Principal Issues: Whether it is appropriate to reduce a taxable benefit for a rent-free apartment from 2/3 of the fair market value to 25% on the basis of the TCC decision in Potvin.
Position: No.
Reasons: The CRA does not have a general position on the amount of a reduction that is appropriate in different situations; only that the reduction must be reasonable in the circumstances. We do not envision any situation where an employee's privacy and quiet enjoyment is so disrupted that no taxable benefit is appropriate. The value of the benefit determined by the TCC in the Potvin decision would be on the low end of the scale. A distinctive fact in Potvin that is worth noting, other than the general nature of the tenants and the usual problems encountered by building managers in these situations, is that Mr. and Mrs. Potvin were the only individuals who managed two townhouse complexes (24 and 36 units) and they were on call 24 hours each day. In the case at hand, there are three superintendent couples and a resident manager couple that collectively manage the property, and these employees are only on call 6 days per month.
Randy Hewlett
XXXXXXXXXX 613-957-2049
2005-014783
November 21, 2005
Dear XXXXXXXXXX:
Re: Taxable Benefit - Rent Free Apartment
We are writing in response to your letter of August 8, 2005, wherein you requested that we provide you with our opinion on the amount of a taxable benefit to include in the income of your employees who collectively manage a XXXXXXXXXX apartment building.
You indicated that on-site staff, XXXXXXXXXX, collectively manage the property. Your letter described the duties of these employees, including their hours of work. XXXXXXXXXX. You currently include 2/3 of the fair market value of the rent-free apartment in the employees' incomes as a taxable benefit. During the days that the employees work a regular or on-call day, you feel they have no quiet enjoyment of the property and do not receive any benefit. In your view, the taxable benefit should be no more that 26% of the fair market value of the rent (XXXXXXXXXX). As support for your view, you quote the decision of the Tax Court of Canada in Potvin v. M.N.R. (90 DTC 1644).
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.
Paragraph 6(1)(a) of the Income Tax Act includes in a taxpayer's income the "value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment." The value of a taxable benefit for free board and lodging should generally approximate its fair market value. As noted in the Employers' Guide: Taxable benefits 2004-2005, there may be special circumstances where it is appropriate to reduce the value of a housing benefit for loss of quiet enjoyment.
The CRA does not have a general position on the amount of a reduction that is appropriate in different situations; only that the reduction must be reasonable in the circumstances. For example, we cannot envision any situation where an employee's privacy and quiet enjoyment is so disrupted that no taxable benefit is appropriate. Further, we are of the view that the value of the benefit determined by the TCC in the Potvin decision would be on the low end of the scale. A distinctive fact in Potvin that is worth noting, other than the general nature of the tenants and the usual problems encountered by building managers in these situations, is that Mr. and Mrs. Potvin were the only individuals who managed two townhouse complexes (24 and 36 units) and they were on call 24 hours each day.
In the circumstances, we do not feel a reduction in the amount of the 2/3 fair market value rent benefit that is currently included in your employees' incomes is appropriate.
Yours truly,
Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch