Citation: 2008TCC258
Date: 20080515
Docket: 2007-4239(IT)I
BETWEEN:
HENRY RACHFALOWSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] This appeal is from
an assessment made under the Income Tax Act for the appellant’s 2002 taxation
year. By that assessment the Minister of National Revenue included $2,047 in
the appellant’s income, the amount of the membership fees for 2002 for the golf
club, the Barrie Country Club, paid for by the employer.
[2] The appellant
joined Canada Life in 1998 as Vice‑President of the Investment
Department. He was in charge of U.S. investments. As part of the employment package he was
offered a membership, to be paid for by the employer, in a golf club of his
choice provided it offered year‑round dining privileges. He was not a
golfer and asked if he could have the cash equivalent of the initiation fees
and the membership fees. This was refused. He asked if he could have a
membership in a curling club instead but this was not permitted. He states that
he tried to decline the membership but was told that he would draw attention to
himself and would look like a maverick or a rebel. He therefore accepted a
membership in the Barrie Country Club. The initiation fees of about $5,000 were
paid by the employer as well as the membership fees for each year up to and
including 2002. The annual fees in 2002 were $2,047. He was not taxed on the golf
club membership until 2002. He used the club occasionally to entertain clients
and on a couple of occasions he played golf with clients but he gave it up
because he was such a bad player. He took his wife to the club a couple of
times and paid for the meals himself.
[3] His argument was
essentially set out in his notice of appeal as follows:
A. Reasons for the appeal
• The
membership was principally for the benefit of the employer, the Canada Life
Assurance Company.
• In order
for there to have been a value, economic benefit or material economic advantage
conferred upon the taxpayer, the taxpayer must in fact have received one, which
he did not.
• A golf
membership for someone who hates golf and does not golf is not a benefit,
unlike the availability of a car (even if not used) or a parking spot (even if
not used).
• The value
of something that is received can be much different than the value conferred.
• The
assessment, review and objection processes were neglected, and hence unduly
delayed, by CRA in this case because they mistakenly assumed that the taxpayer
was part of the larger Canada Life employee‑group appeal, which he was
not. As a consequence, the taxpayer was not provided with complete accurate
clear and timely information, nor was the case handled in a timely manner.
B. Statement of
relevant facts in support of the appeal.
• The
taxpayer hated golf, could not golf and did not golf.
• On the very
rare occasions where the facilities were used, it was for purposes of Canada
Life staff functions or for the development of business contacts for Canada
Life.
• The
taxpayer was not offered an alternative to a membership. Moreover, declining
the membership would have put the taxpayer at odds with his boss and his peers,
all of who had accepted the benefit.
[4] The basis of the
Minister’s assessment is found in paragraph 6 of the Reply to the Notice of
Appeal:
6. In determining the
Appellant’s income tax liability for the 2002 taxation year, the Minister
relied on the following assumptions of fact:
a) the
Appellant held an executive position as the Vice-President of the Investment
Department of Canada Life (“the Employer”) during the 2002 taxation year;
b) the
Employer’s policy was to provide club memberships to employees who held a
position as Vice-President of a Department;
c) the
offering letter of employment agreement provided to the Vice‑Presidents
by the Employer listed the club membership under “Executive Prerequisites”; [sic]
d) the
only condition placed by the Employer on the club membership provided to the
Vice-Presidents is that the club contain a year-round entertaining and dining
facility;
e) the
Appellant held a club membership at the Barrie Country Club;
f) the
Barrie Country Club’s annual dues were $2,049;
g) the
Employer did not include a taxable benefit for the club membership dues of
$2,049 in the Appellant’s employment income for the 2002 taxation year.
[5] It is set out more
fully in the letter from the Appeals Division of the Canada Revenue Agency:
Analysis:
1.
The membership plan
is not available equally to all the employees of Canada Life.
2.
The membership plan
was provided to you upon your promotion to Vice President. It was provided in
the course of your employment. It was “perk”, a symbol, and a demonstration
that rank has its privileges in the corporate structure; it provided you with
an economic benefit.
3.
The membership plan
was part of the benefit package to you. It is provided to you as a perquisite
without any consideration of its use in connection with your employment duties.
4.
There are no
requirement that you arranged all your formal and informal business gatherings
and internal business meetings and events in the club you belonged to. You have
a choice for the place to meet with your clients/associates. It is not
supported that it would be more cost-effective to meet with your
client/associates/staff in the club as opposed to in the other dining/meeting
facilities. You choose to use your club for the formal and informal business
gatherings as a matter of convenience only.
5.
The membership is
with you and not the employer. You have the choice of clubs. There is no
limitation of personal use. You can use it any time you want and bring anyone
with you. The benefit of the membership was something enjoyed by you and did
not flow to your employer.
6.
The maximum allowable
of the initiation fee of $5,000 and the annual fees of $2,047 is not a small
amount. It is a material economic advantage to you.
7.
There is no evidence
that any possible increase in the sales and enhance Canada Life’s profile
within the insurance industry as a result of providing the membership plan to
you. Especially, when you used the club occasionally for golfing with your
clients only.
8.
Keeping a good
relationship with the business contacts by having lunch or playing golf with
them enabled you to carry on your jobs easier. It is for your advantage. Canada
Life received no measurable monetary benefit in return from the provision of
the membership plan.
9.
The courts have
established that a benefit is a benefit even when unilaterally conferred.
Therefore, the fact that you did not like golfing should not be determinative.
In conclusion, the membership plan was
provided in the course of the employment. The membership was principally for
your advantage rather than the employer’s. The payment of membership fees by
your employer results in a taxable benefit to you under paragraph 6(1)(a)
of the Act.
[6] This relatively
small case raises a difficult and important question of principle that affects
the manner in which “benefits” are taxed where they come as part of an employment
package and are provided whether the employee wants them or not.
[7] I shall start with
the statutory provision itself. Paragraph 6(1)(a) of the Income
Tax Act, so far as is relevant, reads:
(1) There shall be included in
computing the income of a taxpayer for a taxation year as income from an office
or employment such of the following amounts as are applicable.
(a) value
of benefits — the value of board, lodging and other 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 an office or employment, except any benefit
. . . . .
The
French version reads:
(1) Sont à inclure dans le calcul du revenu d’un
contribuable tiré, pour une année d’imposition, d’une charge ou d’un emploi,
ceux des éléments suivants qui sont applicables :
a) Valeur
des avantages — la valeur de la pension, du logement et autres avantages
quelconques qu’il a reçus ou dont il a joui au cours de l’année au titre, dans
l’occupation ou en vertu d’une charge ou d’un emploi, à l’exception des
avantages suivants :
. . . . .
[8] There must therefore be a “benefit” (“avantage”) and
it must be received or enjoyed. “Receive” or “recevoir” have broad and well
established meanings. The word “enjoy” is defined in The Canadian Oxford
Dictionary as follows:
enjoy verb 1 transitive take delight or pleasure in. 2 transitive have the use or
benefit of (something pleasant or advantageous). 3 transitive experience
(enjoy good health). 4 intransitive esp. N. Amer. have
an enjoyable experience. ? enjoy oneself experience
pleasure. ? enjoyment noun [Old French enjoier give joy to or
enjoïr enjoy, ultimately from Latin gaudère rejoice]
The word “jouir” has similarly two meanings in French. The
definition of “jouir” in the Petit Robert is extensive but the meaning that I
think is most appropriate in this case is:
JOUIR DE. 1. Avoir la possession (de qqch.). ð
1. avoir, bénéficier (de), posséder. Jouir d’une bonne santé, de toutes ses facultés, d’une grosse
fortune, d’avantages. ð disposer.
Ils « ne jouissent pas d’une grande considération » (Radiguet).
— DR. Jouir d’un droit, en être
titulaire. 2. PAR
EXT. (CHOSES) Appartement qui jouit
d’une belle vue.
I think the meaning of “enjoy” or “jouir de” in
section 6 has the meaning of “have the use or benefit of” or “avoir, bénéficier
(de) posséder”.
[9] I do not think, however, that the only part of the
analysis is the meaning of “receive” or “enjoy” (“recevoir” or “jouir de”). It
is undoubtedly a relevant question whether something that is available but is
not used or taken advantage of is received or enjoyed. The analysis does not,
however, stop there. The thing that is received or enjoyed must be a benefit in
the first place. It is on this question that I think one may more usefully
concentrate. In the result then, we have three questions: is it a benefit, is it
received or enjoyed and what is its value? The three questions do not exist in
hermetically sealed compartments. They merge into each other by imperceptible
degrees so that in a sense they become different aspects of one question.
[10] The question then is to determine in what circumstances
something that is part of the employment package offered by an employer truly
is a benefit. The short and, I am sorry to say, somewhat unsatisfactory answer
is “sometimes it is and sometimes it is not. It all depends”.
[11] I accept the appellant’s assertion that he did not want
the golf club membership, that he asked for the cash equivalent and was refused
and that he tried to decline the membership outright and was persuaded not to
do so because he would stand out and look like a maverick and would not fit
into the corporate culture. I also accept that he used the club a few times for
entertaining clients and on a couple of occasions he took his wife to dinner
there.
[12] There have been many cases under paragraph 6(1)(a)
and they are not necessarily easy to reconcile. I would say, looking at the
multitude of cases and fact situations that arise under paragraph 6(1)(a),
that they fall into two principal categories. Those that give taxable “benefit”
a broad interpretation and those that give it a restricted interpretation.
[13] At one end of the spectrum is Dunlap v. The Queen,
98 DTC 2053, where Sarchuk J. held that an employee’s attendance at a Christmas
party put on by the employer was a taxable benefit. Similarly, in Faubert v.
The Queen, 98 DTC 1380, it was held that reimbursement by Revenue Canada of the cost of an auditor’s
attendance at an accounting course was a taxable benefit.
[14] At the other end, we find Romeril v. The Queen,
99 DTC 221, in which the general manager of a General Motors dealership went,
along with his wife, to Europe to attend a convention. The trip included a
cruise and sightseeing. This court held that the value of the trip was not a
taxable benefit since it related primarily to the business of General Motors. Bowie J. said at page 223:
[8] Counsel referred me to a number
of decisions of this Court, and of the Federal Court, which deal with the
question whether attendance at a particular convention was a taxable benefit to
an employee. As the Federal Court of Appeal recently observed, the answer to
this question is largely fact driven. The question which a trial judge must
answer in each case was succinctly formulated by Stone, J.A. in the Lowe
case in these words:
. . . The essential
question in the present case, it seems to me, is whether on the facts the
principal purpose of the trip was business or pleasure. . . .
This, of course, does not mean that
any pleasurable activities undertaken which would normally be associated with
vacationing and which are enjoyed by the taxpayer during a business convention
should be treated as a benefit, so long as the business aspect predominates.
[9] Considering all the evidence in
this case, I am satisfied that the primary reason for the Appellant's
attendance at this convention was as part of the fulfilment of his duties as
the general manager of CMP. . . .
[15] Lowe v. The Queen, 96 DTC 6226, to which Bowie
J. referred also involved the taxability of a trip for the taxpayer and his
wife paid for by the employer. The Federal Court of Appeal, reversing the Tax
Court of Canada, held that the trip was not a taxable benefit to the appellant.
Stone J.A. said at page 6230:
. . . It seems to me in light of
existing jurisprudence that no part of the appellant's trip expenses should be
regarded as a personal benefit unless that part represents a material
acquisition for or something of value to him in an economic sense and that if
the part which represents a material acquisition or something of value was a mere
incident of what was primarily a business trip it should not be regarded as a
taxable benefit within subparagraph 6(1)(a) of the Act.
[16] In deciding as it did in Lowe, the Federal Court
of Appeal referred to Hart v. The Queen, 82 DTC 6237, again a case
involving a trip paid for by the employer. In Hart, the court held the
trip was a taxable benefit. One could, superficially, distinguish Lowe and
Hart but frankly they cannot be reconciled and I do not think it is
useful to try to do so. In Pezzelato v. The Queen, 96 DTC 1285 at 1289,
I said:
There have been a number of
cases in this court dealing with employer subsidized mortgage interest where
employees were moved from Calgary to Toronto, owing to the increased costs of purchasing a house in Toronto. Some or all of these cases
have been appealed to the Federal Court of Appeal. I shall not comment on them
beyond noting that all but one (Krull) held that the mortgage interest
subsidy was not taxable.
On which side of the line
does Mr. Pezzelato's case fall? I shall begin by observing that Ransom,
Splane, Phillips and Blanchard are difficult, if not impossible to
reconcile. It would appear that the Federal Court of Appeal, in Phillips,
had a similar difficulty. The problem does not become apparent until one tries
to extract from each decision a ratio that does not conflict with the ratio
that one extracts from each of the others.
[17] Instead of trying to find a consistent common thread in
these and in the myriad of other employee benefit cases one may as well accept
that philosophical differences do exist among judges and that although the
expression “material acquisition conferring an economic benefit” used in many
of the cases has a fine and impressively judicial ring to it, its repetition is
no substitute for asking “just what did the employee get out of the alleged
benefit that ought to increase his or her income?”. This is a practical, common
sense sort of question that calls for a practical common sense answer.
[18] During the argument I put to both the appellant and
counsel for the respondent the hypothetical case of three vice‑presidents of the insurance
company, all of whom are offered and accept a membership in a golf club. One is
an enthusiastic golfer who spends as much time as possible on the golf course.
One is an indifferent player who uses the club two or three times a year. The
third plays no golf and does not use the club at all. I asked if the tax
treatment of the three should differ. Counsel for the respondent answered that
it should be the same because the test is the availability of the benefit, not
the actual use. This is, I am sure, the orthodox departmental view, but does it
really bear close scrutiny? I have serious doubts as a matter of common sense
that it does. I have a fair idea what our friend on the Clapham omnibus would probably
say. I think the more reasonable view is that the value to a particular
taxpayer of such a benefit under paragraph 6(1)(a) should be
determined on an individual basis of actual use as opposed to availability.
This position is, I believe, consistent with the decision in McGoldrick v.
The Queen, 2003 DTC 1375 (T.C.C.) aff’d., 2004 DTC 6407; 2006 DTC 2045, where
the question was the taxability of the value of free meals provided to an
employee. In the Federal Court of Appeal, Malone J.A. said at pages 6408 to
6409, 2004 DTC:
[9] As a general rule, any
material acquisition in respect of employment which confers an economic benefit
on a taxpayer and does not constitute an exemption falls within paragraph 6(1)(a)
(see The Queen v. Savage, 83 DTC 5409 at
5414 (S.C.C.)). In this case, the benefit is the money saved by the taxpayer in
preparing a lunch or in making a food purchase from the casino vending machines
while at work. Where something is provided to an employee primarily for the
benefit of the employer, it will not be a taxable benefit if any personal
enjoyment is merely incidental to the business purpose (see Lowe v. The
Queen, 96 DTC 6226 at
6230). The Tax Court Judge found that although the meals were provided for a
business purpose, the personal benefit to Mr. McGoldrick could not be said
to be incidental. That was a factual finding, and no palpable and overriding
error on the basis of the evidence has been established. Indeed, Mr. McGoldrick
voluntarily signed an authorization for the employee meal tax benefit at the
commencement of his employment.
[10] In oral argument, the
appellant frequently noted that, in his view, the meals were not worth the
$4.50/day ascribed by the employer as the taxable benefit. That amount was
based on the cost to the employer of providing the meals and seasonal gifts,
including the PST and GST. He also indicated that although assessed a tax
benefit on the basis that he received such a meal every day he worked more than
five hours, in fact he often declined to go to the cafeteria. As a person
living alone, he often did not take the turkeys or hams offered at holidays.
[11] He did not, however, raise a quantum issue in the notice of
appeal to the Tax Court. Before that Court, he specifically noted that he was
confining his evidence and argument to the question of whether the meals and
seasonable gifts were a taxable benefit and did not address the quantum of the
benefit. While he might well have been able to challenge the value of the
benefit received if it had been an issue before the Tax Court, that was not the
case and accordingly that avenue of appeal is not open to him. Of course, this
does not preclude him from objecting to the quantum of taxable benefits
assessed in subsequent years if he is not out of time to file such objections.
[19] Mr. McGoldrick acted on the suggestion of Malone
J.A. and appealed an assessment for a subsequent year. It came on before
McArthur J. and he held that the value of the benefit should be reduced by one
half because he availed himself of the meals provided only one half of the
time. Applying that reasoning to Mr. Rachfalowski’s case, the benefit to
him of the membership in the golf club was minimal at most.
[20] One further line of inquiry that might possibly be
helpful in attempting to rationalize the seeming inconsistencies in the case
law involves a consideration of the sort of benefit that is being conferred.
(a) Meals.
Generally, they are taxable but not if they involve a reimbursement of the cost
of meals taken when traveling on the employer’s business. In McGoldrick, supra, there are statements
that indicate that one can take into account the value to the taxpayer of the
particular benefit.
[21] The question of food
and lodging has arisen in other countries. In Arthur Benaglia v. Commissioner
of Internal Revenue, (1937) 36 B.T.A. 838, the U.S. Board of Tax Appeals
held that the value of rooms and meals provided to a hotel manager and his wife
at a resort hotel in Hawaii did not form part of his taxable income because his
living in the hotel and taking his meals there were necessary to the
performance of his duties and were for the convenience of the employer. At pages
839-840, Judge Sternhagen said:
From the evidence, there remains no
room for doubt that the petitioner’s residence at the hotel was not by way of
compensation for his services, not for his personal convenience, comfort or
pleasure, but solely because he could not otherwise perform the services
required of him. The evidence of both the employer and employee shows in detail
what petitioner’s duties were and why his residence, in the hotel was
necessary. His duty was continuous and required his presence at a moment’s
call. He had a lifelong experience in hotel management and operation in the
United States, Canada, and elsewhere, and testified that the
functions of the manager could not have been performed by one living outside
the hotel, especially a resort hotel such as this. The demands and requirements
of guests are numerous, various, and unpredictable, and affect the meals, the
rooms, the entertainment, and everything else about the hotel. The manager must
be alert to all these things day and night. He would not consider undertaking
the job and the owners of the hotel would not consider employing a manager
unless he lived there. This was implicit throughout his employment, and when
his compensation was changed from time to time no mention was ever made of it.
Both took it for granted. The corporation’s books carried no accounting for the
petitioner’s meals, rooms, or service.
Under such circumstances, the value
of meals and lodging is not income to the employee, even though it may relieve
him of an expense which he would otherwise bear. In Jones v. United States, supra, the subject was fully considered in determining that
neither the value of quarters nor the amount received as commutation of
quarters by an Army officer is included within his taxable income. There is
also a full discussion in the English case of Tennant v. Smith, H.L.
(1892) App. Cas. 150, III British Tax Cases 158. A bank employee was required
to live in quarters located in the bank building, and it was held that the
value of such lodging was not taxable income. The advantage to him was merely
an incident of the performance of his duty, but its character for tax purposes
was controlled by the dominant fact that the occupation of the premises was
imposed upon him for the convenience of the employer. The Bureau of Internal
Revenue has almost consistently applied the same doctrine in its published
rulings.
I think the principle that can be
extracted from these cases – Canada, United Kingdom and United States – is
that a “benefit” is not included in an employee’s income if it is primarily for
the need or convenience of the employer. From the passage from Lowe quoted
in paragraph 15 above, this is so even where it represents a material
acquisition or something of value.
(b) Parking.
Where parking is provided, a distinction based on whether or not a particular
space has been assigned seems to have arisen. If there is a difference in
principle between the two it is hard to discern. While it is probably too late
to refight this battle, I still have serious doubts whether providing an
employee with a parking space is ever a taxable benefit.
(c) Trips
to conventions and business meetings. The more recent and I think more
sensible view is that they are not taxable if they serve a significant business
purpose of the employer. How any particular case is decided depends on what
emphasis a judge puts on the business as opposed to personal use.
(d) Home
Relocation Costs. These include lump sum payments, payments to cover losses
and assistance with mortgage interest. The cases in this area were reviewed in Pezzelato.
Their tax treatment depends on very specific findings of fact.
(e) Golf
Club Membership. Interpretation Bulletins are not binding but they can be
useful. Paragraphs 33 and 34 of IT‑470R read:
33. Where employees generally are
permitted to use their employer’s recreational facilities (e.g. exercise rooms,
swimming pools, gymnasiums, tennis, squash or raquetball courts, golf courses,
shuffle boards) free of charge or upon payment of a nominal fee, the value of
the benefit derived by an employee through such use is not normally taxable.
The taxable benefit received by an employee who is provided with board, lodging
and accommodation is discussed in ¶s 4 to 6 and 10 above.
34. Similarly, where the employer pays
the fees required for an employee to be a member of a social or athletic club
the employee is not deemed to have received a taxable benefit where the
membership was principally for the employer’s advantage rather than the
employee’s. See also IT‑148R2, “Recreational Properties and Club Dues”.
[22] Assuming that paragraph 34 is an accurate statement of the
law — and, I think it is (it is consistent with what Malone J.A. said in McGoldrick
above and the decisions in Lowe and Romeril) — the
question is whether the determination that an employee’s membership in a golf
club is “principally for the employer’s benefit or the employee’s” is an
objective one or whether it depends on the employee’s or the employer’s
subjective view. I think weight should be given to the views of both parties
but they are not determinative and by and large it requires an objective determination.
[23] From the appellant’s point of view the membership was
clearly not an advantage to him. He did not even want it. It is a fair
inference that the employer wanted its senior executives to belong to a golf
club. It enhanced the company’s image and prestige and provided a place for its
executives to entertain clients of the company. I do not think the employer’s
insistence that he join a golf club (or at all events the very strong pressure the
employer put on him to do so) is particularly attributable to paternalistic altruism.
Objectively, I think the membership in the golf club was primarily for the
benefit of the employer.
[24] I have concluded that the appeal should be allowed.
There are two bases for doing so. In the first place the membership in the golf
club was clearly primarily for the benefit of the employer. Even if I am wrong
in that conclusion, the benefit, if any, to the appellant of the membership in
the golf club was minimal at most and did not constitute a taxable benefit under
paragraph 6(1)(a) of the Income Tax Act.
[25] The appeal is therefore allowed and the assessment for
the 2002 taxation year is referred back to the Minister of National Revenue for
reconsideration and reassessment to delete from the appellant’s income the
amount of $2,047 paid to the Barrie Country Club as membership dues on the
appellant’s behalf.
[26] The appellant is entitled to his costs, if any, in
accordance with the tariff.
Signed at Ottawa, Canada, this 15th day of May 2008.
“D.G.H. Bowman”
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