Principal Issues: [TaxInterpretations translation] 1) Is the reimbursement by an employer to its officers and directors of a business class airline ticket a taxable benefit? 2) Is the reimbursement by the employer to its officers and directors of two economy class airline tickets, to the extent that the cost of those two tickets does not exceed the cost of a business class ticket, a taxable benefit?
Position: 1) No, we are of the view that the policy of reimbursement of a business class ticket is not a taxable benefit for employees.
2) Yes, we are of the view that the policy of reimbursing two economy class airline tickets for the employee and the employee’s spouse, the cost of which does not exceed the price of a business class ticket, constitutes a taxable benefit to the employer's officers and directors.
Reasons: 1) In order to determine whether there is a taxable benefit to employees, it is necessary to consider why the employer is reimbursing those expenses and who benefits most from that arrangement.
2) Position expressed in paragraph 15 of Interpretation Bulletin IT-470R (Consolidated), paragraph 8 of Interpretation Bulletin IT-131R and Employer's Guide T4130.
2006-021029 XXXXXXXXXX Anne Dagenais Advocate,M. Fisc. February 20, 2007 (613) 957-2121
Dear Sir,
Subject: Request for technical interpretation
Executive Air Travel in the Course of Duty
Taxable Benefit - 6(1)(a) and 6(1)(b)
This is in response to your letter of October 11, 2006, in which you asked for our opinion on the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts
Here is a summary of the facts as they were presented to us:
1) A taxpayer's administrative policy regarding the air travel of its executives and directors in the performance of their duties is as follows: "Air travel is limited to economy class, except for flights of 4 hours or more where a business class ticket is reimbursable".
2) Instead of reimbursing the traveller for a business class ticket, the taxpayer agrees to reimburse the employee for the cost of two economy class tickets for the employee and spouse, provided that the price paid for the tickets does not exceed the price of the business class ticket. Therefore, the maximum expense reimbursement an employee can receive is the lesser of the following two amounts:
- The price of the business class ticket, or
- The price of both economy class tickets.
Questions
1) Is reimbursing its officers and directors for the cost of one business class instead of economy class airfare for flights of more than 4 hours duration in the course of their duties a taxable benefit to those employees under paragraphs 6(1)(a) or 6(1)(b)?
2) Is reimbursing its officers and directors for the cost of two economy class airline tickets for flights of more than 4 hours duration in the course of their duties, as long as the price paid does not exceed the cost of a business class ticket, a taxable benefit to those employees under paragraphs 6(1)(a) or 6(1)(b)?
Your Opinion
You are of the opinion that the analysis of the two situations presented must be based on the concept of economic benefit.
You state that the jurisprudential interpretation of paragraphs 6(1)(a) and 6(1)(b) was provided in Poynton1 and Savage.2 According to your reading of those two decisions, there is a benefit under paragraphs 6(1)(a) and 6(1)(b) where the employee receives an economic benefit. Subsequent jurisprudence has confirmed that a taxable benefit exists only if the following question can be answered in the affirmative: did the employee receive an economic benefit?
You add that the court in Hoefele3 expressed itself as follows:
According to the Supreme Court of Canada, then, to be taxable as a "benefit" a receipt must confer an economic benefit. In other words, a receipt must increase the recipient's net worth to be taxable. Conversely, a receipt which does not increase net worth is not a benefit and is not taxable.
The Federal Court of Appeal is very clear: no payment made to an employee is taxable if it does not improve the employee’s economic situation.
You are of the view that in both situations in this case, the employee does not enjoy any economic benefit. Indeed, the reimbursement of expenses made by the employer is never higher than the price paid or that would have been paid by the employee for the acquisition of a business class ticket.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may not under certain circumstances apply to your particular situation.
In the situation you presented, you wish to know whether employees must include an amount in their employment income under paragraph 6(1)(a) or paragraph 6(1)(b).
Paragraph 6(1)(a) provides that an employee must include in income the value of any benefits received or enjoyed in the year in respect of, in the course of, or by virtue of an office or employment unless the exceptions listed in subparagraphs 6(1)(a)(i) to (v) apply. Paragraph 6(1)(b) provides that allowances received in the course of employment are taxable unless one of the exceptions in subparagraphs 6(1)(b)(i) to (ix) applies.
Thus, the application of paragraphs 6(1)(a) and 6(1)(b) depends, inter alia, on whether the amounts paid to employees qualify as a reimbursement or an allowance.
The term "allowance" is not defined in the Act. However, an allowance is generally considered to be an amount that an employee receives from an employer, in addition to salary, and for which the employee does not have to justify its use. In the situation you presented, and on reading the facts as presented, we understand that the amount paid for the air tickets represents a reimbursement. In such a case, a reimbursement that is made primarily for the benefit of the employee must be included in the employee's employment income for the year pursuant to paragraph 6(1)(a).
The reimbursement of an employee's expense by an employer is included in computing the employee's income under paragraph 6(1)(a) where it results in an economic advantage or benefit to the employee. Generally, whether an amount reimbursed to an employee gives rise to an economic advantage or benefit - or whether it relates to a personal expense of the employee - is a question of fact that depends, inter alia, on the reason for the reimbursement. However, reimbursement of supplies consumed directly in the performance of employment duties and reimbursement of actual expenses for the use of, for example, a mobile phone for employment purposes are not taxable because they do not give rise to an economic benefit to the employee.
1) Reimbursement of business class ticket
In the situation you have presented, it is our view that the taxpayer's administrative policy for all officers and directors to reimburse the cost of a business class airline ticket in certain circumstances primarily benefits the employer. For example, the employer may justify the policy by stating that it allows an employee to perform employment-related duties during the flight or that it allows an employee to better perform certain employment-related duties following an overnight flight.
Furthermore, business class air travel may allow the employer to get better performance from the employee. In some situations, it may even be economically advantageous for the employer to pay the costs of a business class ticket, as the stays do not need to be extended. Thus, different objectives may support that employer policy. Consequently, we believe that the reimbursement made by the employer for the business class airfare under the conditions described above does not constitute a taxable benefit to employees under paragraph 6(1)(a). In that regard, we would like to state that the employer has the ultimate responsibility to determine, in each case, whether the amounts it pays to an employee as reimbursement are taxable or not for the employee.
2) Reimbursement of two economy class tickets
First of all, we disagree with your position that the reimbursements made in the second situation are not intended to provide an advantage or benefit to the employee. According to you, since the reimbursement of expenses made by the employer is never greater than the cost of acquiring a business class ticket, this demonstrates that there is no economic advantage for the employee. You conclude that there is no economic benefit to the employee since there is no improvement in the employee’s economic situation. Furthermore, your conclusion is based on a comparison of your client's two administrative policies.
We are of the view that you are misapplying the concept of economic advantage. In our view, the application of the concept of economic advantage must be done by accepting that each situation is independent of the other.
The analysis should not be based exclusively on the outlay made by the employer but on the intended good received by the employee. In fact, in accordance with its policy, the employer reimburses an employee for the purchase of two economy class airline tickets. The two tickets purchased were for travel by an executive in the performance of the executive's duties with the executive’s spouse. The reimbursement made by the employer therefore allows the employee to acquire two goods. In addition, we consider that the employee enjoys a benefit in the course of employment because the employee now owns an airline ticket for which the employee did not have to pay anything.
In our view, there is no doubt that the reimbursement of the spouse's ticket is made primarily for the benefit of the employee and that the latter derives an economic advantage from it. That advantage results precisely from the fact that the executive obtains a free ticket for the executive’s spouse. Thus, we are of the view that the reimbursement of the spouse's ticket is a benefit to be included in the employee's income under paragraph 6(1)(a).
Finally, guidelines have been established to determine whether the reimbursement or payment of an employee's spouse's travel expenses by an employer should be included in the employee's employment income. Those guidelines are set out in paragraph 15 of Interpretation Bulletin IT-470R(Consolidated) - Employees' Fringe Benefits and paragraph 8 of Interpretation Bulletin IT-131R2 - Convention Expenses, as well as in Guide T4130 - Employers' Guide, Taxable Benefits and Allowances. Based on our previous comments, those guidelines apply in this case.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
We hope you find these comments of assistance. Should you require any additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
ENDNOTES
1 72 D.T.C. 6329 (Ont C.A.)
2 83 D.T.C. 5409 (SCC)
3 D.T.C. 5602 (FCA)