Date: 20110613
Dockets: A-364-10
A-363-10
Citation: 2011 FCA 200
CORAM: LÉTOURNEAU
J.A.
DAWSON J.A.
STRATAS
J.A.
A-364-10
BETWEEN:
HER MAJESTY
THE QUEEN
Appellant
and
CARROLL A.
SPENCE
Respondent
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A-363-10
BETWEEN:
HER MAJESTY
THE QUEEN
Appellant
and
DAVID JOHN
RATCLIFFE
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
Issues on appeal
[1]
These are
appeals against a decision of Favreau J. of the Tax Court of Canada (judge) in
which he allowed with costs the respondents’ appeals against their
reassessments under the Income Tax Act, R.S.C. 1985 (5th
Supp.), c. 1, as amended (Act) for the 2003, 2004 and 2005 taxation years.
[2]
I should
say at the outset that the judge felt constrained to follow the decision of a
colleague of his court in Detchon v. R., [1996] 1 C.T.C. 2475 where the
facts were similar to those of his case. It appears that his attention was not
drawn to the decision of our Court in Schroter v. R., 2010 FCA 98,
[2010] 4 C.T.C. 143.
[3]
I should
also add for the sake of clarity that the judge rendered one set of reasons for
the two appeals that were before him. Her Majesty the Queen appeals from the
judge’s finding in both files. Pursuant to an Order of Nadon J.A., both appeals
were consolidated in our Court. In conformity with the Order of Nadon J.A., one
set of reasons will be issued in the lead file (A-364-10) and a copy of said
reasons will be filed in file A-363-10.
[4]
The
appellant submits that the only issue on appeal is the quantification of the
respondents’ employment benefits under paragraph 6(1)(a) of the Act. In
this respect, the appellant contends that the judge should have held that the
value of the benefits was the fair market value of these benefits. Instead, the
judge followed the Detchon decision where the value of the benefit was
determined to be the actual costs of the good or service incurred by the
employer.
[5]
In their memorandum
of fact and law, the respondents raise two additional issues:
a) whether
the benefit was for them as employees or principally for the benefit of the
employer; and
b) whether
there was a material acquisition by the respondents which conferred an economic
benefit on them.
[6]
Counsel
for the appellant objected to the issues raised by the respondents on the
ground that they are contrary to, and in effect a withdrawal of, the judicial
admissions of facts upon which the trial took place. After an exchange between
counsel for the respondents and the members of the panel, it was understood
that the sole issue before us was the valuation of the benefits received by the
respondents.
[7]
That being
so, I am satisfied that there is no recanting of the admission that the
respondents received a taxable benefit. Otherwise, there would be no point in
discussing the value of the benefit received for taxation purposes if the
benefit is not taxable.
The facts giving rise to the litigation
[8]
The
respondents are teachers at a Montessori School in London, Ontario. By virtue of their employment,
they were able to send their children to that school for half the standard
tuition fees. For the taxation years at issue, they declared as a benefit the
difference between the actual overhead cost per student space available the
school incurred in educating the children and the employee tuition rate they had
paid. The Minister of National Revenue reassessed them on the basis that their
benefit was the fair market value of the education, minus the tuition they had
paid.
[9]
The case
proceeded in the Tax Court on the basis of the following agreed statement of
facts reproduced at paragraph 2 of the judge’s reasons for judgment:
[2]
These appeals were heard on common evidence. The parties to the appeals agreed
to file in Court the following Agreed Statement of Facts:
1. during
the years 2003, 2004 and 2005, the Appellants were employed as teachers for The
Montessori House of Children located in London, Ontario (“the School”);
2. the
School serves approximately 400 children and their families annually, with the
support of over 70 full and part time faculty and staff. The School’s central
location houses all program levels from Toddler to Junior High and two
satellite locations, Westmount South and Whitehills North, have additional
preschool programs.
3. during
the years 2003, 2004 and 2005, the respective children of the Appellants were
enrolled at the School;
4. the
Appellants are unrelated to each other and each deals at arm’s length with the
School;
5. the
Appellants are not shareholders of, and do not otherwise have an ownership
interest in, the School;
6. the
School granted a 50% discount on the tuition fees paid by all employees of the
School, including the Appellants, for the enrollment of children of the
employees, including the Appellants’ children, at the School;
7. the
Appellants enjoyed the substantial benefits of reduced tuition fees by reason
of their employment;
8. [t]he
School enjoyed substantial benefits from having the Appellant’s [sic]
children attend the School, such attendance benefitting the School’s
recruitment of prospective students and retention of existing students;
9. the
School calculated the amount of the benefits enjoyed by the Appellants as the
difference between the discounted price charged by the School to the Appellants
and the cost of providing education at the School as calculated by the School;
10. the
amount of the benefits enjoyed by the Appellants as calculated by the School
was included in the income of the Appellants on the T‑4 information
returns prepared by the School, and was reported by the Appellants in their
incomes for the 2003, 2004 and 2005 taxation years;
11. the
amount of the cost of providing education at the School as calculated by the
School is the correct determination of that cost;
12. the
Minister reassessed the Appellants to increase the amount of the taxable benefit
to the full amount of the discount (50% of the tuition charged to non‑employees)[;]
13. the
amounts of the standard tuition, the discount granted, the benefit reported and
the adjustment to taxable benefit as reassessed in respect of the Appellants
are the following:
|
Carroll A. Spence
|
2003
|
2004
|
2005
|
|
Standard tuition
|
$9,400
|
$9,800
|
$5,250
|
|
Discount granted
|
$4,700
|
$4,900
|
$2,625
|
|
Employment Benefit reported
|
$2,772
|
$2,654
|
$1,023
|
|
Adjustment to taxable
benefit
|
$1,928
|
$2,246
|
$1,602
|
|
|
|
|
|
|
David John Ratcliffe
|
2003
|
2004
|
2005
|
|
Standard tuition
|
$9,400
|
$9,800
|
$10,050
|
|
Discount granted
|
$4,700
|
$4,900
|
$5,025
|
|
Employment benefit reported
|
$2,772
|
$2,654
|
$2,271
|
|
Adjustment to taxable
benefit
|
$1,928
|
$2,246
|
$2,754
|
14. the
Fair Market Value of the discount, if determined by reference to the tuition
which would be paid in respect of a child whose parent was not employed by the
School is equal to the full amount of the discount.
Analysis of the judge’s decision
[10]
The fate
of the present appeal, in my respectful view, is governed by the decision of
our Court in Schroter, cited above. What is in issue here is not the
cost for the employer of granting the benefit to the employees. It is the value
of the benefit received by the employees, i.e. in the present instance, the
amount of the tuition fees that the respondents would have had to pay to send
their children at their employer’s school if they had not been teachers at that
school. This is the fair market value of the benefit they received, minus of
course the amount that they paid for the tuition.
[11]
I agree
with Professor Kim Brooks that costs of the benefit to the employer is the
wrong instrument to assess the value of the benefit. While in some cases (see
for example Stauffer v. R., [2002] 4 C.T.C. 2608, at paragraph 17) the
cost may correspond to the fair market value, it is not necessarily the case.
[12]
In her
article entitled Delimiting the Concept of Income: The Taxation of In-Kind
Benefits, (2004) 49 McGill L.J. 255, at pages 274 and 275, Professor
Brooks writes:
Employers can often provide
some goods or services to employees at very little cost to themselves. It is
sometimes argued as a result that because these benefits are provided at no
substantial cost to employers, they should not be taxed in the hands of employees.
However, the obvious reason for discarding this test is that it is the
employee’s income that is in issue. The employer’s cost of providing these
goods is irrelevant to this issue.
…
The “cost to the employer”
method assumes that the value of the benefit to the employee will equal the
cost of the benefit to the employer. Both of these empirical assumptions are
wrong. Employees may receive a huge personal benefit from employer-provided
goods and services even though they cannot sell the goods and services, and
there is no reason for supposing that the value of a benefit to an employee
should be in any way related to its cost to the employer.
[13]
In Schroter,
Dawson J.A. reviewed the principles and the jurisprudence applicable and
applied to the existence and quantification of a taxable benefit under
paragraph 6(1)(a) of the Act. She concluded as follows at paragraphs 47
and 48 of her reasons for judgment:
[47] The equal treatment
of taxpayers is facilitated by valuing their benefits at their fair market value.
On an administrative basis, the Canada Revenue Agency recognizes this and
instructs employers that where the fair market value of a parking pass cannot
be determined, no benefit should be added to an employee’s remuneration. Where
the fair market value can be determined, employers are instructed that the
value of the benefit is based on the fair market value of the parking pass,
less any payment the employee makes to use the space. See: Canada Revenue
Agency, Employers’ Guide – Taxable Benefits and Allowances 2009,
T4130(E) Rev. 09.
[48] Given the inherent
fairness of this method of valuation, and the absence of objective evidence
demonstrating that a fair market value based valuation is somehow inappropriate
on the facts of this case, the Tax Court judge did not err by valuing the
parking pass in the amount of its fair market value.
[14]
Apart from
the fact that I agree with this approach, no objective evidence was provided to
us that demonstrates that resort to a fair market value based valuation is
inappropriate in the present instance. On the contrary, a value assessment
based on the costs incurred by the employer as advocated by the respondents can
work unfairness. I will offer two examples.
[15]
Let us
assume a non-teacher parent with an income of $50,000 who wishes to send his
child to the Montessori school. He pays a tuition fee of $10,000. The school has
an overhead cost of $7,000 for each student space available. Having disbursed
$10,000, this parent would be left with an income of $40,000. However, his
taxable income would be $50,000.
[16]
Now let us
take the situation of a teacher parent at the school who has an income of
$45,000. He pays an employee-discounted tuition fee of $5,000. The school has
an overhead cost of $7,000. The teacher would be left with an income of $40,000
after the disbursement of $5,000 for the tuition fee.
[17]
If this
teacher’s taxable benefit were based on the overhead cost of the education for
the school minus the tuition he paid ($7,000 - $5,000), he would be taxed on only
$47,000, i.e. his salary plus the taxable benefit. He would be in the exact
same position as the non-teacher parent in terms of the money he had left after
paying tuition and in terms of the education his child received, yet he would
be taxed on the basis of an income of $3,000 less. This seems unfair.
[18]
If,
however, the teacher parent were taxed on the tuition he had saved, he would be
taxed on $50,000 total, i.e. his salary plus the benefit. Both parties would
then be taxed on the same amount. They would thus be taxed equally for the
equal benefits they have received from their respective jobs. As Dawson J.A.
said at paragraph 47 in Schroter, cited above, “the equal treatment of
taxpayers is facilitated by valuing their benefits at their fair market value”.
[19]
The
following graphics illustrate the two scenarios:
|
|
Income
|
Yearly tuition fee paid
|
Cost to the school
|
|
Non-teacher parent
|
$50,000 - $10,000
|
$10,000
|
$7,000
|
|
Income left
|
$40,000
|
|
|
|
Taxable income
|
$50,000
|
|
|
|
|
|
|
|
|
|
Income
|
Employee tuition fee
paid
|
Cost to the school
|
|
Teacher parent
|
$45,000 - $5,000
|
$5,000
|
$7,000
|
|
Income left
|
$40,000
|
|
|
|
Taxable income
|
$47,000
|
($45,000 +
|
($7,000 - $5,000)
|
[20]
Counsel
for the appellant argued that the costs to the school depend on many factors
such as efficiency, overhead, suppliers, etc. which, I agree, “are irrelevant
and have no impact on the value of the taxable benefit enjoyed by the
respondents”: appellant’s memorandum of fact and law, at paragraph 26. He
provides the following hypothetical example which, I think, also illustrates
the unfairness of treatment if the cost method is used:
The tuition in three schools
if $10,000. Each offers the same benefit of a $5,000 discount to their
employees. The cost per student for one school is $5,000, the other is $10,000
and the last one is $11,000. According to the cost approach taken by the trial
judge, the value of the discount would be $0, $5,000 or $6,000, even though
each recipient enjoyed the same benefit.
[21]
The
respondents argued at the hearing that the value of the taxable benefit to the
employees should be determined by a balancing, I suppose in an offset fashion,
of the benefit to the employer and the benefit to the employees.
[22]
No
authorities were cited for this proposal and I confess that I cannot find much
legal and practical support for this test. As a general rule, an employer sees
and seeks an advantage when he confers a benefit to an employee. With this
proposed approach, instead of having to determine one value, i.e. the value of
the benefit to the employee, the court would have to determine two values, i.e.
that of the benefit to the employer as well.
Conclusion
[23]
For these
reasons, I would allow the appeals without costs as requested by the appellant,
set aside the decision of the Tax Court of Canada and dismiss the respondents’
appeals to the Tax Court of Canada without costs.
“Gilles
Létourneau”
“I
agree
Eleanor
R. Dawson J.A.”
“I
agree
David
Stratas J.A.”
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