Companies have long offered discounts to their staff, but as a long as items weren’t sold to them below cost, neither employer nor employee had to count them as taxable benefits. The CRA has issued a more recent tax “folio” indicating that employee discounts are to be considered taxable benefits.Brent Lewin/Bloomberg
The sales clerk who gets a 25-per-cent discount on the shoes sold at her store is facing a new bill: The Canada Revenue Agency has indicated that employee discounts will now be taxed.
Companies have long offered discounts to their staff, but as long as items weren't sold to them below cost, neither employer nor employee had to count them as taxable benefits. The CRA's employer's guide, on the agency's website, said so.
But the CRA has issued a more recent tax "folio" indicating that employee discounts are to be considered taxable benefits, and part of their income.
For subscribers: Liberals' proposed tax changes will hurt tech startups, investors warn
Explainer: How the Liberals want to change the tax code -- and why
It's a reinterpretation that prompted disbelief. "Why would the government want to abandon long-standing practice to start taxing a store employee for a 20-per-cent discount on a pair of jeans?" Retail Council of Canada vice-president Karl Littler said at a hearing of the Commons finance committee on Sept. 27.
For months, employer organizations thought that the interpretation in the new tax folio, which indicate employee discounts are taxable benefits, might simply be a mistake. After all, it contradicted CRA's employer guide, which has been in use for years and remains on the agency's website. The employer guide said employee discounts are "not usually considered a taxable benefit," while the new folio indicates "the value of the discount is generally included in the employee's income."
But a spokesperson for the CRA, Zoltan Csepregi, told The Globe and Mail in an e-mail that it is the new folio that is "correct and represents CRA's interpretation of the law." He said CRA's employers' guide and its websites – which had long indicated that employee discounts don't need to be counted up as taxable benefits – will be updated "to ensure that the practical guidance is consistent with the folio."
At a time when the Liberal government is facing controversy over changes to the taxation of small business, arguing that they are closing loopholes for the affluent to be fair to the middle class, starting to tax employee discounts seems to clash with the political message.
Employers discounts typically add up to relatively small sums for the individual who receives them, and they tend to be in jobs that pay relatively modest wages. Mr. Littler told the Commons committee the rule change would affect many of the country's two million retail-sector employees, and possibly hundreds of thousands in other sectors.
For employers, he warned, it could mean an "administrative nightmare." If employee discounts are taxable benefits, then presumably employers would be expected to track them, and tally their value each time an employee buys a discounted item, recording the annual total on their T4 – perhaps encouraging them to drop the discounts to avoid the hassle.
"I can't help but shake my head at this one, to be honest with you," Liberal MP Wayne Easter, chair of the Commons finance committee meeting, told Mr. Littler at the hearing.
The Canada Revenue Agency said in a statement e-mailed to The Globe that they don't expect the change in their interpretation to bring about a significant change in the number of employee discounts that are reported as taxable benefits. They pointed to an exception that stipulates that if an employer has a sale where "that same discount is also available to the general public," then the employee discount won't be considered taxable income.
But employers' groups say that that seems like a narrow loophole, and they are confused that the CRA seems to be suggesting it can be applied to most employee discounts. Rachel de Grace of the Canadian Payroll Association, an employers' organization that deals with payroll matters, said it's not clear how CRA expects the new policy to be applied.
Mr. Easter, the chair of the Commons finance committee, said he thinks the CRA should reconsider its new approach. "They had better," he said in an interview.
He said it appears that the political level of government – cabinet ministers and their political staff – were not aware that officials in the department had changed the interpretation of the law.
Most of the people who benefit from employee discounts are not high-income earners, he said.
"And how are you going to track something like that?" he said. "C'mon. Let's have a little common sense."
Campbell Clark