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When Is a Taxable Benefit Not a Taxable Benefit?

When Canadian employees receive their T4 and T4A slips around the end of February each year, there is often included a figure that represents taxable employment benefits received. The value set for such benefits received by the employee is then included in his or her income for the year, and tax is paid on the imputed amount at the same rate as that paid on actual monetary compensation received.

A recent decision of the Tax Court of Canada has raised the question of what the tax treatment should be where an employee "receives", but does not want, use, or enjoy such a benefit.

The case involved a senior employee of an insurance company who, upon taking his new position was provided, as part of the employer's standard compensation package, with a membership in a local golf club. The new employee, Mr. R., first indicated that he was not interested in having a golf club membership and asked if he could instead receive the cash equivalent of the cost of the initiation fees and the annual membership fees (which would, of course, have been taxable to him). The company refused. Mr. R. then suggested that if having a membership was mandatory, then a membership in a local curling club would be of greater use to him. That option, too, was refused. Finally, Mr. R. tried to decline the golf club membership altogether, but was advised that doing so would reflect badly on his commitment to the company and its corporate culture. In the end, Mr. R. accepted the membership. He used the golf club facilities to occasionally entertain corporate clients and played golf with clients on a couple of occasions, but then gave that up, as he played so badly. He also took his wife to dinner at the club on two occasions, paying for the meals himself. After Mr. R. filed his 2002 tax return, the Minister assessed on the basis that the amount of $2,049, representing the annual dues for the golf club membership, was a taxable benefit to Mr. R., to be included in his income for the year. Mr. R. appealed to the Tax Court of Canada.

The matter was heard by the Chief Justice of the Tax Court, who acknowledged that, while the amounts involved were small, the case raised important questions affecting the manner in which employee "benefits" are taxed when they come as part of an employment package and are provided whether the employee wants them or not.

The Chief Justice concluded that, in fact, Mr. R. had not in fact received a taxable benefit by virtue of his membership in the golf club. He held that the determination of whether a taxable benefit has been received requires that three questions be answered: Is it a benefit, is it received or enjoyed, and what is its value. In other words, the common sense question to be asked is "just what did the employee get out of the alleged benefit that ought to increase his or her income?" The "traditional" view, and the one put forward by the Minister at trial, is that the test is the availability of the benefit, not the actual use. The Chief Justice concluded otherwise, indicating that the more reasonable view is that the value to a particular taxpayer of a benefit should be determined on an individual basis of actual use, rather than availability.

Publications issued by the Canada Revenue Agency indicate that where an employer pays the fees required for an employee to be a member of a social or athletic club, there is no taxable benefit to the employee where the membership was principally for the employer's advantage and not the employee's. The Chief Justice concluded that such a determination should be made, for the most part, on an objective basis, and not simply on the views of the employer and employee. In this case, the Chief Justice had little difficulty in concluding that the golf club membership was primarily for the benefit of the employer. It was clear that the employee had no interest in having such a membership and had in fact tried to refuse it. The few occasions on which he actually visited the golf club were, for the most part, to entertain corporate clients.

Finally, the Chief Justice noted that, even if the membership had been primarily for the benefit of Mr. R., no taxable benefit would have arisen, as any benefit was, on the evidence, minimal at best. The Minister was ordered to reassess the taxpayer to remove the amount of $2,047 from his income for the year.

It should be noted that Mr. R.'s case was decided under the informal procedure of the Tax Court, meaning that judges hearing future cases involving the same issues are not required to come to the same conclusions. Nevertheless, the case raises some interesting questions (and opportunities) for employees who receive unwanted taxable benefits as part of a standard package. When cases have been decided against them in the past under the informal procedure, the Canada Revenue Agency has generally taken the point of view that, since the decision is not binding, there has been, for all intents and purposes, no real change in the law. Whether they will be able to rely on that position this time will likely depend on whether taxpayers seek to challenge similar assessments by relying on the reasoning in this case and the degree of success that they encounter should they do so.