26 November 1992 Income Tax Severed Letter 9235345 - Club Dues and Membership Fees

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.

Draft Response for
Tax Executive Institute Liaison Meeting
to be held December 2, 1992

IX. Non-Deductible Club Dues - Taxable Benefit

In the past year the Toronto District Office of Revenue Canada, Taxation has taken the position that employees should be assessed for a taxable benefit in respect of those club dues that are non-deductible to their employers by virtue of subparagraph 18(1)(l)(ii) of the Act. A number of employees in the Toronto area have been reassessed and, despite strong arguments registered with the Deputy Minister, the District Office's position has been sustained.

TEI believes that RCT's position is improper for a number of reasons. First, the disallowance contained in subparagraph 18(1)(l)(ii) of the Act was a pragmatic legislative proxy for assessing a taxable benefit to individuals in respect of the non-business personal use element inherent in such dues. Secondly, assessing a taxable benefit causes an asymmetric treatment of such dues that results in double taxation. Thirdly, the result of the disallowance can be circumvented simply by paying employees sufficient additional amounts of income (deductible by the employer) so that in after-tax dollars they can pay for the club dues. Finally, notwithstanding IT-148R2, it has not been RCT's practice at any time since subparagraph 18(1)(l)(ii) was enacted to assess taxable benefits in respect of these club dues.

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The conclusion TEI has drawn from its review of material published in the years leading up to the 1971 tax reform proposals, when subparagraph 18(1)(l)(ii) was introduced, is that the Government intended not to allow a deduction for tax purposes for the personal consumption element inherent in club dues paid by a business. There is nothing in the material to suggest, however, an intent to both disallow the deduction to the business and impute a taxable benefit to the employee. The disallowance approach appears to have been adopted in order to avoid the administrative hassle of determining the non-business element inherent in these cost.

The effects of the double taxation - once of the employer (by denying it a deduction) and a second time to the employee (by imputing a taxable benefit) - can be largely circumvented by the employer's paying their employees sufficient additional remuneration so that the employees will be able to pay the club dues personally. From the employer's perspective, however, this is not a very efficient approach to the problem. In some cases, club memberships are transferable between individuals if they are held in corporate name. By effectively placing the memberships in individual names, the corporation may over the long run end up paying more in respect of club memberships. In addition, because of the differential between corporate and personal income tax rates, the payment of additional compensation to the affected employees (so they can pay the dues directly) will prove more costly on an after-tax basis.

Based on the preceding analysis, TEI believes that RCT's policy as set out in IT-148R2 is misguided. TEI recommends either (1) amending IT-148R2 to make it clear that taxable benefits should not be assessed in these circumstances or (2) amending section 6 of the Act to eliminate from employment income any benefit enjoyed from payment subject to the restrictions of subparagraph 18(1)(l)(ii).

Response

Paragraph 6(1)(a) of the Act provides that "the value of ... benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment" (emphasis added) are required to be included in a taxpayer's income. Accordingly, where a benefit is conferred on an employee as a result of the payment of club dues or membership fees by his or her employer, it is the Department's position that the benefit is required to be included in the employee's income notwithstanding that the dues or fees are not a deductible expense to the employer as a consequence of subparagraph 18(1)(l)(ii) of the Act.

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In our view, the particular tax treatment of an outlay or expenditure (in this case its non-deductibility) to one taxpayer is not determinative of the tax consequences that may arise in another taxpayer's hands resulting from the payment or incurring of that outlay or expenditure. A good example of this is the benefit arising on the standby charge rules in respect of an employer-provided automobile. Although the capital cost of an automobile is subject to certain rules under the Act, including the 80% limitation, the cost of the automobile for the purpose of applying the standby charge benefit ignores these rules.

These comments are consistent with the comments in paragraph 34 of Interpretation Bulletin IT-470R "Employee Fringe Benefits" in addition to those in paragraph 12 of Interpretation Bulletin IT-148R2 "Recreational Properties and Club Dues". We do not view such benefits as resulting in double taxation as such a benefit is only considered to arise where it cannot be demonstrated that the membership was principally for the employer's advantage.

As a consequence of the foregoing comments, the Department is not prepared to revise its published position on this matter. As an amendment to the Act would be required to achieve the result requested, your views on the issue should be submitted to the Department of Finance.

M. Eisner
November 26, 1992
#923534

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