, on the other hand, indicates the ease with which workers can move across jobs requiring different skill sets (Robinson, 2011). The MED seeks to directly improve spatial mobility by reducing the costs associated with relocation. To the extent that improved spatial mobility allows workers to access desired employment outside their current occupational group, the MED may be associated with greater mobility in the second dimension.

Two other tax expenditures cite the promotion of labour mobility as an objective, namely the non-taxation of benefits in respect of home relocation loans and the Northern Residents Deductions. The first of these rendered deductible the benefit on loans used to acquire a new residence in the context of a job-related move.[10],[11] The measure was repealed as of the 2018 taxation year on the grounds that it did not reduce barriers to mobility, covered a personal expense as opposed to one necessary to earn income, and was regressive. The second measure is intended to draw skilled labour to northern and isolated communities and features both residency and travel components. In contrast to the MED, it does not recognize expenses necessary to earn income but rather the additional costs faced by individuals residing in such areas. As such, it does not target a specific employer-employee match but more generally aims to provide support to regional labour markets.

Since its inception, the MED has applied to students, which from a human capital perspective may ensure they obtain necessary skills, thereby promoting labour market efficiency. In practice, however, take-up of the MED by students is likely limited. Subparagraph 62(1)(c)(ii) of the Act allows students to deduct eligible moving expenses from taxable scholarships, fellowships, bursaries, etc. and research grants. Yet along with the introduction of the MED in 1972, the first $500 of scholarships, fellowships and bursaries was made exempt from income tax. For most scholarships, Budget 2000 subsequently increased the exempt amount to $3,000, and Budget 2006 rendered the remainder tax-free. Therefore, since 2006, eligibility among students has likely been primarily among those receiving taxable grants.

Beyond the recognition of expenses incurred to earn employment income, the objective of the MED is to improve labour mobility. Therefore, its effectiveness as a tax expenditure should be measured against this criterion. In this section, the usage of the deduction over time is first examined, followed by a number of statistics which show how the MED is associated with the two dimensions of labour mobility: spatial and occupational. A discussion of the findings follows.

Trends in Usage

Chart 1 presents an overview of the tax expenditure cost, value of claimed deductions and number of MED claimants for the period spanning 2002-2016.[12] All three series increased with the tightening labour market preceding the 2008-2009 Great Recession. The number of claimants peaked at 156,000 in 2006, while the value of claimed deductions reached its maximum of $677 million the following year. However, a decrease in all three measures is observed in 2008 and 2009, and no recovery appears to follow. The number of claimants fell sharply through 2009 and continued a modest downward trend thereafter, reaching 94,000 in 2016—despite a year-over-year increase in the number of tax filers. Similarly, the value of deductions also dropped during the recession, and by the end of 2016 stood at $454 million, 32.9% lower than at its peak. As a result of these reductions, the aggregate tax expenditure cost slid from a maximum of $144 million in 2007 to $105 million in 2016. At the individual level, however, the cost per claimant increased by 46.7% over the period, from $762 to $1,118. Two tendencies underlie this change: first, an increase in the average claim from $3,107 to $4,841; and second, an increase in the average effective tax rate applicable to the claim, from 20% to 23.1%, which owes to a change in the age composition of MED claimants (see Table 1).

Chart 1
MED Cost, Claimed Deductions, and Number of Claimants, 2002-2016

Chart 1: MED Cost, Claimed Deductions, and Number of Claimants, 2002-2016
Sources: T1 return data.

At the outset, there are two ways in which the MED might interact with the business cycle. On one hand, a weaker labour market could motivate workers to search further afield for a job; all else being equal, this should yield an increase in MED usage, with the measure acting as an automatic stabilizer (countercyclical effect). On the other hand, an economy-wide scarcity of job vacancies could depress mobility and thus the number of claims (procyclical effect). In Chart 2, the number of claimants are plotted alongside the country-wide unemployment rate. Through 2009, the data were consistent with the procyclical effect winning out: as the unemployment rate fell, the number of claimants rose, and vice versa during the recession, with claimants acting as a lead indicator. However, the trend disappears after 2009: the number of claimants continued declining, despite a decreasing unemployment rate. At the aggregate level then, there is no obvious relationship between the unemployment rate and the take-up of the MED.

Chart 2
Number of MED Claimants and Unemployment Rate, 2002-2016

Chart 2: Number of MED Claimants and Unemployment Rate, 2002-2016
Sources: T1 return data; Labour Force Survey, Statistics Canada.

Two hypotheses for the breakdown of this procyclical association are considered: lower returns to mobility, and aging of the population. First, as moves are costly, it is necessary for those moving for job-related reasons to obtain a sufficient wage premium to make the cost-benefit analysis pass. Chart 3 plots the difference in T4 earnings between two consecutive years among MED claimants and non-claimants. There is a significant premium enjoyed by the MED claimants (approximately $2,500 on average over the period), which held even during the recession. Moreover, it cannot be that the raw earnings change among MED claimants explains the drop in usage, since this metric recovered after 2009.[13] Thus the decline in the number of claimants cannot be explained by lower returns to mobility. The narrowing of the premium observed in 2015 and 2016, however, may result from the decline in the resource sector of western provinces, an issue considered again in the next section.

Chart 3
Change in T4 Earnings Over Two Consecutive Years, MED Claimants vs. Non-Claimants, 2002-2016

Chart 3: Change in T4 Earnings Over Two Consecutive Years, MED Claimants    vs. Non-Claimants, 2002-2016
Sources: T1 return data; Department of Finance Canada calculations.

Second, younger individuals are expected to be more mobile (Finnie, 2004). In Table 1, the age structure of MED claimants is displayed. Between 2002 and 2016, the average age of claimants increased from 32.5 to 35, the result of a decline in the number and proportion of claimants aged less than 55 (the number of claimants 55 and above having actually increased). In particular, usage of the MED fell considerably among those aged 18-24, who represented 29.3% of the total in 2002 but only 20.3% in 2016. By comparison, the 18-24 share of overall tax filers only fell from 11.7% to 10.3% over the same period. An increase in post-secondary education attendance among this group, from 34% in 2000–2001 to 42% in 2015–2016, may underlie the change, given that eligibility for the MED is limited among students.

Table 1
Evolution of the Age Structure of MED claimants, 2002-2016
(%)

Age group 2002 2004 2006 2008 2010 2012 2014 2016
18-24 29.3 29.7 27.0 25.3 25.0 23.6 22.8 20.3
25-34 35.2 34.4 34.3 34.8 36.5 36.7 37.5 38.7
35-44 19.0 18.0 19.2 18.9 17.8 18.4 18.6 19.1
45-54 11.6 12.1 12.8 13.4 12.8 12.8 12.4 12.4
55-64 4.3 5.1 5.9 6.5 6.8 7.2 7.3 7.8
65+ 0.6 0.8 0.8 1.0 1.1 1.3 1.5 1.7
Spatial Mobility

The spatial labour mobility of MED claimants is examined next. Chart 4 plots the proportion of interprovincial moves among MED claimants against the unemployment rate. In this paper, a MED claimant is considered to have effected an interprovincial move if the T1 province of residence in the year the claim was made differs from the T1 province of residence of the immediately preceding year.[14] In the sample period considered, an average of 33% of claimants moved across provincial lines, compared to 1.2% of other tax filers.[15] The data also reveal a procyclical trend: as the unemployment rate decreases, claimants are more likely to move interprovincially. Therefore, if overall usage of the MED seems to have lost its relationship to the business cycle (recalling Chart 2), the character of relocations has not. Moreover, the data suggest a secular upward trend in interprovincial moves.

Chart 4
Share of MED Claimants Moving Interprovincially vs. Unemployment Rate, 2002-2016

Chart 4: Share of MED Claimants Moving Interprovincially vs. Unemployment    Rate, 2002-2016
Sources: T1 return data; Statistics Canada; Department of Finance Canada calculations.

The share of claimants moving interprovincially also varies significantly with the source province, as shown in Chart 5. The share is lower among those claimants residing in larger or more prosperous provinces, i.e., Quebec, Ontario, and British Columbia, closely followed by Alberta and Saskatchewan. By comparison, claimants sourced from the Atlantic provinces and the territories are far more likely to cross provincial lines. This is consistent with evidence from Finnie (2004), who found that interprovincial mobility is negatively related to the population of the home province.

Chart 5
Share of MED Claimants Moving Interprovincially, by Source Province, 2002-2016

Chart 5: Share of MED Claimants Moving Interprovincially vs. Unemployment    Rate, 2002-2016
Note: Excludes claimants who had multiple provinces of residence, and non-residents.
Sources: T1 return data; Statistics Canada.

As context for the preceding, Chart 6 shows all interprovincial movers in a year, based on the change in T1 province of residence. In a given year, only a minority of interprovincial moves are tied to MED claims. Moreover, this proportion is decreasing over time, from a peak of 26% in 2006 to 15% in 2016.

Chart 6
Number of MED Claimants and Non-MED Claimants Moving Interprovincially,
and MED Claimants as a Share of All Interprovincial Movers, 2002-2016

Chart 6: Number of MED Claimants and Non-MED Claimants Moving    Interprovincially and MED Claimants as a Share of All Interprovincial Movers, 2002-2016
Note: Non-MED claimants exclude the spouses of MED claimants.
Sources: T1 return data; Statistics Canada.

Table 2 presents the distribution of claimants moving interprovincially according to their source province (rows) and destination province (columns; shares within a row add up to 100%) for the 2002-2016 period. Whatever the source province, MED claimants who move across provinces typically settle in Ontario, Alberta, or British Columbia. There is, by comparison, little movement in either direction between the Atlantic provinces and the territories.

Table 2
Distribution of MED Claimant Interprovincial Movers, by Source and Destination Province, 2002-2016 Period
(%)

Source province Destination province
N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. N.W.T. Y.T. Nun.
N.L. 0 1 9 3 1 19 2 2 55 5 2 0 1
P.E.I. 3 0 15 9 2 18 1 2 40 7 1 0 1
N.S. 5 2 0 8 3 25 2 3 41 9 1 1 1
N.B. 3 3 14 0 7 20 1 2 40 7 1 0 1
Que. 1 1 2 4 0 41 2 2 30 14 1 1 1
Ont. 3 1 7 3 7 0 5 6 41 25 1 1 1
Man. 1 0 2 1 2 22 0 12 37 20 1 0 1
Sask. 1 0 2 1 1 13 8 0 53 19 1 0 1
Alta. 4 1 5 3 3 23 6 13 0 39 1 1 1
B.C. 1 0 3 1 4 26 4 6 51 0 1 1 1
N.W.T. 4 1 5 2 2 14 4 6 39 18 0 4 1
Y.T. 1 1 4 1 4 13 3 5 29 35 2 0 2
Nun. 2 1 5 2 7 20 5 8 21 26 0 1 0
Notes: Shares within a row add up to 100%. Excludes the spouses of MED claimants.

Table 3 presents the same distribution for non-MED claimant interprovincial movers, as a benchmark. The patterns are similar, with the remaining movers also favouring large provinces with relatively high average incomes as their destination.

Table 3
Distribution of Non-MED Claimant Interprovincial Movers, by Source and Destination Province, 2002-2016 Period
(%)

Source province Destination province
N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. N.W.T. Y.T. Nun.
N.L. 0 2 15 6 2 28 2 1 36 6 1 0 1
P.E.I. 5 0 19 14 3 29 1 2 20 7 0 0 1
N.S. 7 3 0 14 4 32 2 2 24 9 1 0 1
N.B. 4 3 19 0 15 27 2 1 21 6 0 0 1
Que. 1 0 2 6 0 58 1 1 14 11 0 0 4
Ont. 4 1 8 5 19 0 5 4 27 23 1 0 3
Man. 1 0 3 2 3 28 0 12 29 21 0 0 1
Sask. 1 0 2 1 2 13 9 0 51 19 1 0 2
Alta. 5 1 5 3 4 21 5 13 0 40 1 0 2
B.C. 1 0 3 1 5 29 4 5 46 0 1 1 2
N.W.T. 5 1 5 2 2 15 4 6 39 16 0 4 1
Y.T. 2 0 4 2 4 13 2 5 24 39 4 0 2
Nun. 1 1 3 2 17 32 3 4 18 20 0 0 0
Notes: Shares within a row add up to 100%. Excludes the spouses of MED claimants.

Finally, the difference between the two distributions is shown in Table 4. This distinguishes the MED claimant interprovincial movers as more likely to choose Alberta as a destination (as indicated by the cells in bold), and less likely to settle in the Atlantic provinces, Quebec or Ontario (as indicated by the cells in italic). This is in line with the prediction that job-related movers are seeking the best returns in the labour market.

Table 4
Difference in Distribution of MED Claimant and Non-Med Claimant Interprovincial Movers, by Source and Destination Province, 2002-2016 Period
(Percentage Points)

Source province Destination province
N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. N.W.T. Y.T. Nun.
N.L. 0 -1 -6 -3 -1 -9 0 0 19 -1 1 0 0
P.E.I. -1 0 -4 -5 -1 -11 0 1 20 0 0 0 0
N.S. -2 -1 0 -6 -2 -7 0 1 17 0 0 0 0
N.B. -1 -1 -4 0 -7 -7 -1 1 19 1 0 0 0
Que. 0 0 0 -2 0 -18 1 1 16 3 0 0 -2
Ont. -1 0 -1 -1 -12 0 0 2 14 2 0 0 -2
Man. 0 0 0 -1 -1 -5 0 0 8 0 0 0 0
Sask. 0 0 0 0 0 0 -1 0 2 0 0 0 -1
Alta. -1 0 1 0 -1 2 1 1 0 -1 0 0 -1
B.C. 0 0 0 0 -2 -3 0 1 5 0 0 0 -2
N.W.T. -1 0 0 0 0 -1 0 0 0 1 0 0 0
Y.T. -1 0 1 0 0 -1 1 0 5 -4 -2 0 0
Nun. 1 1 2 1 -10 -11 2 4 3 7 0 0 0
Note: Excludes the spouses of MED claimants.

Since the preceding are an average over the sample period (2002-2016), the results account for but do not distinguish between two significant recessionary episodes: the 2008-2009 Great Recession, and the decline in crude oil prices which led to a downturn in Alberta in 2015. In the first case, the interprovincial pattern of migration was largely unaffected, the downturn having caused a country-wide increase in the unemployment rate. By contrast, the spike in Alberta’s unemployment rate in 2015 and 2016 led to a decrease in the proportion of MED users choosing that province as their destination. The difference between the distribution of MED claimants and non-claimants is generally less marked during this period.

To summarize, MED claimants are more likely to effect an interprovincial move than non-claimants, despite accounting for a small share of all interprovincial movers. In addition, an examination of the source and destination provinces indicates that the claims are consistent with return-maximizing behaviour on the part of job-seekers.

Occupational Mobility

Occupational mobility is the second dimension of interest. For the purposes of this analysis, a claimant’s 2-digit North American Industry Classification System (NAICS) code is determined in a given year based on the employer with which they earned the most employment income in that year.[16] Following the logic of the preceding section, an inter-occupational move is considered to have occurred if the 2-digit NAICS code applicable to the year in which the MED was claimed differs from that of the immediately preceding year.[17],[18] As the 2-digit level of classification is highly general, a change represents a substantial shift in the nature of employment.

Chart 7 compares MED claimants and other taxpayers in terms of the proportion changing industries. First, note that among non-claimants, approximately 13% changed industries on average between two taxation years, according to the definition just given. This figure is comparable to the 1994-2005 average of 15% across all workers calculated by Chen and Fougère (2010). For these non-claimants, there appears to be a faint relationship with the business cycle, with the proportion changing industries somewhat depressed in recessionary years. By contrast, between 40% and 50% of MED claimants report a different industry in the year the claim is made over the preceding year, and the trend appears weakly increasing over time. Thus, although the MED is by design concerned with improving the spatial mobility of movers, it is also associated with a large increase in occupational mobility.

Chart 7
Share of Med Claimants and Non-Claimants Changing Industries (2-Digit NAICS Code), 2002-2015

Chart 7: Share of Med Claimants and Non-Claimants Changing Industries (2-Digit    NAICS Code), 2002-2015
Note: Non-MED claimants exclude the spouses of MED claimants.
Sources: T1, T2 and T4 return data; Department of Finance Canada calculations.
Discussion

The preceding suggests a strong association between claiming the MED and greater mobility. However, this is insufficient to establish a causal relationship running from the deduction to relocation. In this discussion, two sources of simultaneity (or reverse causality) are considered, along with movers’ ability to finance the relocation in the first place.

First, timing matters: for the MED to motivate relocation, the decision to claim must be made prior to the move. However, claimants may only become aware of the deduction subsequent to the move, in which case the deduction serves to recognize costs without motivating a relocation. This is to be contrasted with programs where the recipients are made aware of the relocation assistance prior to obtaining a job (e.g., Briggs and Kuhn, 2008; Caliendo et al., 2015). More generally, whenever the expected benefit of relocation exceeds the costs before factoring in the deduction, the move would have occurred anyway.

Formally, the condition which must be satisfied to move can be written as follows (abstracting from social capital considerations). Let !$ ΔY !$ denote the gross mobility premium of a would-be mover in the new work location,[19] !$ τ !$ the applicable marginal tax rate on this income, and !$ M !$ nominal moving costs. Without the deduction, the relocation condition is:

!$ (1-τ)ΔY>M !$ (1)

i.e., the gross mobility premium ΔY must be greater than !$ M/(1-τ) !$. With the MED in place, the condition becomes easier to satisfy:

!$ (1-τ)ΔY>(1-τ)M !$ (2)

or simply !$ ΔY>M !$. Any individual who satisfied the first, stricter condition will have moved regardless of existence of the MED.

To get a sense of the proportion of movers satisfying the stricter condition, suppose conservatively that the hurdle to meet in the absence of the MED is a gross mobility premium twice as large as the nominal moving costs, i.e., assuming a marginal tax rate of 50%. Using the change in employment income between the year of the claim and the preceding year (excluding students and the self-employed) as a measure of !$ ΔY !$ and the claimed moving expenses as !$ M !$, the data suggest that approximately 35.1% of movers meet this condition.[20]

Second, for the MED to increase labour mobility, it must act at the margin to incentivize a move—that is, the value of the deduction in terms of tax savings should be the very difference that causes some individuals to opt to move, where they otherwise would not have. Even if the individual is aware of the MED prior to the move, its presence may still not affect the decision to relocate. “Treatment”, i.e., claiming the MED, is non-randomly assigned, so there may be unobservable characteristics which cause individuals to self-select both into an interprovincial move and a claim. For instance, highly skilled or educated individuals may simultaneously have more opportunities to relocate for employment and be aware of tax deductions available to them, even if the MED does not actually factor into the decision to move.

Lastly, human capital market imperfections are a known barrier to labour mobility (Courchene, 1970). A potential mover facing liquidity constraints may not be able to borrow to finance a relocation, whatever the expected gain to themselves, the prospective employer, or more broadly in terms of allocative efficiency. The MED would not be claimed by these individuals since the deduction can only be applied against income earned in the new location, i.e., after the move.[21]

Nevertheless, the data clearly indicate that the MED is associated with greater mobility in both geographical and occupational dimensions, and that claimants also enjoy a substantial earnings premium over non-claimants.

In this section the MED’s relationship to different measures of equity is considered, first from a theoretical standpoint and then by reference to the data.

Forms of Equity

Horizontal equity requires that taxpayers with similar income pay a similar amount of tax. Since the MED regards the costs of moving as necessary to earn income, the first equity consideration may be illustrated by comparing two taxpayers, one of which had out-of-pocket expenses in the form of moving costs. There are, however, three other relevant comparisons which relate to the MED’s effect on equity. The second is between two taxpayers who move at the same cost, but which face different marginal tax rates. The third is stated explicitly in the Summary of 1971 Tax Reform Legislation: “The deduction… is intended to put taxpayers who pay their own moving expenses more nearly on a par with others whose moving expenses are paid by their employers.” Finally, a comparison is drawn between a taxpayer who receives an allowance from an employer with one whose employer reimburses those costs. Each of these is taken in turn.

One taxpayer moves, the other does not. Suppose that of two taxpayers A and B, A faces moving costs !$ M !$. The MED considers the costs of moving necessary to earn income, and adjusts A’s net income downward by !$ M !$ to put both individuals on a more even footing in their ability to pay tax, thereby favouring horizontal equity.

Both taxpayers move and claim but face different marginal tax rates. Suppose now A and B both incur moving expenses of !$ M !$ on which marginal tax rates !$ τ_A !$ and !$ τ_B !$ are applied, and where !$ τ_A>τ_B !$, i.e., A faces a higher marginal tax rate than B. Since the value of the deduction is based on the applicable marginal tax rate, A’s net moving expenses will be lower than B’s.[22]

Both taxpayers move and claim, but one also has costs partly reimbursed. In this scenario, A and B have the same nominal moving costs !$ M !$ and the same marginal tax rate !$ τ !$, but A has a fraction !$ α !$ of said expenses reimbursed by an employer. Absent the MED, the difference in net costs between B and A of is simply !$ αM !$.[23] It can be shown that with the deduction in place, B will be more on a par with A, with the difference falling to !$ αM(1-τ) !$. This occurs even though A may still claim the MED on the remaining !$ (1-α) !$ of expenses not reimbursed.[24]

One taxpayer receives a relocation allowance, the other has costs reimbursed directly by the employer. Suppose A receives an allowance for nominal moving expenses !$ M !$ while B has those costs reimbursed directly. Without the MED, the net cost of moving for A would be the tax paid on the allowance while B does not face any cost. With the MED in place, A becomes eligible to a deduction on the allowance, and his net cost falls to zero, putting him on a par with B.[25]

Empirical Results and Gender-Based Analysis

Table 5 presents a disaggregation of MED claim characteristics by income bracket for 2016. Three quarters (76.1%) of claims were made by individuals reporting no more than $75,000 in total income. Average and median claim amounts, as well as the 99th percentile of claim amounts, increase with income; among those earning $250,000 and over, this last measure is in the six figures. This positive relationship with income levels stems in part from the set of expenses which are available for deduction. For instance, one may deduct the costs associated with selling the old residence, but this implies ownership, which in turn should be associated with income level. Thus as one’s income rises, the set of expenses which could be drawn from in claiming the deduction becomes larger, and so too the value of the claimed deduction—as seen in the vertical equity comparison provided above. As a result, while only 23.9% of claims are made by individuals with income in excess of $75,000, they are responsible for 52.1% of the total claimed value.

Table 5
MED Claimants, by Income Group, 2016

Total income group
($)
Total number of claimants Total value of claims Average claim
($)
Median claim
($)
Top 1% of claims
($)
Number (%) ($ millions) (%)
<25,000 22,914 24.4 35.2 7.7 1,538 747 13,237
25,000-50,000 29,201 31.1 82.8 18.2 2,834 1,257 23,762
50,000-75,000 19,386 20.6 99.8 22.0 5,150 2,126 33,775
75,000-100,000 10,937 11.6 87.3 19.2 7,979 3,520 43,382
100,000-150,000 7,683 8.2 85.6 18.8 11,138 5,323 56,136
150,000-250,000 2,942 3.1 43.7 9.6 14,844 7,802 74,571
250,000+ 900 1.0 20.4 4.5 22,711 11,402 133,775
Total 93,963 100.0 454.8 100 4,840 1,600 40,809

The corresponding beneficiary information by income group is shown in Table 6. The tax expenditure cost is based on the estimated change in net tax owing among beneficiaries due to the existence of the measure. The results largely mirror those seen among claimants. 72.8% of beneficiaries reported total income no greater than $75,000. The remaining 27.2% of beneficiaries, however, accounted for 63.9% of the tax expenditure cost, as a result of larger claim amounts and higher applicable marginal tax rates. This is also reflected in the average, median and 99th percentile benefit amounts, which increase with income bracket.

Table 6
MED Beneficiaries, by Income Group, 2016

Total income group
($)
Total number of beneficiaries Tax expenditure cost Average benefit
($)
Median benefit
($)
Top 1% of benefits
($)
Number (%) ($ millions) (%)
<25,000 12,383 15.0 2.3 2.6 101 20 942
25,000-50,000 28,302 34.4 11.4 12.7 389 181 2,957
50,000-75,000 19,257 23.4 18.5 20.7 953 422 5,785
75,000-100,000 10,916 13.3 17.7 19.9 1,622 734 8,279
100,000-150,000 7,670 9.3 20.3 22.8 2,646 1,323 12,323
150,000-250,000 2,940 3.6 12.2 13.7 4,163 2,243 19,984
250,000+ 900 1.1 6.6 7.5 7,383 3,704 42,475
Total 82,368 100 89.1 100 948 235 9,536

A further breakdown by gender is offered in Table 7. In 2016, take-up of the MED among those reporting employment income was similar between men (0.6%) and women (0.5%), but since the ability to deduct moving expenses is a function of income earned (in the new workplace), it is unsurprising that the male-female distribution of claims reflects broader labour market trends. Men claimed a total of $293 million, or 64.4% of the total, while women accounted for $161.8 million, or 35.6%. Similarly, $60.3 million, or 67.6%, of the tax expenditure cost resulted from claims by men, compared to $28.8 million, or 32.4%, by women. The income disaggregation reveals that both in terms of claimants and beneficiaries, there are more women than men in the lowest total income bracket. In all other brackets, however, there are a greater number of men. This accounts for the higher average benefit among men ($1,253) compared to women ($841).

Table 7
MED Claimants and Beneficiaries, by Gender and Income Group, 2016

Gender Total income group
($)
Claimants
Number
Deductions claimed
($ millions)
Beneficiaries
Number
Tax expenditure cost
($ millions)
Male <25,000 10,276 16.5 5,764 1.1
25,000-50,000 15,659 44.7 15,262 6.1
50,000-75,000 11,667 61.1 11,606 11.4
75,000-100,000 7,036 56.9 7,025 11.6
100,000-150,000 5,538 63.5 5,531 15.2
150,000-250,000 2,237 34.1 2,236 9.6
250,000+ 675 16.2 675 5.3
Subtotal 53,088 293.0 48,099 60.3
Female <25,000 12,638 18.8 6,619 1.2
25,000-50,000 13,542 38.1 13,040 5.2
50,000-75,000 7,719 38.8 7,651 7.1
75,000-100,000 3,901 30.3 3,891 6.1
100,000-150,000 2,145 22.0 2,139 5.2
150,000-250,000 705 9.6 704 2.7
250,000+ 225 4.2 225 1.4
Subtotal 40,875 161.8 34,269 28.8
Total 93,963 454.8 82,368 89.1

Generally, the MED’s design advances horizontal equity by recognizing costs borne to generate employment income, but the extent of the offset is a function of the applicable marginal tax rate. Meanwhile, the data indicate the deduction is mostly claimed by individuals in lower income brackets but that the tax expenditure cost is driven by individuals with total income in excess of $75,000.

Tax measures are considered efficient insofar as they meet their stated objectives in a cost-minimizing fashion. The cost of a tax expenditure is calculated in terms of forgone revenues, that is, the dollar difference in collected tax revenue in the presence of the measure compared to a counterfactual in which the measure was not implemented.[26] Each aspect of the MED’s objective—the recognition of expenses necessary to earn employment income, and the promotion of labour mobility—relate to efficiency and are reviewed in this section.

Moving is a large expense that is considered necessary to the generation of employment income, and the MED recognizes such outlays. As this tax expenditure operates as a deduction, the cost of meeting this objective depends directly on the marginal tax rate of claimants, that is, on their income distribution (as shown in the previous section).

Improving labour mobility bears on efficiency through an indirect channel. To the extent that improved labour mobility increases the allocative efficiency of productive inputs, the cost of the measure will be indirectly offset by greater overall tax revenue. Formally, the net change in tax revenue from a claimant is

!$ Δ_τ=τΔY-τM !$ (3)

Since the mobility premium should exceed the cost of moving for a relocation to occur, the net change in tax revenue will be positive among MED users. However, there a few considerations to highlight in this respect.

Recall that the deduction would not be claimed by those who do not possess the funds ex ante to effect a move. For these individuals, any expected gain in allocative efficiency—in terms of their income, and the additional output their relocation will occasion—is left unrealized since they can only claim on income earned in the new work location. As an illustration, recent survey evidence by Morissette (2017) on unemployed workers reveals that 10% cite financial reasons as an impediment to relocation for the purposes of employment. The T1 data show that, among claimants minimally attached to the labour market in the year prior to a claim (i.e., with employment income not exceeding $1,000, and excluding students and the self-employed), the average change in earnings is $18,500 for a mean claimed deduction of $3,600. This compares favourably to an increase in earnings $4,500 among other claimants, for a mean claim of $4,900. However, only 6.7% of claimants fit the definition of minimally attached, and those without sufficient funds to move would not claim the MED.

For some claimants, the decision to move may already be guaranteed by a sufficient premium on their future real earnings stream before the value of the deduction is taken into account, and the MED simply recognizes relocation costs incurred. As suggested in the discussion of the measure’s effectiveness, a conservative estimate of claimants in this position is 35.1%. Among these individuals, the tax revenue on the mobility premium would have been realized independently of the MED.

In addition, it can be noted that the mobility premium and associated tax take may be parcelled out over several periods, subject to appropriate discount factors, while the deduction can be claimed upfront. In 2015, for instance, 39% of claimants did not have employment income greater than the moving costs, which suggests that the decision to relocate was based on an expected stream of future earnings.[27] A mover in this situation would maximize the net present value of the deduction by claiming immediately, and this is possible because moving expenses may be deducted against all income earned in the new workplace (not merely the premium). Tax revenue on the additional income, meanwhile, would only be collected over the succession of periods.

These considerations aside, it remains that where the MED is encouraging mobility, the net change in tax revenue (increase in income tax less the cost of the deduction) will be positive.

This paper presents an evaluation of the MED against the criteria of relevance, effectiveness, equity and efficiency. The MED features a dual objective: the recognition of moving expenses as costs incurred to generate income and the encouragement of labour mobility, which is desirable as allocative efficiency should promote economic growth. The MED is also available to students moving to an educational institution, but take-up is likely limited to those receiving taxable grants. With respect to effectiveness, several noteworthy trends appear in the data: a decrease in usage matched by an increase in the tax expenditure cost on a per-claimant basis; a decline in the number of claimants which, while not explained by a drop in the returns to moving, is characterized by a decrease in usage among the youngest claimants (18-24 years of age); and an upward trend in the proportion of claimants moving interprovincially and between industries, with the levels of both far outpacing what is seen among non-claimants. Determining the MED’s causal effect on moving is made difficult by potential simultaneity and unobserved confounding variables, and it is noted that the deduction would not be claimed by individuals whose moves are inhibited by liquidity constraints. There is, nevertheless, a clear association between usage of the MED and greater spatial and occupational mobility, as well as an earnings premium among claimants. A review of equity indicates the MED works towards horizontal equity by recognizing costs incurred to earn income, and that the bulk of claims are seen at lower income levels, but that the extent to which moving costs are offset depends on claimants’ marginal tax rates. Finally, in considering the efficiency of the measure, it is shown that insofar as the MED encourages relocations, it will lead to additional net tax revenue.

Briggs, Brianna and Peter Kuhn (2008). “Paying for the Relocation of Welfare Recipients: Evidence from the Kentucky Relocation Assistance Program,” Center for Poverty Research Discussion Paper Series DP2008-01, University of Kentucky.

Caliendo, Marco, Steffen Künn and Robert Mahlstedt (2015). “The Return to Labor Market Mobility: An Evaluation of Relocation Assistance for the Unemployed,” Journal of Public Economics, 148: 136-151.

Canada Revenue Agency (2017). Income Tax Folio S1-F3-C4, Moving Expenses. Retrieved October 11, 2018.

Chen, Xuyang and Maxime Fougère (2010). “Inter-provincial and Inter-industry Labour Mobility in Canada, 1994-2005,” Human Resources and Social Development Canada, Ottawa.

Courchene, Thomas J. (1970). “Interprovincial Migration and Economic Adjustment,” Canadian Journal of Economics, 3(4): 550-576.

Department of Finance Canada (1971). Summary of 1971 Tax Reform Legislation. Retrieved October 11, 2018.

Finnie, Ross (2004). “Who Moves? A Logit Model Analysis of Inter-provincial Migration in Canada,” Applied Economics, 36: 1759-1779.

Morissette, René (2017). “Barriers to Labour Mobility in Canada: Survey-based Evidence,” Statistics Canada Catalogue No. 11-626-X, Economic Insights No. 076.

Robinson, Chris (2011). “Occupational Mobility, Occupation Distance and Specific Human Capital,” CIBC Working Papers, 2011-5. London, Ontario: Department of Economics, University of Western Ontario.

Rogers, Cynthia L. (1997). “Job Search and Unemployment Duration: Implications for the Spatial Mismatch Hypothesis,” Journal of Urban Economics, 42: 109-132.

Sjaastad, Larry A. (1962). “The Costs and Returns of Human Migration,” Journal of Political Economy, 70(5): 80-93.


1 The analysis presented in this paper was prepared by Maxime Dufournaud-Labelle, Economist, Tax Policy Branch, Department of Finance Canada. Enquiries regarding Department of Finance Canada publications can be sent to finpub@canada.ca.

2 Hereinafter, “the Act”.

3 See section 248(1).

4 That is, the distance between the new residence and the new workplace must be at least 40 kilometres less than the distance between the old residence and the new workplace. The distance should be calculated respecting the shortest normal route available to the travelling public. See Income Tax Folio S1-F3-C4, Moving Expenses (Canada Revenue Agency).

5 See section 62.

6 There is no restriction on the carryforward period.

7 The eligible expenses are detailed in section 62(3) of the Act.

8 In his words, as “investment increasing the productivity of human resources.”

9 For example, in 2009, the Agreement on Internal Trade was amended to extend the recognition of qualifications for workers in regulated professions or trades across all jurisdictions. Its successor, the 2017 Canadian Free Trade Agreement, reaffirms such labour mobility provisions.

10 The benefit was equal to the difference between interest calculated on the loan at the prescribed interest rate and the interest actually paid.

11 That is, the home relocation loan would have been designated for the acquisition of a residence in the context of a new work location, and where the new residence was at least 40 kilometres closer to the new work location.

12 Values are expressed in constant 2016 dollars throughout.

13 These results are also obtained when disaggregating to the 2-digit North American Industry Classification System level.

14 As the carryforward period is not restricted, there may be interprovincial movers who did not claim until a later year and who would not be counted by this method, leading to an underestimation.

15 For other tax filers, a 10% representative sample was used.

16 This information is not always provided in the data. In many cases, however, due to the generality of the 2-digit classification, it is often possible to determine the NAICS code based on the business name. Overall, where a business number was present, a NAICS code could be assigned in 89.6% of cases.

17 Alternatively, inter-occupational moves could be counted within the year of the claim, but this would require limiting observations to the one-third of claimants in the sample which had exactly two employers.

18 Those reporting tuition fees and the self-employed are excluded.

19 !$ ΔY !$ should be understood to represent the total gain to the earnings stream, where such income may accrue over multiple periods. This issue is revisited in Section 3.4.

20 If the move occurs closer to the end of the year, it is more pertinent to consider the difference between the following year’s employment income and that of the year of the claim. This exercise yields a nearly identical result of 36.1%.

21 See Income Tax Folio S1-F3-C4, Moving Expenses, paragraphs 4.16 and 4.17, which clearly set out that expenses can only be deducted both after they are paid and after the relocation has occurred. Thus the MED can in no way act as a subsidy or advance to increase the liquidity of a potential mover.

22 Relatedly, since moving expenses may be shared between an employer and employee and are deductible by either, the value of the deduction will be maximized for the party facing the higher marginal tax rate.

23 This assumes the reimbursed expenses are a benefit to the employer and non-taxable. It is also assumed that the expenses in this example fall under the set described in section 62 of the Act. In reality, however, employers could also cover the following without generating a taxable benefit: the cost of housing hunting trips, including child care and pet care expenses while the employee is away; long-distance telephone charges that relate to selling the old residence; and adjustments and alterations to existing furniture and fixtures to arrange them in the new residence, including plumbing and electrical changes in the new residence. Moreover, the $5,000 limit on interest, property taxes, insurance premiums and the cost of heating and utilities in respect of the old residence, which governs MED claims, does not appear on the employer side. Lastly, the MED includes “the cost of meals and lodging incurred near the old residence or the new residence for a period not exceeding 15 days” (see Income Tax Folio S1-F3-C4, Moving Expenses, Canada Revenue Agency), while on the employer side this expense is defined as “reasonable temporary living expenses while waiting to occupy the new, permanent accommodation” (see Employers’ Guide: Taxable Benefits and Allowances,Canada Revenue Agency).

24 That is, by claiming, B’s moving costs fall to !$ M-τM !$, while A’s costs are reduced to !$ M-αM-(1-α)τM !$, where the last term is the value of the deduction on the non-reimbursed portion. The difference between B’s and A’s costs is !$ αM(1-τ) !$.

25 Note that the first $650 of allowance for moving expenses are regarded as a reimbursement and are therefore non-accountable and non-taxable.

26 See Part 1 and 2 of this report for more information about the benchmark taxation system.

27 Excluding students and the self-employed. Using the difference in the next year’s employment income and employment income in the year of the claim yields a comparable figure of 39.9%.

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