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Your employer sends you on a business trip. It happens to be to Cancun, Mexico. You give a presentation, schmooze with clients who sell your products and attend a variety of social activities, including a catamaran cruise. Years later, you get hit with a taxable employment benefit because you went on that business trip.
If that result seems ludicrous, you may be interested in a recent decision by the Court of Quebec, after a BMO Insurance employee was assessed a taxable employment benefit by Revenu Québec (RQ) of $1,872 in respect of a business trip he took in 2015. Before going into the details of the case, however, let’s review the general rule regarding taxable employment benefits.
Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.”
In determining whether an employee must include the value of a benefit received, the Canada Revenue Agency (and RQ) looks at three determining factors: Does the benefit gives the employee an economic advantage? Is the benefit measurable and quantifiable? And does the benefit primarily benefit the employee, as opposed to primarily benefiting the employer?
The taxpayer in question here has been an employee of BMO for the past decade, where he serves as the director of business development. BMO offers a variety of personal insurance products to its customers across Canada. Rather than employ brokers or financial advisers to sell its products directly to the public, it relies on a network of managing general agents (MGAs), which act as intermediaries between the insurer and brokers and advisers. BMO’s primary relationship with brokers and advisers is through MGAs, making it critical that it has visibility with them, especially by participating in their activities.
The taxpayer’s duties were to manage relationships with MGAs, work with dealers and advisers, train them on BMO products, and generally encourage them to sell BMO products to their clients.
In August 2015, BMO was approached to sponsor an Elite Congress to be held in Cancun. The conference brought together the MGA’s top-performing brokers and advisers. The sponsorship included airfare for one person and a week’s hotel stay. By sponsoring the conference, a company is entitled to make a presentation about its products. BMO’s decision to participate in these types of conferences is based on the business volume (or potential volume) of a given MGA. BMO participates in approximately five conventions per year, with each MGA hosting one convention every two to three years.
Since this particular MGA had been a major business partner of BMO for many years, the insurer saw the conference as a good opportunity to gain visibility with brokers and agreed to sponsor it. It decided to send the taxpayer to Cancun to represent BMO.
The conference, the only one the taxpayer attended in 2015, included a number of activities, some were directly related to work, such as a company booth and training sessions, and some were various leisure activities. The taxpayer gave a presentation about BMO’s products, and participated in as many activities as possible with clients, including a catamaran outing, and had various meals with brokers and advisers. In the meantime, he continued to carry on his normal employment activities such as responding to e-mails and returning phone calls.
Upon his return to Canada, the taxpayer sent a “very detailed email” describing all the meetings he had had with advisers or brokers, and the potential that resulted from them. His boss expressed appreciation for the development work he did in Cancun.
The following year, the MGA was the subject of a taxable benefit audit related to the Cancun conference in which RQ divided the attendees into three categories: MGA employees, the brokers and advisers who earned their place by qualifying in a sales contest, and representatives of the insurance companies, including the taxpayer.
RQ concluded that since the MGA employees were sent on the trip in the course of their normal employment activities, the trip did not constitute a taxable employment benefit for them. Conversely, RQ determined that the trip constituted “entertainment” for the winning advisers, and it assessed a taxable benefit equal to 100 per cent of the value of the trip.
But for employees attending on behalf of the sponsors, RQ took the position that only 37.5 per cent of the trip was for business purposes, and the remainder was a taxable benefit. As a result, RQ in May 2018 reassessed the taxpayer for a taxable benefit for 62.5 per cent of the value of the trip, or $1,872.
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The taxpayer objected to the assessment and took the matter to court, arguing that his attendance at the Cancun conference should have been treated as a business trip in its entirety, and not classified, in any way, as a taxable benefit.
The judge who reviewed the case noted that prior case law recognizes that while certain activities on these types of business trips may, indeed, be “entertaining in nature,” this does not prevent the primary purpose of the trip being business development. Furthermore, the judge added, it was “not appropriate to make a strict mathematical calculation to determine the proportion of leisure activities in the context of a given conference or trip. Rather, one must look at the overall purpose of attending the conference.”
As a result, the judge concluded that no portion of the cost of the trip should have been a taxable benefit to the BMO employee, since his participation on the trip was neither an award nor a prize. He went to the conference alone, it was not considered or counted by BMO as a vacation, there was an expectation he would be actively involved in meeting with advisers and brokers, and he continued to manage his day-to-day employment duties even while he was away.
The taxpayer was also awarded costs.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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