If you're an employee, chances are you've already attended or been invited to the annual holiday office party this season. If so, be forewarned that the taxman may want to share in the festivities.
Under the Income Tax Act, employees are subject to tax on the value of all benefits they receive in connection with their employment. The wording in the Act is so broad the language states income inclusion is required for a benefit "of any kind whatever" received or enjoyed by the employee.
Years ago, the Canada Revenue Agency instituted a formal administrative policy to deal with the taxable benefit associated with the office holiday party in response to a particularly harsh Tax Court of Canada decision, which was criticized in the tax community as being overly Scrooge-like.
That 1998 tax case involved an employee who attended his employer's Christmas parties, along with a guest. The party consisted of a dinner, open bar and overnight accommodations. All expenses associated with the dinner, including the bar and the cost of accommodations, were paid for by the company, which did not assess any taxable benefit to its employees.
The CRA took the particular employee to court and assessed a taxable benefit of about $300 a year for each Christmas party attended, which was calculated by dividing the total cost of the party by the number of attendees. While the employee tried to argue "he received no economic benefit from attending the Christmas parties," the judge disagreed and upheld the CRA's taxable benefit reassessment.
Subsequently, the CRA announced that holiday parties costing up to $100 per person will be considered to be non-taxable. Ancillary costs, such as transportation home, would increase the non-taxable amount.
Some large companies now ask employees to buy tickets to the company party, at a substantially subsidized price, which not only helps defray some of the company's cost but also can help ensure no taxable benefit arises to the employee.
A few years ago, the CRA was asked about employees that need to travel from out of town to attend their employer's holiday party. In these cases, the employer paid for cost of the flights and overnight accommodations and wanted to know if the cost of such travel and accommodation would be "ancillary costs" that would also be non-taxable.
The CRA responded that since "in making such a trip, the employee would take the opportunity to combine work-related matters with attending the social function" the amounts would generally be non-taxable.
On the other hand, if an employee is allowed to bring a spouse or a guest to the holiday party, as long as the event cost is $100 or less, no taxable benefit will be assessed for bringing the guest. However, any ancillary costs attributable only to the employee's spouse or guest that are paid by the employer, such as an extra plane ticket, would generally result in a taxable employee benefit.