30 June 1999 Internal T.I. 9916907 - EMPLOYEES - FREE RECREATIONAL PASSES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Employer operates a ski resort and is in the business of providing recreational facilities to the public. Employer gives free recreational passes to all its employees and their family members. Is there a taxable benefit to the employees pursuant to paragraph 6(1)(a) if the employee’s employment duties are administrative/retail and the use of the pass is not directly related to the performance of the employee’s duties? If free passes are provided to family members of all employees, is there a taxable benefit to the employee?

Position: Question of fact as to whether the employer or the employee is the primary beneficiary of the free recreational pass. However, in this case, the employer indicates that knowledge of the resort by all employees is essential for performing their duties of employment. In addition, the Department has a long-standing position that if free recreational passes are provided to all employees and not to a selected group of employees, then there is no taxable benefit to the employees. This is outlined in IT-148 and IT-470.

Reasons:. The determination of whether there is a taxable benefit to an employee is a question of fact that would depend on whether the employee or the employer is the primary beneficiary of the free recreational pass. As the employer has indicated that knowledge of the resort and ski hill are essential for all employees to perform their employment duties, it is reasonable to assume that the employer is the primary beneficiary. With respect to free passes to family members of employees, in our view, the employees are the primary beneficiaries of such a benefit and as such, the value of the pass is a taxable benefit in the hands of all employees whose family members receive such passes pursuant to paragraph 6(1)(a) of the Act.

	XXXXXXXXXX 					HEADQUARTERS
	Benefit Employment Income Audit	G. Moore
	XXXXXXXXXX  TSO				952-1506

							7-991690

Taxability of Free Recreational Passes to Employees of Ski Resort

We are writing regarding your memo of June 16, 1999, concerning the taxability of free recreational passes to employees of XXXXXXXXXX.

As we understand the situation, XXXXXXXXXX, which is in the business of providing recreational facilities to the general public, offers free passes to its employees for unrestricted use of recreational facilities, which include ski hills, a golf course, and indoor and outdoor tennis courts. There are approximately XXXXXXXXXX staff in the winter season, XXXXXXXXXX of which are year round employees. All employees are provided free access to the above-mentioned facilities. It is the contention of XXXXXXXXXX that the benefit conferred does not fall within the definition of income under paragraph 6(1)(a) of the Income Tax Act (the “Act”) and that the free passes are required for employees to carry out their duties of employment as the employees need to be familiar with the business and provide a high level of customer service. It is your view that the benefit conferred on the employees is material and has economic value to the employee. You believe that the benefit is measurable and is enjoyed by the recipient. A comprehensive tour of the resort and interviews with employees were conducted by the auditors and it was learned that only specific staff (i.e., ski patrol, ski school, lift operators) are required to have access to the hills and that all other staff have no need to access the mountain and may do so only on their off-duty hours. It is your view that the benefit is measurable and material and this is proven by the fact that the facilities are available to the general public. You have referred to a Rulings opinion (document number 9610725) which indicates that when an employer provides child care to the public at large for a fee greater than that charged to its own employees, the difference is considered to be a subsidy to the employee which must be included in the employee’s income from employment.

According to the information provided by the employer, XXXXXXXXXX employs approximately XXXXXXXXXX staff in the winter season. Of these, roughly XXXXXXXXXX are year-round employees and the balance are seasonal staff employed during the winter season only. Mountain operations, which consist of approximately XXXXXXXXXX staff, include ski patrol, lift operators, maintenance staff. Ski patrol are responsible for a variety of functions relating to safety on the mountain. Lift operators are responsible for starting up, running and operating the XXXXXXXXXX lifts and assisting the loading and unloading of lifts. Maintenance staff are employed to maintain the lifts and other equipment used on the mountains. Ski school staff (approximately XXXXXXXXXX employees) are responsible for teaching visitors to the mountain how to ski or snowboard. Retail staff (approximately XXXXXXXXXX employees) are employed in the various food, rental/repair and retail shops operated by the employer. Administrative staff (approximately XXXXXXXXXX employees) are employed to perform a variety of functions including payroll, accounting, marketing and promotion. According to the employer, marketing and promotion staff use the lifts to access the mountains to demonstrate the facilities to prospective customers. Managers (approximately XXXXXXXXXX employees) have the responsibility of supervising employees who are involved with operating the facilities.

XXXXXXXXXX.

You are asking whether the employees of XXXXXXXXXX are in receipt of a taxable benefit pursuant to paragraph 6(1)(a) of the Act for their use and their family members’ use of the employer’s recreational facilities.

OUR COMMENTS

Paragraph 6(1)(a) of the Act generally requires an employee to include in income the value of any benefit received or enjoyed in respect of, in the course of, or by virtue of employment; however, certain exceptions exist. In addition to statutory exceptions, paragraph 33 of Interpretation Bulletin IT-470R, Employees’ Fringe Benefits, sets out the Department’s position with respect to employer provided recreational facilities.

Paragraph 33 of IT-470R provides that, in order for the use of an employer’s recreational facilities (e.g., exercise rooms, swimming pools, gymnasiums, tennis squash or racquetball courts, golf courses, shuffle boards) at nominal or no charge not to be considered a taxable benefit in the hands of an employee, those same facilities must be available to employees generally. If certain select groups or categories of employees are given the privilege of using employer recreational facilities at no/low cost for which other employees in the organization would be required to pay full price (as well as any other client of the organization) then the Department considers that a taxable benefit is being conferred on those employees that have been given the advantage. A further factor to be considered in this context is found in paragraph 34 of IT-470R and paragraph 12 of IT-148R3. When an employee is provided free or low cost access to social or athletic clubs primarily so that the employee is better able to carry out the specific duties of employment for the benefit of the employer, with only a secondary and incidental benefit being derived by the employee, then the benefit so derived would not be considered taxable in the hands of that employee. In order for the benefit derived by an officer or employee from the use of employer-owned recreational facilities to be considered a non-taxable benefit, all employees generally must be provided access to those facilities. Where access is limited to certain employees, the benefit would be considered taxable in their hands.

Paragraph 12 of IT-148R3, Recreational Properties and Club Dues, indicates that the payment or reimbursement of club dues or membership fees by an employer would generally be considered a taxable benefit to the employees; however, if an employer pays the fees required for an employee to be a member of a social or athletic club, the employee is not considered to have received a taxable benefit when the membership is principally for the employer’s advantage rather than the employee. The use of an in-house recreational facility that is owned by the employer for the use of the employees does not usually give rise to a taxable benefit to the employees. In addition, no taxable benefit will generally arise to the employees if the employer pays a related or unrelated organization to provide such facilities, as long as the facilities or membership is available equally to all employees. On the other hand, if the club membership is in the nature of a fringe benefit with little or no advantage to the employer’s business, then the cost of the membership is considered to be a taxable benefit to the employee and included in the employee’s income even though the dues or fees are not deductible by the employer because of paragraph 18(1)(l). The onus is on the employer and employee to establish that membership in the facility is primarily to the employer’s advantage.

You have referred to a Rulings’ opinion letter (9610725) regarding a child care facility that is managed directly by an employer and in-house child care is provided by the employer to employees at rates below market rates. Where the employer provides child care to the public at large for a fee greater than that charged to its own employees, the difference is considered to be a subsidy to the employee which must be included in the employee’s income from employment. We agree that the principle in the above-mentioned opinion letter would apply to this case, that is, where the employee is the primary beneficiary of a benefit provided by the employer free of charge or at a nominal fee, and the employer is in the business of selling the same service to the public at fair market value rates, there is a taxable benefit to the employee pursuant to paragraph 6(1)(a) of the Act. However, in the case at hand, a determination has to be made as to whether the employee or the employer is the primary beneficiary of the benefit of free recreational passes.

The taxpayer has referred to the court cases of The Queen v. Savage (83 DTC 5409), Splane v. The Queen (90 DTC 6442), The Queen v. Huffman (90 DTC 6405), Lowe v. The Queen (96 DTC 6226) and Hale v. M.N.R. (68 DTC 5326) as support for the taxpayer’s contention that free recreational passes issued to all XXXXXXXXXX employees are not taxable benefits within the meaning of paragraph 6(1)(a) of the Act. The employer contends that there is no material acquisition by employees in their personal capacity and that the principal purpose of the pass is the furtherance of the objectives of the employer and convenience of the passes to the employer as an operational procedure for the conduct of the ski resort business. In the Savage case, the Courts found that “in respect of” in paragraph 6(1)(a) were words of the widest possible scope and the payment received by the taxpayer from the employer easily fell within the category of benefit. In the Splane and Huffman cases, the general principles that emerged were that, based on the facts of those particular cases, no economic benefit of any significant value was conferred on the taxpayer and that the reimbursement of expenses could not be considered a benefit since the taxpayer was simply restored to the same economic situation the taxpayer was in before his employer ordered him to incur those expenses. In our view, these cases are not particularly relevant to the issue to be decided in respect of the XXXXXXXXXX, that is, whether the employee or the employer is the primary beneficiary of the free recreational pass and this is a determination of fact.

The taxpayer has also referred to the Lowe and Hale cases. These cases deal with the issue of whether there is a taxable benefit to an employee who has been awarded a trip by his or her employer. In addition, if a trip is awarded by an employer to a family member of an employee, the employee is considered to have received a taxable benefit. The taxable benefit may be reduced if there is conclusive evidence to show that the employee is involved in business activities for the employer during the trip. In a situation where there is conclusive evidence that an employee’s presence is required and this function is the main purpose of the trip, no benefit will be associated with the employee for the value of the employee’s trip. In the Hale case, the Court found that where an employee’s spouse accompanies the employee on a business trip, the payment or reimbursement by the employer of the employee’s spouse’s travelling expenses is a taxable benefit to the employee unless the employee went on the trip at the request of the employer and it can be established that the main purpose of the spouse’s attendance was to assist in attaining the business objectives of the trip. Accordingly, the taxable benefit relating to the value of a family member’s trip may similarly be reduced. There are numerous court cases on this issue (Hart v. The Queen (82 DTC 6237), Philp et al. v. M.N.R. (70 DTC 6237), Ferguson v. M.N.R. (72 DTC 1097), Lougheed v. M.N.R. (72 DTC 1487), Marossi v. M.N.R. (80 DTC 1693), Allettuso v. M.N.R. (81 DTC 389) and Gancher v. M.N.R. (78 DTC 1005); however, as is the case with the jurisprudence the taxpayer has referred to, these judgments were based largely on a finding a fact and therefore, in our view are not relevant to the XXXXXXXXXX situation as the essential question addressed by the courts in these cases is whether on the facts, the principal purpose of the benefit given by the employer to the employee was business or pleasure.

The determination of whether there is a taxable benefit to an employee is a question of fact that would depend on whether the employee or the employer is the primary beneficiary of the free recreational pass. As you are aware, the position in paragraphs 33 and 34 of IT-470R and paragraph 12 of IT-148R3 with respect to the treatment of these type of benefits reflects the Department’s long-standing practice of not subjecting the value of these privileges to tax as a benefit from employment. In addition, as the employer contends that knowledge of the ski resort is required in order for all employees to perform their duties of employment, in our view, it appears that the passes are not in the nature of a fringe benefit with little or no advantage to the employer’s business, and it is reasonable to assume that the employer is the primary beneficiary of providing free passes to all employees.

XXXXXXXXXX

With respect to free passes to family members of employees, in our view, the employees are the primary beneficiaries of such a benefit and as such, the value of the pass is a taxable benefit in the hands of all employees whose family members receive such passes pursuant to paragraph 6(1)(a) of the Act. As noted by the taxpayer, consistent with the recent XXXXXXXXXX audit, they have included family member passes as taxable benefits.

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 954-2898. The severed copy will be sent to you for delivery to the client.

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch