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:: Taxation Issues - Canada |
Frequent Flyers Subject to Tax
A recent decision of the Tax Court of Canada (see Note 1) has
confirmed Revenue Canada s long standing position that personal
(rather than business) airline flights obtained through the
redemption of frequent flyer mileage accumulated on employer-paid
flights constitutes a taxable benefit from employment. However,
the amount of the benefit is significantly less than the cost of a
full fare ticket in the class in which the employee travels.
Notwithstanding that membership in frequent flyer programs is
limited to individuals and is clearly a contract between the
individual and the airline, the Court concluded that personal-use
airline flights obtained through the redemption of frequent flyer
mileage accumulated on employer-paid travel was a taxable benefit,
within the relevant provision of the Income Tax Act (Canada) (see
Note 2). The Court based this conclusion on the fact that the
employer paid for the airline ticket upon which the frequent flyer
mileage was accumulated.
The decision does not, however, conclude that frequent flyer
mileage accumulated from other than employer-paid travel, such as
personal travel or credit card use, constitutes a taxable benefit
from employment. The Court was not required to decide this point,
since in this particular case all of the frequent flyer miles were
accumulated on employer-paid travel. Intuitively, an allocation of
accumulated mileage between that credited from employer-paid
travel and other sources would be required. In addition, for
purposes of determining the amount of the taxable benefit, it may
be necessary to notionally redeem such mileage in the order it is
accumulated, thereby necessitating a further allocation.
In determining the value of the benefit, the Court took into
account the numerous restrictions inherent in flights obtained
through the redemption of frequent flyer mileage. The Court
concluded that the proper measure of the value of the benefit is
the price which the employee would have been obliged to pay for an
airline ticket entitling the employee to travel on the same flight
in the same class of service and subject to the same restrictions
as are applicable to the ticket obtained through the redemption of
frequent flyer mileage.
In taking these restrictions into account, the Court concluded
that an economy class ticket obtained through the redemption of
frequent flyer mileage was unlikely to be worth more than the most
heavily discounted economy ticket sold for the flight in question.
The Court noted that although business class and first-class
tickets are not discounted, frequent flyer flights obtained for
travel in those two classes cannot, because of the restrictions,
be regarded as equal in value to purchase tickets in the same
classes. The Court concluded that the restrictions to which
first-class and business class frequent flyer tickets are subject
reduces the value of such tickets to the same extent that the
restrictions on economy class frequent flyer tickets reduces their
value.
Accordingly, the Court developed a formula to calculate the value
of a frequent flyer ticket in either business or first-class as
being equal to that proportion of a purchased business or
first-class fare which the price of the most heavily discounted
economy class fare on that flight is of the price of a full fare
economy ticket. Expressed as a formula, the value of the frequent
flyer ticket equals A x B over C where:
A is the price of business class or first-class ticket,
as the case may be;
B is the price of the most heavily discounted economy
class fare for that flight; and
C is the full economy class fare for that flight.
This is clearly an unwelcome decision for business travellers who
accumulate frequent flyer mileage which they use for personal
purposes. However, the decision is positive to the extent it
significantly reduces the value of the benefit as originally
calculated by Revenue Canada. In the case of an individual who
redeems frequent flyer mileage for a first-class ticket, the value
of the benefit is, generally, 15% to 20% of the purchase price
that would be charged for a similar ticket on that flight.
It should be noted that the assessment arose as a result of an
employee taxable benefit audit conducted at the employer s place
of business, where a Revenue Canada auditor saw a reference to the
travel agency used by the employer. The auditor contacted the
travel agency and reviewed all the travel records relating to that
employer, which included personal travel records for certain
employees. It was during this review that the auditor obtained
details of frequent flyer mileage redeemed for personal use.
Finally, it should be noted that there is no obligation on an
employer to keep track of frequent flyer mileage accumulated by
employees or to report a taxable benefit on an employee's T4.
Rather, it is the employees who are required to report such
benefit when filing their tax returns.
In light of the significant reduction in the value of the benefit
as originally assessed by Revenue Canada, it has been determined
that the decision will not be appealed.
NOTES
1. Giffen v. The Queen (released August 11, 1995).
2. Section 6 of the Income Tax Act (Canada) requires that a
benefit be included in income only if it is "received or enjoyed"
by the employee "... in respect of, in the course of or by virtue
of ... employment".
This article was written by James G. Morand email:
jmorand@mccarthy.ca and Brian C. Pel email: bpel@mccarthy.ca,
members of the Firm's Tax Group in Toronto (McCarthy Tetrault).
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The Layman's Version of Taxation Issues - Canada
In Canada, the frequent flyer award has not fared so well. A decision in November of 1995 by the Tax Court of Canada confirmed Revenue Canada's long-standing position that free personal (not business) flights earned using frequent flyer mileage or points accumulated on flights paid for by the employer factors into a taxable benefit of employment.
The decision does not conclude that mileage accumulated from other than employer paid travel such as personal travel or credit card use, constitutes a taxable benefit from employment, but did go as far as developing a formula for determining the value of a first or business class award for tax purposes. When A is the price of the business or first class ticket, B is the price of the most heavily discounted economy class fare for that flight and C is the full economy class fare for that flight, the value of a first or business class ticket=AxB over C which is estimated to be 15-20% of the purchase price that would be charged for a similar ticket. The court also decided there is no obligation on an employer's part to keep track of mileage accumulated by employees. It is suspected that the ruling will be appealed.
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