October 13, 2017
In recent days, the policy and interpretation choices made by the Canada Revenue Agency (“CRA”) have taken a rare step into the public discourse. At issue are employee discounts enjoyed by retail workers. While tax issues are often widely discussed, it is normally in relation to legislative changes being considered by the Federal Government rather than policy choices made by the CRA. The recent furor arises from a short-lived change to the CRA’s policy position with respect to employee discounts in a document known as “Income Tax Folio S2-F3-C2”. The change would have seen the value of employee discounts counted as income for the largely low-income workers that benefit from such programs.
By way of background, Income Tax Folio’s are documents representing CRA’s interpretation of topics under the federal Income Tax Act and are generally drafted for, and relied on by, income tax professionals. Certain area of tax policy, such as the taxation of employee benefits provided by a health and welfare trust, are entirely guided by CRA interpretation under these Folios, as opposed to the tax legislation itself. The CRA is currently in the process of replacing existing Interpretation Bulletins with updated Income Tax Folios.
The recent change stated that the fair market value of an employee discount would now be considered a taxable benefit for employees, representing a significant change from the CRA’s previous position on these discounts.
In this context the recent controversy arose. The CRA’s recent Income Tax Folio on Benefits and Allowances Received from Employment replaced and cancelled the prior Interpretation Bulletin IT-470R Employees’ Fringe Benefits. In the prior Bulletin, the CRA’s position had been that employee discounts were not taxable absent “an extraordinary arrangement with a particular employee or a select group of employees” or “an arrangement by which an employee is permitted to purchase merchandise…for less than the employer’s cost.”
Unexpectedly, the new Folio indicated that the CRA would now be taxing these benefits such that “[t]he value of the [taxable] benefit [would be] equal to the fair market value of the merchandise purchased, less the amount paid by the employee.” – i.e if a $100 item was purchased for $90 due to an employee discount program, $10 of income would be imputed to the employee who made the purchase. The CRA also indicated that no amount would be included in income “if the discount [was] also available to the general public or to specific public groups.”
This change proved understandably upsetting to the large number workers who receive and rely on employee discounts, and particularly concerning to the often low-wage and precarious workers in the retail and food-service industries, where employee discounts can represent a key aspect of compensation, sometimes off-setting the cost of clothing, food, or other budgetary items. Counting such discounts as taxable effectively lowers the wages of many already at the fringes of low-wage and precarious work, including two million retail industry employees.
The Folio has been on CRA’s website for a number of months. However, once public awareness of the change set in, backlash was swift across traditional and social media. The CRA’s change in policy appeared to be a surprise to the Federal Government. CBC news reported on October 11 that it had received a statement from Revenue Minister Diane Lebouthillier’s spokespersons regarding the Folio that “[t]his document was not approved by the Minister and we are deeply disappointed that the agency posted something that has been misinterpreted like this…The agency issued a guidance document that does not reflect our government’s intentions and the Minister of national revenue has instructed officials to clarify the wording.” The Folio has now been removed from CRA’s website with a statement that it is “currently under review.”
Prime Minister Trudeau took to twitter to state “Let me be blunt: we are not going to tax anyone’s employee discounts. Minister @DiLebouthillier has asked the CRA to fix this.”
While the Government’s clarification and direction to CRA is welcome, the incident perhaps highlights some more significant concerns with respect to tax policy for vulnerable workers. The Government has generally committed to closing loopholes and tax credits. While some of these reforms, such as curtailing benefits available to small business corporations and incorporated professionals, have been controversial, they clearly fall within the Government’s broader policy framework promoting tax fairness.
What is more concerning is an apparent blind-spot from CRA and the Government towards the effect of tax policy on vulnerable workers. The CRA’s recent mis-step echoes the news from earlier this year that the Liberal Government had been considering amendments to require that employer provided health and dental benefits be considered taxable benefits (see our past blog post on this issue). These changes would have added to the tax burden on employees, with a disproportionate effect on low-wage and vulnerable workers.
In light of these controversies, it is important to keep in mind that small changes in tax policy can have significant and perhaps disproportionate effect on average workers who rely on tax credits in planning their finances and are not seeking mechanisms for tax avoidance. Policy responses should keep in mind that what may appear to be an “unfair credit” for a well-compensated employee, may make the difference between providing access to dental care, clothing or other essentials for more vulnerable employees who need it most.
Additionally, tax assistance incentives promoting, for example, health care and medical benefits often serve a public purpose such as mitigating the costs to our overburdened public health care system. The answer to any inequity that might exist between workers who have workplace benefit plans and those who do not is to promote expanding private benefit plan coverage for the “have-nots,” not to raise tax revenues from workers and good employers who provide these benefits – and therefore turn more workers into “have-nots”.
These controversies show that tax policy need to be more proactive, and less reactive, in addressing the needs of the growing segment of vulnerable and precarious workers in Canada. It is unfortunate that the discussion of key tax policy issues facing many workers is playing out on Twitter and Facebook, It would be preferable if this controversy could open a dialogue to a considered policy response addressing the needs and issues of these workers within the context of the Income Tax Act and CRA Policy.
Pension and Benefits