With flurries in the forecast for parts of Canada this week, thoughts quickly turn to outdoor recreation, with skis and snowboards soon to replace bikes and scooters. It’s therefore timely that last week, the Canada Revenue Agency issued a technical interpretation letter in response to whether ski privileges offered to a ski hill operator’s employees and their families would be considered to be a taxable employment benefit.
The CRA’s response will be of interest to any employee who may also enjoy a fringe benefit such as a fitness club membership and wondered whether that benefit is taxable.
Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.”
In determining whether an employee must include in their income the value of a benefit received, the CRA looks at three determining factors: does the benefit gives the employee an economic advantage, is the benefit measurable and quantifiable and does the benefit primarily benefit the employee (or a non-arm’s length person, such as a relative) as opposed to primarily benefit the employer.
Based on these factors, the CRA’s long-standing position when it comes to employer-paid club memberships is that if your employer pays or reimburses you for club dues or membership fees, it is typically considered to be a taxable benefit from employment and must be included by your employer on your T4 slip. There are, however, a few administrative exceptions to this rule.
First, if an employer provides an in-house recreational facility that is available to all employees, no taxable benefit will be assessed. Similarly, if your employer pays a fee to an external recreational facility that is available to all employees and the membership is in the employer’s name, no benefit will be assessed to the employees.
The final, and most difficult exception to prove, is when dues are paid for membership in a social or athletic club for select employees, such as the executive team, and it can be “clearly demonstrated that the membership is for the employer’s advantage.” In such cases, no taxable benefit will arise. The onus is both on the employer and employee to prove that the membership is primarily to the employer’s advantage.
Note, however, that the CRA does not consider an employer to be the primary beneficiary in situations where an employee’s membership in a fitness facility provides only an indirect benefit by becoming physically healthier as a result of using the club’s facilities, even though the argument has been made that the employee’s “good health provides benefits to (the) employer through reduced stress and disability leave.” In these cases, a taxable employment benefit will generally be assessed.
In this most recently-published CRA letter, the Agency was asked by a ski hill operator, which operates a facility that is open to the public, whether a season ski pass provided to its employees and their family members is a taxable benefit and if it was, whether the value of the pass can be based on the cost to the employer, which presumably is nominal.
According to the letter, which was issued in French, the operator felt that the season pass should not constitute a taxable benefit to the employee since it benefits primarily the employer because the employer requires each employee to have a “thorough knowledge of the ski slopes and their conditions in order to be able to answer customers’ questions.” Alternatively, the operator argued that the ski area should be considered to be a recreational or internal fitness facility of the employer, which fits into the first exception above.
The CRA responded that it’s reasonable to consider that the benefit conferred on the employee is an economic benefit and is both measurable and quantifiable; however, the question of whether the season pass benefits primarily the employer or the employee is a “question of fact.” Nonetheless, the CRA said that it had: “some doubts that a season pass is necessary for the performance of the duties of all the groups of employees … and (had doubts) that, in all cases, the benefit accrues primarily to the employer.”
Notwithstanding this view, however, the CRA went on to say that the operator likely falls into the first exception above, provided the employer makes the recreational facilities (which, it conceded, can include a ski centre) available to all its employees, free of charge (or for a nominal fee). This CRA administrative position, however, does not apply to situations where recreational facilities are made available to a limited number of employees or a group of employees in particular, nor is it applicable to the portion of the benefit offered to family members.
As for the value of the benefit being based on the presumably negligible cost it represents to the employer, the CRA disagreed and said that this cost would “not be representative of the value of the benefit received by the employee” or their family and thus the fair market value of the pass ought to be used to value this fringe benefit, particularly in the case of family members’ passes, which would be taxable.