A version of this article was previously published in Canadian Tax Focus Volume 7, Number 4, November 2017
On October 10, 2017, a media storm erupted over the Canada Revenue Agency’s (“CRA’s”) relatively recent Income Tax Folio S2-F3-C2 (the “Folio”) (now removed from the CRA website), which explains the income tax treatment of benefits and allowances received from employment, covering among other things discounts on merchandise. In quick response,[1] the Minister of National Revenue (the “Minister”), named CRA bureaucrats as the source of the aggressive position taken in the Folio and committed to reviewing the Folio. Later the same day, the Prime Minister committed to retracting the policy altogether. These events raise a question: does the Folio conform with or depart from the law as it has evolved over time?
Prior to the publication of the Folio, the CRA espoused a less aggressive position on the issue of employee discounts for merchandise. The earlier policy is in the CRA’s T4130 Employer’s Guide: Taxable Benefits (the “Guide”), which outlines the tax treatment of a wide range of benefits that an employee might receive. Of note, the Guide states (on page 18): “If you sell merchandise to your employee at a discount, the benefit he or she gets from this is not usually considered a taxable benefit”. The Guide goes on to clarify that if an employee discount allows an employee to buy merchandise for less than the employer’s cost, there would be a taxable benefit. In other words, the value of the taxable benefit is the difference between the discounted price to the employee and the employer’s cost for the merchandise. For example, if a t-shirt cost $10 retail, $5 at a discounted price to an employee, and $6 at cost for the employer, the taxable benefit would be $6 minus $5 or $1.
The Folio was published in July 2016 and shifted the CRA’s position on merchandise discounts; despite this, the Guide was left unchanged. The Folio recites paragraph 6(1)(a) of the Income Tax Act (the “Act”) explaining that “[g]enerally, ‘the value of board, lodging, and other benefits of any kind whatever received or enjoyed … in respect of, in the course of, or by virtue of an office or employment’ is included in an employee’s income.” The Folio specifies that a discount on merchandise is a taxable benefit to be included in the employee’s income and that the quantum of that benefit is the amount by which the fair market value of the merchandise exceeds the price the employee paid.
The jurisprudence on this issue shows that the change in the CRA policy mirrors a shift that occurred in the courts. In Detchon v R (96 DTC 2032), the Tax Court considered whether employee teachers who received free tuition received a taxable benefit from the employer school. In holding that a benefit was received, the court determined that the benefit was equal to the cost to the school, and not the amount that the employees would have otherwise paid. This approach to calculating the quantum of an employee benefit is followed in the Guide, which as explained above considers the employee benefit to be equal to the difference between the discounted price to the employee and the employer’s cost for the merchandise.
However, in Spence v R (2011 FCA 200), the Federal Court of Appeal overturned Detchon. The question before the court was the amount of the employee benefit derived from a 50% percent discount on school tuition given to teachers who were employees at the school. The court held that the benefit was not the cost to the employer, but the value of the benefit received by the employees, i.e. the fair market value of the tuition less any amount paid by the employees. This approach to calculating the quantum of an employee benefit is followed in the Folio. Two subsequent cases – an employment insurance case, Steam Whistle Brewing Inc. v MNR (2012 CarswellNat 2772 (TCC)), that concerned with free beer provided to employees, and Anthony v R (2010 TCC 533; aff’d 2011 FCA 336), which considered the quantum of the benefit related to free parking given to teachers at a school in downtown Toronto – followed this approach.
Hence the case law demonstrates that the Folio, which taxes employee benefits more aggressively than the Guide, adheres to the relevant jurisprudence.
Further, the outcry over the Folio and the Minister’s response serves as a reminder of the dual sources of authority that determine CRA policy. Subsection 220(1) of the Act provides that Minister shall administer and enforce the Act and that the Commissioner of Revenue (the “Commissioner”) may also do so. In other words, the Minister, who is politically appointed, shares the administration of the Act with the Commissioner, who is non-elected. As the employee discount drama shows, this power sharing arrangement can lead to CRA policies that are inconsistent with each other.
About the author
Kathryn Walker, Thorsteinssons LLP Tax Lawyers