With Halloween behind us, invitations to the upcoming corporate holiday party
-- formerly known as the Christmas party-- have already begun to circulate.
Before you accept the invitation to share an evening of food, drink and
possibly debauchery with your colleagues, you want to make sure that you get
stuck only with a hangover the next morning -- not a tax bill.
In 1998, the taxable benefit associated with attending the company-paid
holiday party came to widespread attention with a decision of the Tax Court of
Canada involving Peter Dunlap, an employee of Modern Mechanical Inc.
Mr. Dunlap, along with a guest, attended his employer's Christmas parties in
1992 and 1993, held at the Ottawa Congress Centre and Ottawa Westin Hotel. Each
year, the party consisted of a dinner, open bar and overnight accommodations at
the Westin. All expenses associated with the dinner, including liquor and the
hotel room, were paid for by Mr. Dunlap's employer. The total cost of the
parties each year was just under $25,000, which Modern Mechanical deducted as a
business expense. The company did not assess any taxable benefit to Mr. Dunlap
for either tax year.
As a result, the Canada Revenue Agency stepped in and assessed a taxable
benefit of about $300 each year "by virtue of [Mr. Dunlap's] and his guest's
attendance at the Christmas parties and the said eating of the food, drinking of
the liquor, other beverages and the enjoyment of other amenities previously
referred to herein, and the overnight stay at the Westin Hotel."
The CRA arrived at the taxable benefit amount, which was not disputed, by
dividing Modern Mechanical's total costs by the number of attendees.
Mr. Dunlap attempted to argue that "he received no economic benefit from
attending the Christmas parties provided by the employer for its employees since
no economic gain had accrued to him by virtue thereof." In other words, since
his net worth was not increased, he was not in receipt of a taxable benefit.
Mr. Dunlap also argued that it was inappropriate to include the cost of the
hotel room in the value of the taxable benefit because it was "inconsistent with
good public policy since the employer had a duty to ensure that its employees
... did not risk driving home from the parties while under the influence of
Unfortunately, the court disagreed with both arguments. The judge referred to
the Income Tax Act, which states that an employee must include in income "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."
This wording was found to be sufficiently broad enough to include the value
of the party in Mr. Dunlap's income.
In response to this decision, in December, 1998, the CRA introduced its
current policy, which states that an employer-provided party or other social
event, which is available to all employees, will be accepted as a non-taxable
privilege if the cost per employee is "reasonable in the circumstances." It then
set a cap of $100 per person that an employer could spend on such a party.
The CRA cautioned that any parties costing more than that per person are
generally considered to be "beyond the privilege point" and could result in
taxable benefits. This may have contributed to the trend in recent years whereby
employees are asked to buy tickets to the company party, say at $25 per guest,
which represents a substantially subsidized price. This partially offsets the
company's cost but also helps avoid a taxable benefit to the employee.