Fringe Benefits get a Pass

National Post


A lawsuit launched recently by Porter Airlines Inc.'s chief executive Robert Deluce against Air Canada seeking $5-million in damages or reinstatement of his and his wife's lifetime Air Canada flight passes has piqued the curiosity of tax geeks who wonder how such a benefit is valued and, most importantly, taxed.

Mr. Deluce and his wife were given the passes by Air Canada in 1986 when he sold his controlling interest in Air Ontario Ltd. and Austin Airways to Air Canada. The passes were revoked by Air Canada on Sept. 1, 2009, due to their "misuse" and a "breach of terms and conditions" under which they were granted, according to the statement of claim filed with the Ontario Superior Court of Justice.

So, what is the value of these passes?

Mr. Deluce stated that he and his wife have used, on average, $11,000 worth of travel a month on Air Canada since the passes were awarded.

So presumably, to arrive at the fair market value when the passes were issued, Mr. Deluce would have taken the present value of $11,000 of monthly travel for life and discounted it back in 1986 to arrive at some approximation of fair market value. Given the $5-million value he feels it's worth today, it must have been worth considerably more back in 1986.

The Canada Revenue Agency's position on free transportation passes is discussed in its Interpretation Bulletin "Fringe Benefits." The CRA states that airline passes available to airline employees are only taxable if the employee travels on a space-confirmed basis and is paying less than 50% of the economy fare on that carrier for that trip.

By contrast, employees of bus and rail companies are never taxed on the use of their free passes, presumably due to the lower value associated with such passes compared with air travel.

Finally, the CRA states that retired employees of transportation companies will not be taxed on pass benefits under any circumstances.

Mr. Deluce, however, was in a unique position as he received his passes not as an employee but as part of the proceeds of the sale of his shares. Technically, it seems that the fair market value of the lifetime travel should have been estimated at the time of sale and the present value of that benefit included as part of the capital gain Mr. Deluce would have reported on the sale of the shares back in 1986.

Alternatively, while Mr. Deluce may have received his passes as part of the consideration for his shares, it's possible that CRA may have given him a break and considered the value of passes non-taxable, adopting a broad interpretation of its policy for retired employees -- notwithstanding that he was not a retired employee of Air Canada.

Mr. Deluce could not be reached for comment.