No free lunch from taxman: It's a taxable benefit

National Post


Are free meals provided by your employer taxable as an employment benefit, even
if you don't like the food? That was the question facing the Federal Court of
Appeal last month.

Douglas McGoldrick works for Casino Rama near Orillia, Ont., north of
Toronto. For sanitary reasons, the casino bans employees from bringing in their
own food. Due to the casino's remote location, it is impractical for employees
to eat off-site during their half-hour meal breaks. Consequently, the casino
provides each employee with one free meal per shift, which is eaten at the
casino's employee cafeteria. The only alternatives to eating at the cafeteria
are either to use coin-operated vending machines or, presumably, not to eat.

During 2000 and 2001, Mr. McGoldrick was required to pay tax annually on over
$1,000 worth of "free meals" provided to him at the cafeteria, reported as a
taxable benefit on his annual T4 slips.

Although on most days Mr. McGoldrick ate at the cafeteria, he testified that
"he did not enjoy the experience." The issue before the court was whether or not
the free meals, which he did not really "enjoy," were nonetheless taxable.

Under the Income Tax Act, employees are taxed on their monetary remuneration,
such as salary and bonus, and any taxable benefits they receive. In prior
decisions, the Supreme Court determined that a benefit is received when it
results in a "material acquisition that confers an economic benefit."

Mr. McGoldrick argued that the value of the meals ought not to be taxable
since they were not intended to be provided as an employee benefit, per se, but
rather because of business considerations, namely sanitation.

In fact, according to the vice-president of Human Resources at Casino Rama,
providing meals to employees was for the employer 's benefit, since it enhanced
the attractiveness of the casino. Mr. McGoldrick contended that the provision of
these free meals should not be a taxable benefit if any personal enjoyment is
merely "incidental" to the business purpose.

Indeed, past decisions of the courts have reached that conclusion where
something that has been provided to an employee is determined to be primarily
for the benefit of the employer.

Most recently, this approach was taken in a 2003 Quebec case that concluded
that reimbursement of meals during overtime work was not a taxable benefit,
since a meal expense would not otherwise have been incurred and the small
expense of producing a meal at home should be ignored.

As the Quebec judge wrote, "while it can be said that the food the employee
would have consumed at home is still intact... the inconvenience of the expense
outweighs that small saving."

Unfortunately, in Mr. McGoldrick's case, the court concluded otherwise and
felt that the personal element was not incidental. The money Mr. McGoldrick
saved by being provided with daily free meals (meals being an "ordinary every
day expense") was not immaterial compared to the benefit, and therefore it
should not be ignored and is properly taxable.

This case confirms that there really is no such thing as a free lunch...

GRAPHIC: Black & White Photo: Rod Frketich, The Canadian Press; Dealers sharpen
their skills at Casino Rama in Orillia, Ont. Casino employees get free meals,
which are taxable, whether they like it or not.