Does your employer provide you with a free or subsidized membership in a
health club? If so, have you ever wondered whether such fees, paid for by your
employer, are considered to be a taxable benefit from employment? Well, the Tax
Court of Canada had to answer this question last month in a case involving a
squash club membership.
As owner and president of Specialty Construction Products Ltd., a wholesale
distributor, Joe Solomon's main role is to procure business for the company,
which requires him to liaise with architects and engineers.
In both 1998 and 1999, Specialty paid for his annual membership dues at the
Winnipeg Squash Club. Mr. Solomon argued his membership was used to promote new
business, entertain clients and for various other business purposes. The Canada
Revenue Agency disagreed, finding that the business-related meetings amounted to
less than 5% of his overall use of the club.
Mr. Solomon's accountants, when preparing his tax returns, took the position
that since the membership fees were incurred "primarily for the benefit of (his)
employer" the amount should not be considered a taxable benefit, relying on a
CRA exception to the general rule.
The CRA's long-standing general position 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 annual T4 slip and taxed accordingly.
The exception to this general rule is that if the membership is "principally
for the employer's advantage rather than the employee's," then the amount paid
by the employer will not be considered to be a taxable benefit. The onus is both
on the employer and employee to prove that the membership is primarily to the
So, you may be wondering, what does "advantageous to the employer" actually
mean? Earlier this year, the CRA was asked this question by an employee that was
entitled, by contract of employment, to be reimbursed for annual health club
membership fees. The employee felt that the fees should not be taxable because
the employee's "good health provides benefits to (the) employer through reduced
stress and disability leave."
The CRA didn't buy that argument replying that "indirect benefits" to the
employer, such as the employee being healthier and better able to perform his or
her duties as a result of utilizing the club's facilities, is primarily of
benefit to the employee and therefore taxable.
Unfortunately, Mr. Solomon was unable to convince the judge that the use of
the squash club was primarily for his company's benefit and was forced to pay
tax on 75% of the club fees, the CRA allowing 25% as a reasonable compromise as
to the business use of the squash club.