The CRA has caused confusion with an apparent change to its employee benefit policy.
UPDATE: Since we first published this article, Prime Minister Justin Trudeau has come out and publicly stated that the government is “not going to tax anyone's employee discounts” and that the CRA has been instructed to “fix” its guidance. In response, the CRA has removed the controversial Income Tax Folio from its site “for review”. As a result, the CRA will continue to follow its longstanding position that there is normally no taxable benefit where an employer sells merchandise to an employee at a discount.
Specifically, in a recent publication, the CRA states that it generally considers all items purchased at an employee discount to be taxable benefits to the employee. The CRA's previous longstanding position was that there is generally only a taxable benefit when an employee is permitted to purchase items below the employer's cost. A CRA statement recently said that the CRA is not targeting retail employees but stopped short of confirming the CRA intended to change its policy. The CRA indicated it intends to clarify its position, but did not specify when it may do so.
It appears that the CRA did not widely publicize this apparent change to its longstanding position. Instead, the CRA updated its discussion of employee discounts in an Income Tax Folio in 2016 to no longer specifically state that the value of the discount is only included in the employee's income where the discounted price is less than the employer's cost of the merchandise. If the CRA confirms that there has been a policy change, employees will have to include the benefit of discounted products in their income and employers may face significant administrative burdens as they would be required to track many low-cost benefits not previously recorded. Further, this change would likely have GST/HST repercussions for these employers. It is unclear when the CRA might start applying this new policy.
This apparent policy change was raised by an industry association at a pre-budget consultation meeting with the House of Commons Standing Committee on Finance in September 2017. The confusion has been compounded by discrepancies between the PDF and HTML versions of T4130, "Employers' Guide-Taxable Benefits and Allowances" that are posted on the CRA site. Only the HTML version of the guide reflects the new Folio.
The CRA's longstanding position has been that there is normally no taxable benefit where an employer sells merchandise to an employee at a discount except in extraordinary cases or where the employee is permitted to purchase the merchandise for less than the employer's cost. Where the merchandise is "old or soiled", there is generally no taxable benefit, even if these items are sold to employees below cost. This previous position was set out in paragraph 27 of the old IT-470R, "Employees' Fringe Benefits".
Folio appears to introduce new CRA policy
The CRA released Income Tax Folio S2-F3-C2 "Benefits and Allowances Received from Employment", in July 2016 to replace IT-470R, which it cancelled. This Folio summarizes the federal income tax treatment of benefits and allowances received from employment and also includes updated comments to reflect legislative changes and principles developed by the courts.
The Folio states that, when an employee receives a discount on merchandise because of their employment, "the value of the discount is generally included in the employee's income" and the "value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee" (under paragraph 2.28). The Folio further explains that there is no benefit if the discount is also available to the general public or to specific public groups. The Folio no longer mentions the previous administrative exception where the employee purchases the merchandise at an amount equal to or above the employer's cost (but below the fair market value). The Folio also provides examples of employee benefits where discounts on merchandise are offered, including where the employee receives a cash rebate.
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Information is current to October 12, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500