CRA Goes Grinch over Staff Christmas Parties :CRA SOTW

It's party time

Andy Wong ,Guest columnist
Monday, December 15, 2008

Some time-honoured business practices can produce nasty tax consequences. This particular issue was exposed in a two-decade-old tax case regarding a staff Christmas party where the long arms of the Canada Revenue Agency (CRA) reached out to dampen its spirits.

In Dunlap v. The Queen, Tax Court of Canada, Aug. 31, 1998, a taxpayer had to deal with more than just a hangover after attending his employer's Christmas parties in 1992 and 1993. Following a tax audit on his employer's business, the taxpayer was assessed a taxable benefit of $302 and $278 for those two years. The benefit was on account of his meal, an allocated cost of the total liquor bill and hotel accommodation.

The taxpayer couldn't understand how his attendance at the parties could give rise to a taxable benefit. His employer had organized the events to foster better working relationships amongst the employees. Indeed, the Christmas party was a benefit for his employer, not him. Moreover, he contested charging him with the cost of the hotel room didn't make sense. He reasoned that the CRA had a policy where employer-paid counselling session for substance abuse or stress management is tax-free. To the taxpayer, the free rooms amounted to the same idea because it kept him off the road after a night of partying.

The CRA argued the Christmas parties were a benefit enjoyed by the taxpayer because of his employment. There are many ways to remunerate employees. Throwing a staff Christmas party was one. That's how his employer chose to remunerate him and other employees for their loyal services.

According to the Income Tax Act, remuneration includes "benefits of any kind whatever ... received by virtue of employment." The judge had to agree with the CRA because of the board intent of the tax rule. He ruled the Christmas party was the employer's decision to reward employees and another way to pay them for their services. As to the benefit arising from the use of the hotel room, the judge noted CRA's handling of the employee's counselling cost is a fortuitous, one-way street. The CRA can grant leniency but you cannot demand it.

Following this court decision, the CRA did give its head a shake and relaxed its position on employer-provided parties or social events. Playing less of a Grinch, the CRA introduced a rule which states events costing up to $100 per employee would be tax-free. If the party cost $101 or more (per employee), the entire amount, not just the excess portion, is fully taxable to the employee.

The tax-free threshold of $100 applies to the event only. Reasonable ancillary costs such as taxi and hotel provided to the employee are also tax-free. Here's a double jeopardy - if the per employee event cost exceeds $100, the total amount of the event cost plus any ancillary costs become fully taxable.

Andy Wong, CGA, CFP, is a tax consultant at MacKay LLP, Chartered Accountants, in Yellowknife. He can be reached at: andrewwong@yel.mackayllp.ca.

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