Canada: Recent Canadian Tax Court Case Rules Free Parking Space Provided By Employer Is A Taxable Benefit To The Employee

In Adler, D.A. et al. v. The Queen (TCC)¹, the Tax Court of Canada recently ruled that parking passes provided by Telus Communications Inc. ("Telus") to certain senior employees was a taxable benefit to those employees. The Minister of National Revenue (the "Minister") had assessed sixteen Telus employees on the basis that the fair market value of the parking pass constituted a taxable benefit and added that amount to the employees' taxable income for the 1998 tax year. The employees appealed this assessment. They contended that the Minister was incorrect in assuming the parking pass primarily benefited them rather than Telus, or that the parking pass was a personal benefit conferred on them because it facilitated travel to and from the workplace.

The sixteen employees were all given parking passes because of their rank or placement within a pay band unless he or she otherwise qualified pursuant to a grandfathering arrangement arising from a merger of Ed Tel and Telus. Parking passes were issued regardless of (1) the employee's job description, (2) whether the employee would be required to work overtime, or (3) the requirement to have a vehicle to perform the job. The parking pass could be used for personal reasons, and could be loaned to other Telus employees upon notification to Telus. If there was no available space in a Telus-run parking lot, a space was rented in a nearby facility owned or operated by an independent entity. The majority of the employees had a schedule that permitted them to take public transportation to and from work, even though that was not generally as convenient during late hours, weekends and holidays.

The central issue in the case was whether the parking pass was a taxable benefit under section 6(1)(a) of the Income Tax Act² which states that the value of board, lodging, and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment must be included in computing the income of the taxpayer. The term "benefit" is not defined in the Income Tax Act; however, it has been defined by the courts as "a material acquisition which confers an economic benefit on the taxpayer."³ A receipt which does not increase net worth is not a taxable benefit. A benefit paid primarily for the convenience of an employer is not a taxable benefit to the employee; therefore, the primary question the courts had to answer was whether the benefit of providing the parking passes primarily accrued to Telus or to its employees.

Telus stated that it provided the parking passes to these employees because it believed it was primarily to its advantage, considering the nature and duties carried out by these employees, and their rank within the organization, which required them to work irregular hours, extra hours, weekends and holidays. In 1998, Telus had a policy to pay for taxi fares between an employee's home and place of work when beginning early or ending late, and for employee travel during regular business hours, where such transportation was required in the course of carrying out their duties. The employees argued that if they arrived early or worked late by utilizing their own vehicles, then Telus gained the benefit of having them work beyond regular business hours, thereby becoming the primary recipient of the benefit derived from the use of the parking passes. Telus did not carry out any analysis to determine whether there was an economic advantage to provide parking to its employees, rather than reimbursing them for taxi fares, or whether it was cost-effective to provide parking for its employees as opposed to paying for taxis. No analysis was undertaken to compare the cost of requiring employees to use their own vehicles in the course of their duties rather than reimbursing them for taxi fares.

For fourteen of the sixteen employees, the Court agreed with the Minister's assessment that the parking passes were a taxable benefit to the employee, and the fair market value of the parking passes should be included as income. The parking pass conferred a measurable economic advantage on the employees because it eliminated the need for the employees to pay for the same privilege out of their own pockets. The Court found that the benefit primarily accrued to these employees because the passes were provided based on their position in the pay band, without any evidence that the employees required a vehicle in the course of their employment, or that they needed a parking space in the Telus office building to discharge their responsibilities. The parking pass was considered a perk, and demonstrated that rank had its privileges in Telus' corporate structure.

The Court found that no taxable benefit accrued to two of the employees. The first was an employee who was provided a leased vehicle by Telus for business travel throughout Alberta. The benefit of a parking pass for this employee, whose vehicle was used 70% of the time for business, was considered ancillary to the benefit derived by Telus. The other employee never used the parking pass. That employee was not given an assigned parking stall, and the Court assumed that another Telus employee parked in that space or it was sold as a paid parking space to a member of the general public. Because the employee did not use a vehicle in the course of his employment, and did not need the parking space, the Court found that no taxable benefit accrued to him.

Although determining what is a taxable benefit must be dealt with on a case-by-case basis, the Tax Court provided a list of factors that could be considered by an employer prior to providing a benefit to an employee, if the matter of taxation is a concern. These factors are:

1. Is the benefit provided automatically upon attainment of a certain rank or pursuant to an obligation in some agreement without reference to the nature of the duties performed?
2. If there are criteria entitlement - particularly those relating to security concerns – have they been examined with respect to employees in specific positions, or in special categories, departments or business units?
3. If a vehicle is required in the course of employment, is that need expressed in the job description, and if the matter of vehicle use arises subsequently, is there a policy in relation to that?
4. If there are times in the year when any benefit accrues primarily to the employer, and others when it does not, how are those periods identified and the details of relevant circumstances recorded?
5. Has there been a cost analysis undertaken in the course of comparative examination – to some reasonable standard – to determine whether the payment with respect to the benefit will be primarily for the convenience of the employer?
6. Is there a method of review to determine whether a material change in circumstances has invalidated the original reasons for providing the benefit?
7. Instead of providing parking space on an individual basis, has the concept of pool parking been considered, whereby a certain number of spaces can be used by different employees as and when required for specific business purposes?

Employers should consider the above factors when providing parking passes to their employees to avoid the fair market value of the parking pass being added as a taxable benefit to their employees' income. There must be a clear rationale for providing a parking pass which demonstrates the employee (1) requires a vehicle in the course of their employment, or (2) needs a parking space to discharge their responsibilities. A parking pass should not been given based solely on the rank and position of an employee.

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