Question 1 (8 marks) Jean-Luc Chabeut is the chief financial officer of Patisserie Inc., a popular chain of French coffee and dessert restaurants in Kingston, Ontario. Jean-Luc would like to reward his employees by providing employer-paid benefits to them. He has done some research and identified a few opportunities to do this but is unsure of the tax effects of these to both Patisserie Inc. and its employees. The options he is considering are as follows:

a) Providing each management employee with an automobile. Jean-Luc found a deal where he can purchase 10 cars, enough for each restaurant manager, at a cost of $25,000 each. The managers do NOT need to drive for work purposes so the kilometres driven will be for personal use only. He plans to limit the kilometres driven by the employees each year to 20,000, to help the vehicles retain some value.

b) Providing a comprehensive health insurance benefits plan to all employees. The cost is $500 per employee. The employees would NOT be required to pay into the plan. Patisserie Inc. is also considering the purchase of life insurance for its key executives with Patisserie Inc. named as the beneficiary. These premiums cost $2,000 per year per employee.

c) Providing one monthly lunch at each location for management to award employee prizes to each of the top kitchen staff at each location for the month. Management will also use this opportunity to explain the monthly specials at each location and provide other informational updates from head office. The lunch would be free to all employees and mandatory for all staff to attend, even if they are NOT working that day. The cost to Patisserie Inc. is estimated at $200 per lunch per location. The employee prize given out at each location will be a $25 gift certificate to a popular local department store.

Required:

Discuss both the employee and employer tax consequences to each of Jean-Lucs options. If an amount will be taxable, calculate the amount that should be included in the income of each of the employee and employer. Provide any calculations required to support the analysis