Principal Issues: 1) Whether some specific benefits are considered taxable under section 6? 2) Can an employer deduct expenses related to these benefits?
Position: 1) The answer depends on the specific nature of the benefit; 2) Generally yes, subject to sections 67 and 67.1.
Reasons: 1) and 2) Based on previous decisions and administrative policies of the CRA.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 20 Business expenses/taxable benefits
More and more companies are offering incentives to their employees to encourage them to work for them, to encourage team spirit and a sense of belonging. Thus, businesses offer 5 to 7s, team lunches, a relaxing area with pool tables and arcade games. Others encourage employees to cycle and offer bike parking on their premises. Others will propose sports activities (e.g., training for a marathon with a coach).
The benefit to the company is significant. By encouraging employees, seeing to their interests, and supervising these types of sports and leisure activities within the framework of work, team spirit and a feeling of belonging to the employer allow several advantages including:
- Avoiding training costs for new staff;
- Encouraging volunteering for overtime, especially if the salary is on an annual basis;
- Encouraging long hours of work in order to meet deadlines.
Often in the audit framework, these expenses are denied to the company on the basis that they are not expenses for earning income, and the auditor may entertain assessing a taxable benefit on the employees.
To be deductible, income does not have to arise from the expense. Instead, the expense must be part of the income-earning process.
With respect to the calculation of a taxable benefit, the questions to be asked are:
- Does the employee receive an economic benefit?
- Is the benefit monetarily quantifiable?
- Does the benefit advantage principally the employee or the employer?
- Is the benefit conferred in respect of or in the course of the employment?
Question to CRA
We would like to know the CRA's position on this type of expenses and the tax treatment that should be given where all of these measures and incentives are put in place by the employer of its own accord to respond to employee needs?
CRA Response
Taxable benefits
Paragraph 6(1)(a) provides inter alia that the value of any 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 the taxpayer’s office or employment are included in the taxpayer’s income with the exception of certain benefits stated in that paragraph and which arise in certain specified situations.
Generally, it is necessary to take the following factors into account in determining if there is a taxable benefit:
- Does the employee receive an economic benefit?
- Is the benefit measurable and quantifiable?
- Does the benefit advantage principally the employee or the employer?
- Is the benefit conferred in respect of or in the course of the employment?
For example, in order to determine if a taxable benefit is conferred on an employee, it is necessary to establish if the benefit advantages principally the employer or an employee. If the employee principally benefits, a benefit on the employee would be recognized. This determination is one of fact. In this regard, the fact that there are business reasons for offering the benefits to the employees does not necessitate a conclusion that the employer benefitted principally and that the benefits are not taxable.
Thus, where the employer proposes competitive sporting activities such as paying the expenses of the services of a trainer to permit an employee to succeed in a marathon, the CRA considers that the employee is principally advantaged by the benefit.
Among the factors to consider in determining if a taxable benefit is conferred on an employee, it is necessary to establish the value of the benefit. However, there are situations where the value of a benefit is difficult to quantify or measure, such as where a bike stand area is provided. As a general manner and subject to certain exceptions, the CRA’s position is that an employee usually receives a taxable benefit under paragraph 6(1)(a) when the employer furnishes a parking spot for an automobile at its place of business. The same reasoning could apply respecting a bike stand area which is offered to all the employees. However, when the usage of a bike stand area by an employee is difficult to quantify and measure, the CRA is of the view that a benefit is not required to be included in computing the income of the employee who uses the bike parking stand.
Furthermore, the CRA has already reviewed specific types of benefits accorded to employees and has taken certain general positions. Among these are the following situations: an employer-provided party or other social event and the installation of internal recreation areas.
In this regard, the CRA’s position is that when an employer offers free-of-charge, to all employees, a party or other social event, there is no taxable benefit if the cost per party or other social event does not exceed $100 per person. The CRA is of the view that a “5 to 7” or a team lunch of a social nature could be considered as a type of social activity. Consequently, the CRA is of the view that there is no taxable benefit for a “5 to 7” or a team lunch of a social nature which is offered to all the employees if the cost does not exceed $100 per person per event. However, the number of events subject to this position must be reasonable in the circumstances.
The CRA’s position is that the furnishing of internal recreational facilities of the employer offered to all the employees does not give rise to a taxable benefit to them. Consequently, the CRA is of the view that making available, to all the employees, a relaxation area on the employer’s facilities with billiard tables and arcade games does not give rise to a taxable benefit.
Deductibility
Paragraph 18(1)(a) provides that expenses are not deductible in computing the income of a taxpayer from a business or property except to the extent that they are made or incurred by the taxpayher for the purpose of earning income from the business or property. It also is necessary that the expense be reasonable in the circumstances by virtue of section 67.
The application of paragraph 18(1)(a) is a question of fact which cannot be determined before an examination of all the facts and circumstances of a particular situation.
In general, when an expense constitutes a benefit accorded on employees, the employer usually can deduct its amount as a business expense, being remuneration or other employee benefits, to the extent that the amount is reasonable and no specific provision of the Income Tax Act applies to restrict the deduction.
Thus, it could be the case, in certain circumstances, that the expenses of an employer such as those attributable to offering a bike parking stand, a relaxation area with billiard tables and arcade games or the services of a trainer offered to the employees would be deductible in computing the income from the carrying on of a business of the employer provided that they were reasonable.
Furthermore, subsection 67.1(1) provides a further limitation respecting an amount paid for food or beverages consumed by persons. Under this section, the amount is deemed to be the lesser of the amount actually paid or payable and the amount which would be reasonable in the circumstances. Subsection 67.1(2) provides that subsection 67.1(1) does not apply to and amount paid or payable by a person for food or beverages in certain circumstances. For example, paragraph 67.1(23)(f) provides that subsection 67.1(1) does not apply where the amount is in respect of one of six or fewer special events held in a calendar year at which the food or beverages are generally available to all individuals employed by the person at a particular place of business of the person and are consumed or enjoyed by those individuals. Thus, to the extent that the expense is made or incurred by the employer for the purpose of earning income from a business and it is reasonable in the circumstances, the expense for a “5 to 7” or a team lunch of a social nature offered to its employees would be deductible in computing the income from the carrying on of a business of the employer and it would not be subject to the 50% limitation provided in subsection 67.1(1) by reason of one of the exception in that subsection.
Responsible Rulings Officer:
Anne Dagenais
(613) 670-9050
2015-059568