What You Need to Know – Employees Attendance at a Conference is Not a Taxable Benefit

This month, employers are issuing their employees’ T4 and Relevé-1 slips so that their employees can properly fill in their Federal and Quebec income tax returns. Sections 32, 36 and 37 of the Taxation Act of Quebec[i] (the “TAQ”) requires that employees declare, in their income tax returns, not only their salaries but also any fringe benefits. These Sections read as follows:

?“Subject to this Part, an individual’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the individual in the year.

?An individual shall, in computing the income of the individual for the year from an office or employment, include all amounts the individual receives or benefits from in that year or which are allocated to the individual for that year, and that are provided for in this chapter.

?Such amounts include the fees received by the individual because of, or in the course of, an office or employment, including director’s fees.

?The amounts required to be included in computing an individual’s income are the value of board, lodging and other benefits of any kind whatever received or enjoyed by the individual, or by a person who does not deal at arm’s length with the individual, because of, or in the course of, the individual’s office or employment and the allowances received by the individual, including any amount received, without having to account for its use, for personal or living expenses or for any other purpose.”

?Section 6 of the Income Tax Act of Canada[ii] (the “ITA”) is to the same effect.

?When completing those slips, employers must include, as part of their employees’ salary, both the actual salary paid and the value of any taxable fringe benefits received.

?But how does an employer or an employee know whether the employee’s attendance at a congress, conference, convention, or similar event at the employer’s expense, constitutes a taxable fringe benefit?

?In the case of Lussier vs. Agence du revenu du Quebec,[iii] [iv] Mr. Martin Lussier was employed by BMO Insurance (“BMO”) as its Director of Business Development.[v]

?BMO sold various life and health insurance products through Managing General Agents (“MGA”). The MGAs were intermediaries between BMO and other insurers, on the one hand, and insurance brokers and financial advisors (collectively the “Brokers”) on the other hand.[vi]

?Mr. Lussier’s job included managing relationships with MGAs, collaborating with Brokers, offering them training with regard to BMO’s products and more generally promoting sales of BMO products.[vii]

?One of the MGAs which BMO dealt with was BBA Financial Group (“BBA”). In August 2015, BBA asked Mr. Daniel Walsh, Mr. Lussier’s boss, if BMO would one of the sponsors of BBA’s convention in Cancun, Mexico. The convention was for BBA’s highest performing Brokers. The sponsorship cost $12,000.00 but included an airline ticket for one BMO representative to fly to Cancun as well as his or her stay at the hotel for one week, all to attend the convention. Sponsors were allowed to have to have their?logos on the convention’s brochures and promotional materials and to have their representatives present their products to the attendees.[viii]

?BMO annually participated in approximately five conventions, etc. organized by MGAs. Usually, each MGAs organized a convention every 2 to 3 years.[ix]

?As BMO did a lot of business with BBA ,it agreed to sponsor the event. BMO was not the only insurer sponsoring such events organized by MGAs.[x]?

?BBA asked that Mr. Lussier, who was BMO’s contact person, be designated to represent BMO at the convention.[xi] BMO Agreed. The BBA convention was the only one Mr. Lussier attended that year.[xii]

?In 2016, BBA was audited by Ms. Genevieve Prud’homme on behalf of the Agence de revenu de Quebec (“ARQ”). She was particularly interested in BBA’s 2015 convention in Cancun.[xiii] She determined that attendance at the convention by BBA employees did not result in them receiving a taxable fringe benefit as their presence was part of their job. But she concluded that the Brokers who were attending received a fringe benefit and judged 100% of the value of their attendance at the convention and the ARQ assessed them for unpaid Quebec income tax according.[xiv]

?As for the employees of the sponsoring insurers, such as Mr. Lussier, she concluded that 37.5% of their time at the convention was work and the ARQ assessed him for 62.5% of the value of the trip, that is $1,871.54, as a fringe benefit.[xv] Mr. Lussier contested the assessment and, in due course, appealed it to the Court of Quebec.[xvi]

?At the outset of the Court’s analysis, it noted that the law presumes[xvii] that any tax assessment issued by tax authorities .[xviii] Consequently, it is the taxpayer has the burden of proving prima facie[xix] that the assessment may be wrong.[xx] It is not sufficient for a taxpayer to simply deny the correctness of an assessment. The taxpayer, preferably through the use of documentation, but also through testimony, must reverse the presumption by putting the validity of an assessment in doubt.[xxi]

?Once the taxpayer has reversed the presumption that the assessment was correct, it is for the tax authorities, in this case the ARQ, to prove by preponderance of evidence that its assessment in fact was correct.[xxii]

?The Court then turned its mind to the question of when a fringe benefit is taxable in the hands of an employee. It noted that not all fringe benefits are taxable, and each case must be determined on its own merits. It highlighted certain of the criteria identified by jurisprudence;

?·??????“There is a ‘taxable benefit’ when the expense is ‘essentially’ or ‘principally’ for the benefit of the taxpayer being assessed and is not when it is ‘principally’ or ‘essentially’ for the benefit of the business;

?·??????There is generally not a ‘fringe benefit’ when the expense results from a particular request of the employer [.]”[xxiii]

?A particular line of jurisprudence has been developed with regard to the treatment, for income taxation purposes, of foreign trips by employees when attending meetings and events such as the one organized by BBA:

?“… the fact that certain activities can be entertaining, does not stop the purpose [of the trip] from being the development and maintenance of business relationships. Moreover, it is not appropriate to use a strict mathematical calculation to determine what proportion of activities were for relaxation… rather the overall purpose of the convention must be considered.”[xxiv]

The Court highlighted that “…tax authorities are not to dictate to entrepreneurs how to run their businesses or carry out their commercial activities unless their decisions are unreasonable. This principal shall be of particular importance in analyzing this case.”[xxv]

?On reviewing the evidence, the Court found that “…Mr. Lussier not only presented prima facie proof reversing the presumption of the validity of the assessment in question, but by preponderance of the evidence showed that the assessment was unfounded.” The Court based itself on the following evidence:

?·??????“…BMO’s business model requires a close relationship with the MGAs in order that the financial advisors and brokers…be aware of BMO’s [insurance] products and offers them to their clients;

?·??????BMO’s participation at conventions organized by MGAs falls within context of its [business] objectives. The participation of one of its employees allows [BMO] to tighten its connections with brokers and financial advisors who are present in addition to creating new opportunities;

?·??????Mr. Lussier being the contact person with BBA, it was logical that he would be chosen to attend the convention. His participation was neither compensation [for his work] or prize. And it did not result in a request on his part;

?·??????Mr. Lussier went to the convention alone. It was not a family vacation. Indeed, he testified that the timing [of the convention] was not particularly convenient because he was in the process of separating from his spouse;

?·??????The trip not being considered or treated by BMO as Mr. Lussier’s vacation, was an expectation that he would actively seek to meet financial advisors and brokers, whether in the formal context of his presentation to the convention, or in less formal context such as meals and supporting activities. He also had to continue to manage the day-to-day activities of his office even though he was away from it;

?·??????Mr. Lussier’s testimony as well as the contemporaneous email he sent at the end of the convention to [his immediate superior] Mr. Walsh showed his multiple approaches [to convention participants] and meetings. The whole of his time was devoted to the primary objective of his attendance. His attendance was necessary to pursue BMO’s [business] activities and he worked during the entire time of his stay. There was no basis for the ARQ to arbitrarily reduce the amount of [his time] devoted to work.”[xxvi]

?The ARQ raised the following arguments to counter those put forward by Mr. Lussier, all of which were dismissed by the Court for the following reasons:

?The ARQ argued that Mr. Lussier’s activities were insufficiently detailed to allow it to conclude that his attendance was “…mainly for the benefit of his employer BMO.”[xxvii] The Court found that there was no reason to doubt the testimony of BMO’s President, Mr. Peter McCarthy,[xxviii] of Mr. Walsh, and of Mr. Lussier himself. Documentary evidence corroborated their testimony. Such evidence included: “…the convention program, emails sent regarding Mr. Lussier’s attendance at the convention and the presentation that he would make, the printed presentation itself and the ‘action email’ sent by Mr. Lussier to Mr. Walsh”[xxix];

?The ARQ argued that “…BMO could have sponsored the convention without sending a representative.” The Court disagreed because “…it was not for the ARQ to substitute itself for BMO in the latter’s business decisions. BMO’s choice was not in any way unreasonable…in the circumstances. In fact, the price of the sponsorship included the attendance of a BMO representative. It would have been, to say the least curious, if [BMO] had not taken advantage of the opportunity to send a representative leaving its competitors a carte blanche to present their products to the advisors and brokers present [at the convention].The Court added that, given its competitive environment. BMO could not allow itself “…to pay for a sponsorship which included participation [of a representative], without sending one [when its competitors for the same sponsorship could send a representative [to the convention];

?·??????The ARQ argued that Mr. Lussier participated in leisure activities such as a trip on a catamaran. Such activities, it argued, were purely for his personal benefit. The Court disagreed, adding that while the activity “…may have been enjoyable, this does not change the purpose of Mr. Lussier’s attendance. Playful activities are nevertheless opportunities to create or maintain [business] relations with the advisors and brokers. There is nothing mutually exclusive between work and pleasure;[xxx] and

?·??????To the ARQ’s argument that the convention “did not have to be held outside of Quebec.” The Court noted that BMO did not choose for BBA’s convention to be held in Cancun and that, in any event, the location of the convention had no bearing on whether Mr. Lussier’s attendance constituted a taxable fringe benefit.[xxxi]

?The Court concluded by lambasting the ARQ:

?“It is difficult to explain [the ARQ’s] position regarding the facts of this case and the clear and recent jurisprudence with similar facts. Its way of seeing things is punitive and unfair to Mr. Lussier. His employer did not give him a choice as to whether to participate or not on the trip, or that he went alone, and where he was expected to work and develop business, which he did, both during and outside of business hours. This was not a vacation. Must he therefore pay for a part [of the trip by being assessed additional taxable revenue]?

?It appears to the Court that the ARQ’s position results either from a poor understanding of the steps required to develop business, …or from it desire to dictate to businesses what their business models should be and how to achieve it. In either case the ARQ’s position is unjustified.”[xxxii]

?Mr. Lussier’s appeal was upheld and the ARQ’s assessment was annulled.[xxxiii]

?WHAT YOU NEED TO KNOW

?·??????Income tax or other tax assessments issued by federal or provincial tax authorities are presumed to be valid. It is for the taxpayer to prove that, on its face, a contested assessment is wrong. In theory, if the taxpayer succeeds then the burden of proof shifts to the tax authority that issued the contested assessment, to prove, by a preponderance of evidence, that the assessment is correct. Practically, however, once the court determines that, on its face, the assessment is wrong it is almost impossible for the tax authority to then prove that the assessment was correct;

?·??????Courts are not sympathetic with tax authorities who second guess taxpayers’ legitimate business decisions; and

?·??????Employees attending conferences, conventions, etc., at their employer’s request and cost, will not be taxed on the cost of their attendance as a fringe benefit if the employee can show that his or her attendance was not a vacation or reward by the employer. This is true even if a substantial portion of convention activities were of a social or casual nature.

?It goes without saying that the preceding comments are general in nature and are not intended to offer any legal advice regarding any specific situation.

[i] CQLR, c. I-3.

[ii] RSC 1985, c. (●) 5th Supp.

[iii] The Agence du revenu du Quebec is the Quebec equivalent of the Federal Canada Revenue Agency and of the American Internal Revenue Service.

[iv] 2022 QCCQ 9.

[v] Paragraph 3 of the Judgment. (Unless otherwise indicated, all references to paragraph numbers refer to paragraph numbers of the Court of Quebec’s Judgment.)

[vi] Para. 4.

[vii] Para. 7.

[viii] Para. 9.

[ix] Para. 10.

[x] Para. 11.

[xi] Para. 12.

[xii] Para. 13.

[xiii] Para. 18.

[xiv] Para. 20.

[xv] Para. 22.

[xvi] Paras. 22 & 23.

[xvii] Section 1014 TAQ and sub-section 152(8) ITA

[xviii] Para. 25.

[xix] That is on its face

[xx] Paras. 25-28.

[xxi] Paras. 28 & 29.

[xxii] Para. 31.

[xxiii] Para. 34, references and internal footnotes omitted. (Our English translation of the French original).

[xxiv] Para. 36, internal footnotes omitted.

[xxv] Para. 37, internal footnotes omitted.

[xxvi] Para. 38.

[xxvii] Para. 39.

[xxviii] Para.5.

[xxix] Paras. 39 & 40.

[xxx] Para. 43.

[xxxi] Para. 44.

[xxxii] Paras. 45 & 46.

[xxxiii] Paras. 47-49.