I live in the UK so this doesn’t affect me personally, but as I adore all things tax, this struck me as interesting.
Seems the CRA (Canada Revenue Agency) has issued a new interpretation of the Income Tax Act with regards to employees receiving sales discounts from employers (retail shops, restaurants, etc) and whether or not those discounts should be taxed as part of regular employment income. Up until this point those discounts were not collated, reported and the tax deducted at source. The ITA (Income Tax Act) is rather unwieldy and you need to be a super specialist to interpret it. MP Wayne Easter has stated in the HP post that the CRA should rethink this new interpretation. I’m sorry to disillusion Mr Easter or anyone else – but any challenges to CRA’s interpretation of the ITA has to go through the Tax Court and the Supreme Court of Canada also hears tax cases – when sent up from the Federal Court of Appeal. This is usually why you need either a Tax Lawyer or an accountant (usually one from one of the Big 4) on your side when fighting the CRA.
So, employee discounts. I have experienced these myself, when I was but a baby accountant, learning the tricks of the trade and earning just a bit over minimum wage. I worked for Sears Canada for 3yrs, in their Finance Department. There I did get a 15% discount on any items I purchased in the Sears Canada stores. Whenever I would get the discount I would present my employee card and that would get swiped. This argument that keeping track of which discounts an employee gets is a red herring – most employees have an employee number which can easily be punched into the POS system at the point of purchase. Run the reports from the POS and viola! you have your listing of the discounts the employees have gotten.
The Canadian Income Tax Act is structured in such a way that ALL employees who gain any form of economic benefit through work must be taxed on that economic benefit (i.e., wages). This also includes any benefits received in kind, such as private dental insurance, payment of any membership dues (CPA-CGA in my case) and whatnot. Banks for ages have been forced to tax their employees on the reduced interest rates they pay on any personal loans or mortgages they may have received as part of their renumeration package with the bank.
Do I think it fair to tax these benefits? Yes. By the very notion of the ITA those discounts are an economic benefit. I know some would argue that in some retail shops the employees are required to wear the shop clothes whilst working. In that case, those costs can be claimed as part of a “uniform” as the terms of employment will specifically state this requirement. And this negates the argument of “what of those retail employees who are forced to purchase the shop’s clothes”.
When I worked for Pfizer we had the benefit of the Employee Store, which opened twice a week. So we were able to get OTC products (such as visine, lubriderm, nicorette, purel etc) cheaply. BUT, Pfizer did not discount these products for us. They sold them to us for exactly the same amount that they would sell to Shopper’s Drugmart, Sears, Rexall etc. So there was no dip in the company’s profits, so to speak, to provide a discount to the employees. It’s just the middle man was cut out of the equation. And this fits in perfectly with the new re-interpretation of the ITA.
Now, thinking from the Treasury/CRA point of view, I have a quick & dirty table explaining the effects of providing an employee discount to staff and the effect it has on tax revenues.
As you can see, when a shop sells to the general public, the tax revenues collected for CRA are significantly higher than providing a discount to the employee under the current system. Yes, in essence, this is a cash grab by CRA to plump up the tax coffers. But if we turn back to what I mentioned earlier – we as employees get taxed on the economic gain from employment (salaries/wages, benefits etc). CRA’s interpretation is looking at what are employee benefits. If you want this changed, the ITA needs to be updated via legislation – meaning Parliament has to make that amendment.
As for those who argue about the free coffee, tea etc they get in the employer’s canteen/kitchenette etc. Under current legislation the employer can only claim half the cost of providing those freebies when filing their corporate tax return. So if they paid $100 for the tea/coffee they can only claim $50 as a business expense – so effectively they need to pay an extra (at 28%) $14.00 to CRA.
So I would suggest before jumping on the bandwagon and flailing the fists that this is unfair, maybe look at the implications on the tax coffers. We all whine that the government keeps cutting benefits & funding, but the coffers need to be more robust so that those cuts don’t happen.