# How does the IRS look upon DC memberships?



## pwrshift (Sep 25, 2007)

Many of us have ways to deal with the taxmen when it comes to memberships in golf clubs, private clubs, health clubs, etc.  I was wondering if this situation might exist with Destination Club membership initiation fees and the annual fees too?

I assume that the tax requirements would be similar in the US, but in Canada, 'membership' fees are coming up in more audits than in the past.

A technical interpretation dated August 10, 2007, Canada Revenue Agency (CRA) says: "Generally, the cost of a golf club membership provided to an employee is considered to be a taxable benefit included at 100% of fair market value in the employee's income.  However, if the employer and employee can establish that the membership is primarily for the employer's advantage, no taxable employment benefit will arise."

There are 6 factors the CRA could take into account to determine if membership resulted in taxable benefits: 

1. Could the employee have performed the job as well without the membership? 
2. Was there a business reason that obligated the employee to use the membership? 
3. Were there conditions that prohibited the personal use of the membership? 
4.Did the employer save money by providing the membership (compared to alternatives)? 
5. Does the employer advertise the membership as an inducement to attract or retain staff? 
6. Is the membership made available on the basis of salary, seniority, job function or some other criterion? 

In each case there is a need to determine the employee's job requirements and how they relate to the membership use.  It would not  be sufficient to demonstrate that a club membership produces an indirect benefit for the employer -- such as a fitness membership results in a healthier employee who takes less sick leave or incurs lower employer-paid healthcare expenses.

Where membership clearly benefits the employee and employer the benefit might be pro-rated so only the 'personal' portion of the cost of membership is a taxable benefit, but that is not appropriate if the employee receives the primary benefit of the membership. 

It seems that many of you consider a DC membership akin to joining a golf club but I wonder if the taxman feels the same?

Brian


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## Dave M (Sep 25, 2007)

In the U.S., all employee benefits that the employer pays for are taxable to the employee, unless there is a specific exclusion, which there isn't in this case. Specifically, club costs such as DC membership fees and annual dues would not fit into one of the exclusions and, thus, would be taxable to the employee. (Income Tax Regulations §1.61-21(a)(1)

Further, if the employer paid for the DC to use primarily for business purposes, not for the benefit of an employee, the expenditures would not be deductible by the business. That's because the DC would be treated under the U.S. tax law as an "entertainment facility", for which expenditures are not allowed as a tax deduction.


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## LTTravel (Sep 25, 2007)

Dave M said:


> In the U.S., all employee benefits that the employer pays for are taxable to the employee, unless there is a specific exclusion, which there isn't in this case. Specifically, club costs such as DC membership fees and annual dues would not fit into one of the exclusions and, thus, would be taxable to the employee. (Income Tax Regulations §1.61-21(a)(1)
> 
> Further, if the employer paid for the DC to use primarily for business purposes, not for the benefit of an employee, the expenditures would not be deductible by the business. That's because the DC would be treated under the U.S. tax law as an "entertainment facility", for which expenditures are not allowed as a tax deduction.



What if one were to purchase a corporate membership and give out the weeks to employees or clients. I would think that the corporation could deduct the membership dues as long as the value of the week be documented to an employee or client. One would also think that the weekly membership dues would be deductible as a business expense if the purpose of the trip were for business, say a business meeting or deductible as a business entertainment expense if you brought a client up to entertain them. A 1099 would not need to be generated unless the value is $600 or greater. I am not a tax accountant, and have no idea what I am talking about,  but this seems possible to me.


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## smbrannan (Sep 25, 2007)

In a related vein...

Arguably, buying an equity DC membership is a form of investment.  There's an upfront cost and an annual payment required (that covers property maintenance and management).

If you terminate your membership and the value of the properties has increased.  How do you calculate your taxable gain?

Is it just the gain over the original cost of buying into the DC?

Or can you capitalize the annual fees?  After all, the annual fees are payable regardless of whether you used the property or not, so arguably they are a cost of ownership that needs to be taken into consideration upon disposition of the membership?


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## LTTravel (Sep 25, 2007)

smbrannan said:


> In a related vein...
> 
> Arguably, buying an equity DC membership is a form of investment.  There's an upfront cost and an annual payment required (that covers property maintenance and management).
> 
> ...



There was an article in Redweek about taking writeoffs for dues if you rent out your timeshares. As I remember it was rather complicated with multiple requirements. You may be able to look it up. I am sure a similar scenario to what you are talking about.


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## Dave M (Sep 26, 2007)

smbrannan -

This Income Taxes and Timeshares article from the TUG Advice section applies equally to DCs. It answers all of your questions.

In short, the annual fees are primarily for operating expenses, just the same as monthly fees for your condo (if you own one) or the utilities and other expenses of owning your home. Since those expenditures are related to your personal use of the DC (even if you don't use it), those annual fees are not deductible and, with the partial exception noted in the article, are not included in your cost of the DC membership for computing gain or loss on sale.


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## smbrannan (Sep 26, 2007)

Dave M said:


> smbrannan -
> 
> This Income Taxes and Timeshares article from the TUG Advice section applies equally to DCs. It answers all of your questions.
> 
> In short, the annual fees are primarily for operating expenses, just the same as monthly fees for your condo (if you own one) or the utilities and other expenses of owning your home. Since those expenditures are related to your personal use of the DC (even if you don't use it), those annual fees are not deductible and, with the partial exception noted in the article, are not included in your cost of the DC membership for computing gain or loss on sale.



Thanks - that makes sense.  Wishful thinking on my part, I guess.


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## pwrshift (Sep 26, 2007)

DaveM ... I guess these tax rules on DC's wouldn't apply in full for condo-hotels which would be more of a business/financial adventure?

Brian


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## Steamboat Bill (Sep 26, 2007)

This is one thread where I would love to see Helium, Sherpa, or a DC employee post an answer.


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## Dave M (Sep 26, 2007)

You are correct, Brian. Although many of the same U.S. tax rules apply, you'll typically get a rental income statement from the condo-hotel management company for use in preparing income tax returns. I can't speak to the Canadian tax rules, since I don't handle Canadian tax matters any more.


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## SDKath (Jan 3, 2008)

Thank you for all the replies.  I was thinking specifically of using the TS nearby work to have a retreat with employees and discuss strategies for the coming year, perhaps sometime in Jan or Feb of each year.  A week at a nice resort locally would be a perfect way to do this.  Any thoughts if that would be allowed?  It wouldn't be for entertainment as much as an offsite meeting.  I have done this with a larger company I worked for as an employee a few years ago and everyone loved it.  Now that I am my own boss, I thought it would be good for my own business.

Katherine


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## Dave M (Jan 3, 2008)

Please see the responses in your other thread. I am closing this one to avoid multiple discussions on the same topic.


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