Opening Remarks – July, 20 2010

Opening Remarks – July, 20 2010

Johnson v. The Queen (and perhaps the rest of the world)

This is the type of legal case that normally would go unnoticed by most. However, I think it may be one of the most significant cases involving frequent flyer miles that I’ve ever examined. Here’s why. A recent appeals case in the Tax Court of Canada has ruled that a taxpayer can claim medical expenses of $2,060–the value of Aeroplan miles used to purchase an award flight for the purpose of obtaining medical treatment. The implications from this case are less about the medical expenses claim as they are about the definition of the word “paid.”

In 2007, the taxpayer traveled from Thunder Bay, Canada to Chicago for medical treatment. He flew on an Aeroplan award ticket using his miles and paying $220 taxes on the ticket. He calculated that the flight would have cost him $2,060 if he’d paid in cash and he claimed that amount as a medical expense on his income tax. The Minister of National Revenue only allowed the taxpayer to claim the cash portion of the cost of the ticket as medical expense, the $220.

However, The Honourable Justice Brent Paris in the recent ruling stated, in part, “In this case, I find that the points given up by the Appellant for the ticket were a right, since they were exchangeable for air transportation services at his request, and that they had a value that could be expressed in money since the services for which they could be exchanged was offered for sale to arm’s length parties at a fixed price. Also, the points could be purchased for three cents apiece. By redeeming his points, the Appellant gave what was due for the services and therefore ‘paid’ for them within the ordinary meaning of that word. It follows that the amount paid by the Appellant included 76,000 Aeroplan points.” He concluded, “For these reasons, the appeal is allowed, and the Appellant is entitled to additional medical expenses of $2,060 in computing his medical expense credit for his 2007 taxation year.”

The actual value of the Aeroplan miles is of less importance than whether the Aeroplan miles used by the taxpayer constituted an amount “paid” for the ticket. At the hearing, counsel for the National Revenue argued that the value of the miles that were used to obtain the ticket could not be determined and, therefore, that it could not be said that an amount was “paid” by the taxpayer for the ticket.

In court, the taxpayer testified that he redeemed 76,000 Aeroplan miles in order to travel to Chicago and back. When he filed his tax return, he checked on the Air Canada Web site, and found that an equivalent fare for the trip was $2,280 at that time. He produced two printouts of airfares from the Air Canada Web site showing that the full return airfare for a Thunder Bay to Chicago trip would have been $2,678.78 for travel in September 2008 and $2,932.18 for travel in March 2009. The former was for a “Latitude” fare type and the latter was for a “Tango Plus” fare type. Both are economy class fares. The Aeroplan redemption was similar in that it was for an economy award. As part of his defense for the medical claim and use of Aeroplan miles, he stated that you can buy Aeroplan miles at a cost of three cents per mile and provided a printout from the Aeroplan Web site to confirm this rate.

National Revenue took the position that there was no amount paid by the taxpayer within the meaning of subsection 118.2(2) of the Act because no money was paid by him for the ticket. Counsel for the National Revenue said that a transfer of “money’s worth” did not constitute an “amount paid.” The word “paid” is not defined in the Act. According to the Canadian Oxford Dictionary (2nd Ed.) “pay” means:
1. Give (a person, etc.) what is due for services done, goods received, debts incurred, etc.
The definition of “payment” in Black’s Law Dictionary (9th Ed.) refers to: performance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation.

The word “amount” which precedes “paid” in subsection 118.2(2) is defined in subsection 248(1) of the Act as follows:
248(1) In this Act, “amount” means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing, …

The judge found that the miles redeemed by the taxpayer for the ticket were a right, since they were exchangeable for airline services at his request, and that they had a value that could be expressed in money since the services for which they could be exchanged was offered for sale to arm’s length parties at a fixed price. Also, the miles could be purchased for three cents apiece. By redeeming his miles, the taxpayer gave what was due for the services and therefore “paid” for them within the ordinary meaning of that word.

The actual value given to the Aeroplan points played no part in this case, given that the Reply to the Notice of Appeal which set in place the actual appeal, did not mention that the value of the frequent flyer miles used by the taxpayer was in dispute, and therefore, the onus was on National Revenue to show that the value of the miles was less than the amount claimed by the taxpayer. Since there was no challenge to the taxpayer’s printout of the Aeroplan’s Web site, the value of the points were accepted as claimed.

So, what’s the big deal? Well, for the first time ever in any legal proceeding worldwide, a precedent was set that the use of frequent flyer miles can and does have the very same rights and privileges as cash or any other currency when it comes to being recognized as payment. This case, and the fact that it was upheld on an appeal, sets in place a basis for many frequent flyers to have their use of miles as payment actually amount to something. Now, whether this case will hold up in situations where a person can claim a tax deduction when using their miles for a charity or other cause remains to be seen. But the importance of this particular case and how the definitions of what payment can consist of certainly can’t be overlooked. I applaud the judge’s ruling. Now let the implications of this case move forward.

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