13 February 1992 Internal T.I. 9128887 F - Benefit from Employment

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

February 13, 1992

24(1)

This is in reply to your memorandum of October 3, 1991, addressed to Mr. E.H. Gauthier, A/Director General, Audit Programs Directorate, in which you requested confirmation of your proposed treatment of benefits provided by mutual fund dealers,    24(1) to representatives of registered brokerage firms. We have reviewed the package of material forwarded with the request which included a submission received from the    24(1)  representative, the firm of       24(1)

Although our review took in the information concerning both 24(1)      the similarities between the two cases are such that, for the purposes of our response, our comments regarding the 24(1)       situation can be applied equally to the      24(1) situation.

The facts of the case, as we understand them, can be summarized as follows:

24(1)

24(1)

District Office Position

Your office is of the view that the trips constitute paid vacations and that the full value of these trips should be considered a taxable benefit to the brokers under paragraph 6(1)(a) of the Act. In support of your view you have referred to the Supreme Court decision in the Queen v. Savage 83 DTC 5409, the decision of the Exchequer Court in Waffle v. MNR 68 DTC 5007 and the Tax Court decision in Rovan v. MNR 86 DTC 1797. In addition, your assessment of the above facts, which appears to place emphasis on the manner in which the benefit is funded and the alternative cash payment, leads you to conclude that the trip is similar to remuneration-in-kind and should be fully taxable.

Our Comments

In general, where an employee is in receipt of an expense-paid personal trip and entitlement to the trip is acquired in the course of or by virtue of his employment then the employee is considered to be in receipt of an employment benefit. This is so regardless of the fact that the benefit may be provided by a party other than the employer. These two principles are now well established with the aid of the Savage and Waffle decisions to which you referred.

     24(1)

In short, it is our view that the contra-evidence of additional commission payments, being provided in the form of vacation trips or cash, would not, by itself, be sufficient to refute the taxpayer's published statements.

Having concluded, however, that a benefit is considered to have been received by the attending brokers by virtue of their employment, the main issue becomes the determination of the taxable portion of that benefit. The brokers are not required by their employers, as a part of their duties of employment, to attend the conference; that is, they do so at their own discretion. The trips are partially funded by the pool of retained commissions and provided as a reward for sales achievement. It is your contention that the trips are merely paid vacations and consequently the full value of these trips should be included in income.

There are a number of cases that deal with the reward aspect of the issue. In the Waffle case the employee became entitled to a Caribbean cruise for two, awarded by a third party (supplier), which was found to be entirely taxable. In that case, however, there was no suggestion of there being any business element; it was simply a paid vacation. In Philp et al v. MNR 70 DTC 6237, one of the appellants was an employee of a corporate employer whose supplier provided the benefit, the trip was provided as a reward for achievement of certain sales levels. It should be noted that in the Philp case the court recognized that the trip was primarily a paid vacation and promoted as such, but was also satisfied that there was an element of business being conducted, even though the "convention" was held outside the territorial scope of the organization sponsoring the convention. Consequently, the court ruled that the overall benefit should be appropriately reduced. The benefit was reduced by half on the grounds that on three days of the six day trip the taxpayer conducted some business related activity.

In Hale v. MNR 68 DTC 5326, the issue was whether expenses related to the attendance of the employee's spouse at the convention was a taxable benefit. The court was convinced by the evidence that in those particular circumstances the spouse had an integral role in the employer's scheme of things and was required by the employer to attend the conference. The evidence also established that the trip was predominantly of a business nature and consequently the benefit was considered not taxable. In the case of Hart v. The Queen 82 DTC 6237, a case similar to the Philp case, the court found that the trip sponsored by a third party was predominantly a vacation trip but with a business element which had to be recognized and the taxable portion of the benefit was reduced accordingly.

The apparent distinction between the cases noted above and the   24(1)         situation is that in the court cases the benefit was provided either by or through the employer. IT-470R at paragraph 10 discusses the situation where the employer provides the employee with a vacation trip. The value is considered to be a benefit received by virtue of his employment. The reason that an employer paid vacation is considered a taxable benefit is that the trip provides no benefit to the employer; i.e., it is not part of the duties of employment. The paragraph goes on to state, however, that if it can be shown that the employee was involved in business activities for his employer then the taxable benefit can be appropriately reduced. In other words, if the employee is engaged in business activities that can reasonably be regarded as being of benefit to his employer then the taxable portion of the benefit may be reduced.

Whether business related activities are being conducted by the employee is a question of fact. An examination of a       24(1) Conference first stage agenda reveals a description of activities that appear to be business related.

24(1)

Although a benefit is clearly being provided to the brokers in an amount equivalent to the full value of the cost of the trip for themselves and their companions, case law does not support the taxation of that benefit at 100% where the recipient of the benefit can clearly show that business related activities took place during the course of the trip and the Department is reasonably satisfied that the individual participated in those activities. In the Philp and Hart cases where such evidence was provided a reduction in the taxable portion of the benefit was ordered by the court. Whether business related activities took place at these conferences is a question of fact, and given the published agendas and format for the first stage of the    24(1) Conference, the onus would clearly shift to the Department to refute such a claim.

Reference has been made to the decision of the Tax Court in Rovan v. MNR 86 DTC 1791, in which the court upheld an assessment in which the costs of attending a legal convention in Monte Carlo were disallowed in their entirety. The court concluded from the evidence that the business element was not sufficient in relation to the length of the trip to describe it strictly as a convention trip. As well, the amount of expenditure incurred by the taxpayer himself and the extent of information concerning the convention agenda that was available at the time the taxpayer made his decision to attend, indicated that the trip was intended primarily as a vacation trip. You appear to have placed some reliance on this decision (being the most recent of decisions relevant to the issue) and the court's approach in disallowing the entire expense. We have reviewed this case in particular, in the course of discussions on the entire      24(1)     situation, with our legal advisors and have concluded that its value as an indicator of a trend in jurisprudence is limited since it is a lower court decision and the taxpayer (whose legal experience did not include tax law) represented himself. In addition, the criteria outlined by the court for determining the primary purpose of the trip, if applied to the first stage of the      24(1) Conference, would likely not lead to a similar decision.

In assessing the taxable portion of the benefit, it is our view that:

(1)     the portion related to the attendance of a companion would be considered personal,

(2)     the portion related to the second stage of the      24(1) Conference would be predominantly personal and,

(3)     since the locations of the Conference are clearly outside the territorial scope of      24(1)     , some of the travel cost would reasonably attach to the personal element of the trip.

Consequently, it is our view that for individual brokers attending the first stage of the Conference      24(1)      where only their personal attendance is paid for by      24(1)      an argument could be made for reduced taxability. Normally, where each recipient of a benefit is potentially subject to reassessment that individual's personal circumstances must be taken into account in making the determination. For example, if an individual attended each of the sessions as scheduled on the conference agenda with only incidental social activity that individual could argue up to 100% business portion (the Hale case, decided entirely in favour of the taxpayer, also recognized an incidental social content). If an individual attended only a portion of the agenda, departure from a business agenda to pursue a personal activity should increase the taxable assessment. Any benefits related to the companion should be treated as fully personal. he second stage of the conference, which takes place at a more exotic location, should be taxed in its entirety for the following reason. The second stage is reserved for top producers and its business agenda has no structure, no predefined business substance. It loosely provides participants an opportunity to exchange ideas on matters of interest. Accordingly, the onus would properly shift to the taxpayer to prove that the purpose of the second stage included more than just incidental business discussions (regardless of the presence of     24(1)       representatives at this stage). This same rationale should be applied when considering the taxable portion of benefits provided in connection with the other named conferences.

As mentioned previously, where each individual is to be assessed a taxable benefit that individual's particular circumstances should be considered. On the other hand, if your office is contemplating reaching a settlement in the same format as suggested by the       24(1)      representative; i.e., an adjustment to the corporate return (not affecting the individual broker) we would agree that a more average benefit assessment can be justified.

We trust that our comments will be of assistance to you.

P.D. FuocoSection ChiefPersonal and General SectionBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch

c.c.     E.H. Gauthier,     A/Director General,     Audit Programs Directorate

c.c.     A. Bissonnette,     Director     Source Deductions Division