Fact check: Are employee discounts taxed, or not?
Published Wednesday, October 11, 2017 12:42PM EDT
Last Updated Wednesday, October 11, 2017 1:43PM EDT
OTTAWA – The Canada Revenue Agency has changed how it is interpreting existing tax law concerning taxable employee discounts. While the update has stakeholders concerned about the impact, the government says the effect should be minimal and it is working to clarify widespread confusion about the rollout.
Employee benefits have always been subject to tax, but the latest change to what the CRA considers taxable has some retail groups and the opposition Conservatives concerned about the impact on working class employers and their employees.
The government says the new guidance doesn't change tax policy, and isn't meant to target the retail sector, though National Revenue Minister Diane Lebouthillier's office clarified that is the sector where it's expected the revised interpretation of existing tax law is likely to have the biggest impact on the most businesses.
As the minister responsible for the CRA, Lebouthillier is taking into consideration the concerns of stakeholders who are worried employers will cut employee discounts for the sake of simplicity, or come tax time it would overly burden their filing requirements.
She is reviewing the guidance document that a source in her office says was changed without her approval. The source also said that the minister is disappointed that the CRA's updated guidance, meant to clarify employer calculations on what is taxable, has been “misinterpreted.”
Here's what you need to know:
What has changed?
Up until July 7, 2016—when the CRA issued the new guide for employers explaining how it would interpret the merchandise portion of the Income Tax Act—companies that offered merchandise discounts to staff weren't expected to report them as taxable benefits.
But now, according to the updated document, the CRA is advising employers that, in certain instances, these benefits count as part of income and are considering them fair game to tax:
- if an employer makes a special arrangement with employees to buy merchandise at a discount;
- if an employer allows an employee to buy merchandise for less than what it cost the employer;
- and if an employer arranges with another employer for a reciprocal employee discount on merchandise.
The requirement will be on employers to report taxable income on employees' T4s.
However, there is an exception when the same discounts are offered to members of the public at some point during the year, for example: when car companies offer “employee pricing” promotions.
For example: if an employee receives a 60 per cent discount on product at the store they work at, and that discount is not available to the public, the CRA now considers the difference between what a customer would pay for that product and the lessened price that the employee pays (the value of the discount), a benefit they can tax. If it's not available to the public, it's a benefit, and the CRA says that should be stated on employees' tax filings.
But, if the store that offers employees a 60 per cent discount, also offers the public a 60 per cent off sale at any point in that year, the employer would no longer be required to report it.
When did the change happen, and why?
The 2016 update to the language around employee discounts is the result of the CRA changing its interpretation of the existing tax law, not a change to the law itself. The update followed 2011 tax court rulings that found the CRA's old guidance for employers was inaccurate, forcing the Agency to reevaluate the information it was providing employers.
While the CRA's new approach has been in effect since the guidance change was made, CTV News was told that the agency plans to work with employers into the 2018 tax year, to make sure they understand what they're expected to report.
What will the impact be?
The CRA expects the policy update should result in a minimal change to the number of employee discounts that are reported as taxable benefits, but it has yet to be seen how the CRA intends to enforce this.
The minister's office said the new way the CRA is instructing employers to calculate benefits could result in more benefits being declared than before, because the CRA's updated interpretation will put the rules on employers radars.
However, they say retail sector employers shouldn't expect to find themselves subject to a CRA audit over their reporting on employee benefits.
If the confusion isn't cleared up, Retail Council of Canada vice president of public affairs Karl Littler cautions there is potential for this to become an “administrative nightmare” for employers come tax time.
In flagging this change to the House finance committee in September, Littler said it could impact a good number of the two million retail industry employees, and “hundreds of thousands if not more employees in other sectors.”
According to the minister's office, the CRA is pulling the guidance documents down off their website to be reviewed, and once that is completed a new version will be put out for consultation with stakeholders.