Citation: 2010 TCC 455
Date: 20100901
Dockets: 2008-2505(IT)G
2008-2508(IT)G
BETWEEN:
CARROLL A. SPENCE,
DAVID JOHN RATCLIFFE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
These appeals are from
reassessments under the Income Tax Act, R.S.C. 1985
(5th Supp.), c. 1 , as amended (the “Act”), dated
November 6, 2006 for the 2003, 2004 and 2005 taxation years of the
Appellants.
[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.
[3]
The main issue in these
appeals concerns the valuation of employment benefits. Since it has been
recognized by the Appellants that the 50% discount on the tuition fees for their
children constitutes a benefit and that that benefit is taxable, the only issue
is the quantification of that benefit. Should the value of the benefit be:
the fair market value (“FMV”) of
the discount; or
the difference between the cost to
the School and the price paid by the Appellants?
[4]
As a general rule, any
material acquisition that is attributable to employment and that confers an
economic benefit on a taxpayer falls within paragraph 6(1)(a) of
the Act. An employment benefit is taxable whether it is monetary or non‑monetary
in nature. The discount on tuition fees at issue herein is taxable under
paragraph 6(1)(a) of the Act, which reads as follows:
6(1) Amounts to be included as income from office or employment -- 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 . . .
[5]
Paragraph 6(1)(a)
of the Act refers to the “value” of the benefit rather than to its “fair
market value”. In the French version of the Act, the term “valeur” is
used, which has the same meaning as the term “value”. In Steen v. The Queen,
86 DTC 6498, Justice Rouleau of the Federal Court Trial Division examined
extensively whether the term “value” had a different meaning than “fair market
value” and concluded that such was not the case in the context of an employee
benefit arising from a stock option plan (at page 6503):
The plaintiff argued before me that because the word “value” is used
in paragraph 7(1)(a) rather than the term “fair market value”,
which is used in several other provisions of the Act, some difference in
meaning was intended by the legislators. However, for most purposes concerning
provisions of the Act the term value has been held to mean “market value” or
“fair market value”. . . .
That decision was affirmed by the Federal Court of
Appeal, 88 DTC 6171.
[6]
In Interpretation
Bulletin IT‑470R (Consolidated) — Employees’ Fringe Benefits, the
Canada Revenue Agency (“CRA”) states that it will take the fair market value
approach to the valuation of employment benefits in the form of discounts on
tuition:
20. Where an educational institution which charges
tuition fees provides tuition free of charge or at a reduced amount to an
employee of the institution, or to the spouse or children of the employee, the
fair market value of the benefit will be included in the employee’s income.
[7]
While the courts
generally support the fair market value approach, they have also taken into
account certain other factors in order to discount the fair market value of the
benefit. These factors include the following:
-
the lack/loss of quiet
enjoyment of the benefit by the employee (Mommersteeg et al. v. The Queen,
96 DTC 1011 (T.C.C.); Adler et al. v. The Queen, 2007 DTC 783
(T.C.C.); Rachfalowski v. The Queen, 2008 DTC 3626 (T.C.C.); Philp
v. M.N.R., [1970] C.T.C. 330 (Ex. Ct.));
-
the loss of privacy (Schutz
et al. v. The Queen, 2009 DTC 19 (T.C.C.); and
-
the lack of a retail
market for the benefit (Wisla v. The Queen, 2000 DTC 3563 (T.C.C.).
[8]
In employment benefit case
law, the fact that the employer also receives a benefit is not generally a
factor used for discounting the value to the employee. By contrast, when it
comes to shareholder benefits in subsection 15(1) of the Act, the
expression “amount or value” is used with regard to the determination of the
benefit to be included in the shareholder’s income, and the courts have a tendency
to calculate the amount or value of the benefit by reference to the return on
the amount the corporation paid (Gillis v. The Queen, 2006 DTC 2093
(T.C.C.); Jarjoura v. R., [2009] 1 C.T.C. 2420 (T.C.C.) and Youngman
v. The Queen, 90 DTC 6322 (F.C.A.)).
[9]
In certain cases, the
courts have concluded that a benefit is not to be included in an employee’s
income if the benefit is conferred primarily to meet a need of the employer or for
the employer's convenience (Rachfalowski, cited above). In such
circumstances, the benefit to the employee is merely incidental or ancillary to
the convenience for the employer.
[10]
On occasion, the courts
have departed from the FMV approach and have used the cost saving approach, which
looks at the cost that the employee would have incurred if he had had to
purchase a comparable benefit (Schroter et al. v. The Queen, 2009 DTC
205 (T.C.C.) and McGoldrick v. The Queen, 2004 DTC 6407 (F.C.A., obiter
dictum). Another approach used by the courts to evaluate a benefit is
the cost approach, which is the approach suggested by the Appellants and which
consists in valuing the benefit at its cost to the employer. This method was
used by this Court in Detchon v. R., 1995 CarswellNat 958, [1996] 1
C.T.C. 2475, Stauffer v. R., [2002] 4 C.T.C. 2608 and Dunlap v. The
Queen, 98 DTC 2053, and by the Exchequer Court in Waffle
v. M.N.R., 69 DTC 5007.
[11]
It is acknowledged by
the parties that there is no statutory provision setting out how a benefit is
to be calculated and that the employment benefit case law is far from being
consistent. Generally, the courts have used the FMV approach, sometimes applying
a discount, and occasionally they have used the cost approach. Where an
employer has to pay an amount to a third party with whom that employer is dealing
at arm’s length, there is no disparity between the cost to the employer and the
FMV.
[12]
Another issue is whether
or not the shareholder benefit case law is applicable for the purpose of
calculating an employment benefit considering the fact that the legislation
dealing with employment benefits refers only to the “value” of the benefit
while the shareholder benefit legislation provides that the “amount or value”
of the benefit is to be included in the shareholder’s income.
[13]
Ms. Margaret Whitley,
Director of the School, testified. She briefly explained the origin of the
Montessori education system and what makes it so unique. She also provided
information concerning the education programs followed, the specialized
materials used, the mandatory training received by the teachers, the
recruitment of students and the competition faced by the School in the London area. The School is one of the largest Montessori
schools in Canada with 370 students (full-time and part-time)
and 45 teachers. The School has no religious affiliation and no charitable
status and does not receive government funding.
[14]
Ms. Whitley also
explained that the teachers have a formal employment contract with the School
and that they are aware of the School’s policy of reduced tuition fees for the children
of staff. Ms. Whitley further stated that the teachers are not required to enrol
their children at the School. However, the reduced tuition fee is an incentive
for them to do so because it would not be good for the image of the School and
for the recruitment of students if teachers’ school-age children attended
public or other schools.
[15]
According to Ms.
Whitley, most of the teachers who have children aged from 2 to 6 years enrol
them at the School, but 20% of them can no longer afford to do so when their
children reach 7 years of age. At any given time, only 50% of the teachers are
able to keep their children in the School, and teachers’ children always
represent less than 10% of all students.
[16]
Finally, Ms. Whitley
confirmed that the salary paid the School's teachers represents about half the
salary of teachers in the public system and that no additional salary is paid
to teachers who do not have children at the School.
[17]
Dr. Roger More of Roger
More and Associates testified as an expert witness. He described the factors
considered by parents in choosing a school for their children, namely:
location, distance, cost, and the experiences of other parents, relations,
friends or colleagues. He considered that the risk of rejection is higher at
the School due to its education program. Parents are concerned about how their
children will adapt when, at the end of the program, they go to college and
face tests and exams. According to him, it is very important for the School
that teachers enrol their children at the School. For certain parents, the fact
that children of teachers do not attend the School is an important factor in
their rejection of the School. No supporting statistics or data were provided with
regard to the importance of that factor.
[18]
Both Appellants
testified. Carroll Spence stated that she has been teaching at the School for
16 years. In addition to her normal teaching responsibilities, she was also
responsible for the parents’ education sessions and she was involved as well in
the sessions for parents of prospective students. She stated that she is often
asked by such parents if her own children are enrolled at the School. David
Ratcliffe explained that his son was enrolled at Casa Little and that the cost
was equivalent to what he would normally be charged for daycare but the
education program was much better.
The Detchon Decision
[19]
A review of the Detchon
decision is required because its facts are very similar to those in the case at
bar and because the cost approach was accepted therein for the purpose of
determining the value of the benefit received by teachers in the form of free
tuition fees for their children. The Detchon decision was rendered in
1995 by Judge Rip (now Chief Justice of this Court). Detchon was a
general procedure case.
[20]
In Detchon, the appellants
were teachers at Bishop’s College School (“BCS”), a private school in Quebec and a registered charity. BCS had a policy of
encouraging the teachers’ school-age children to attend BCS free of charge. The
teachers at BCS had certain obligations; among these were living on campus,
attending chapel every morning, coaching sports and being available 24 hours a
day, seven days a week. Salaries paid to the teachers were not dependent on
whether their children were attending BCS. The children of BCS staff were fully
integrated into the school’s general population. They attended the same classes
and followed the same program as paying students. During 1985 and 1986, there
were 14 or 15 children of BCS staff who attended the school out of a total of approximately
300 students, of which 240 were boarders and 60 were day students.
[21]
In Detchon, the
appeals were allowed and the assessments referred back to the Minister of
National Revenue for reassessment on the basis that the value of the benefit
was the lower of the average cost per student to BCS for each year and the
value actually assessed.
[22]
The following extracts from
Judge Rip’s decision are helpful in understanding his rationale:
49 It is quite a stretch to consider that only BCS obtains a
benefit when its teachers’ children attend the school. While it may be useful
for its purposes to have its teachers’ children attend BCS, it is no less an
advantage for the employees of BCS to avail their children of a product that
demands a good amount of money in the education marketplace.
. . .
51 I agree with Me Lefebvre that the free tuition was a
benefit for purposes of paragraph 6(1)(a). The free tuition represented
something of value in a material or economic sense to the appellants. . . .
. . .
53 I do not agree with the appellants’ counsel that the value
of the benefit is the additional or incremental cost to BCS of having the
appellants’ children attend the school. . . .
54 I do not agree with Me Gauthier that the value of the benefit is the cost of obtaining
education elsewhere in Quebec. .
. .
. . .
57 There is no obligation for an employer to charge its
employees for a good or service any more than its actual costs of the good or
service. The employer need not add any profit element and indirect overhead
costs to any good or service it provides to its employees: ABC Steel
Buildings Ltd. v. Minister of National Revenue, [1974] C.T.C. 2176, 74
D.T.C. 1124 (T.R.B.). . . .
[23]
The Respondent’s
counsel argued that this Court is not bound by the Detchon decision
because it is based on a decision of the Tax Review Board (ABC Steel
Buildings Ltd. v. Minister of National Revenue, 1974 CarswellNat 284, [1974]
C.T.C. 2076, 74 DTC 1124) dealing with shareholder benefits taxed under
subsection 8(1) of the Act (now subsection 15(1)).
[24]
The facts of the ABC
Steel Buildings case are summarized in paragraph 2 of the decision:
2 Thomas P. Murphy (hereinafter referred to as “Murphy”) was the
controlling shareholder of ABC Steel Buildings Limited (“ABC”). Prior to
November 11, 1968 Murphy owned a building which housed a steel fabrication
plant in the village of Bolton, Ontario and carried on the business of
fabrication and erection of steel buildings as a sole proprietorship under the
names of “Amalgamated Building Company” and “ABCO Steel”. On April 1, 1964
Murphy caused ABC to be incorporated and transferred the said business to his
new company; however he retained ownership of the land and buildings which he
rented to ABC. During ABC’s 1968 and 1969 fiscal years, Murphy caused an
extension to be made to his building and plant comprising an outdoor crane, a
plate shop (an extension to the structural shop) and a small joist shop. The
assessments levied by the respondent against ABC were based on the assumption
that Murphy who, as I just mentioned, held title to the land and buildings, had
not fully reimbursed ABC for all costs incurred by it on account of the said
extensions and that a taxable benefit had therefore been conferred on Murphy .
. . .
[25]
The evidence in ABC
Steel Buildings was that, because of the use of steel obtained at salvage
cost and because nothing was charged for indirect overhead or profit, the appellants
were able to build the extensions for about one-third of what a customer would
have had to pay.
[26]
Mr. Frost of the Tax
Review Board made the following statement in paragraph 14:
. . . If a taxpayer is able to save money through his own efforts or
the instrumentality of a company he controls, he should not be taxed on an imputed
benefit which is the result of his personal efforts to limit his expenses to
the actual costs incurred. . . .
[27]
Counsel for the Appellants
argued that the Detchon decision is good law because it was not appealed
and that this Court is for all practical purposes bound to follow it. He
referred to the following decisions in which the courts were bound by the stare
decisis rule: Stuart v. Bank of Montreal (1909), 41 S.C.R. 516; Bernier
Estate v. M.N.R., 90 DTC 1220 (T.C.C.); Heath et al. v. The Queen,
90 DTC 6009 (B.C.S.C.); The Queen v. Farm World Equipment Ltd. et al.,
97 DTC 5360 (S.C.Q.B.); Mourtzis v. The Queen, 94 DTC 1362 (T.C.C.).
[28]
Upon reading the
decisions referred to in the preceding paragraph, it seems clear to me from Judge
Rip's pronouncement in Detchon, that the valuation of the benefit at the
average cost per student was an appropriate method of valuation, was not in the
nature of an obiter dictum but was a significant, if not primary,
element in the ratio decidendi of the case.
[29]
Our courts have on many
occasions recognized that a judge is not legally bound under the principle of stare
decisis to follow a decision of another member of the same court, but such
a decision should be followed in the absence of strong reason not to do so. No
such strong reason for not following the Detchon decision has been
identified. No subsequent decisions have affected the validity of that decision
and it has not been demonstrated that there was a failure therein to consider some
binding decision or relevant statute.
[30]
In the interest of
justice, I feel constrained to follow and uphold the decision of Judge Rip and the
matter of the appropriate valuation method must be left for a higher court to
decide.
[31]
In the absence of such
a decision, I would dismiss the appeals and decide the matter as proposed by
counsel for the Respondent considering the fact that the reduced tuition
represented a substantial benefit and was fully integrated into the
remuneration package of the teachers. The teachers accepted a lower salary in
exchange for a greater fringe benefit.
[32]
I do not think that the
shareholder benefit case law should be completely disregarded for the purpose
of determining the value of an employment benefit, but a certain degree of
caution is required as the benefits to be valued are different. The term
"amount", which is the distinctive element as regards shareholder
benefits is defined in subsection 248(1) of the Act as meaning "rights
or things expressed in terms of the amount of money or the value in terms of
money of the right or thing". The term "amount" refers to anything
expressed in terms of money. For that reason, the expression "amount or
value" as used in subsection 15(1) would seem to be broader in scope.
[33]
For the foregoing
reasons, the appeals are allowed, with costs, and the reassessments are
referred back to the Minister of National Revenue for reconsideration and
reassessment.
Signed at Ottawa, Canada, this 1st day of September 2010.
"Réal Favreau"
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