In the house where I grew up, we bought almost all of our clothing, housewares and other durable goods from one retailer. That’s because it was the company where my dad worked, and part of the employment deal was a discount on purchases.
That’s a common practice for retail employees and restaurant workers, and one that garnered some front page media attention recently. It’s not because of any public uproar as if it was some kind of scandalous abuse. On the contrary, it was prompted by what appeared to be a reversal of the Canada Revenue Agency’s longstanding practice of acknowledging these as non-taxable items.
Is the CRA really intending to begin requiring employers to track the savings each employee receives, and report that as a taxable benefit each year?
Income Tax Act (ITA) Canada
Per paragraph. 6 (1)(a), income from employment includes “benefits of any kind whatever received or enjoyed by the taxpayer …in the course of, or by virtue of the taxpayer’s office or employment”. Some exceptions are allowed in the following subparagraphs, with no mention of discounts.
Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment
The CRA has an ongoing multi-year project migrating and consolidating its tax practice guidance from a variety of older formats into the online Folio format. This particular Folio was published in October 2016, but the story hit the headlines in October, 2017.
The Folio states that a discount is generally to be included as an employee benefit under para. 6(1)(a). With the exception of discounts made available to the general public, “the value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee.” Responsibility is placed on the employer to “determine the value of the benefit to include in an employee’s income.”
CRA letters 2017-0726641M4 & 2017-0729161M4 – Taxability of employee discounts
An immediate firestorm erupted for the Minister of Revenue Diane Lebouthillier, and within a day she clarified that this was the action of CRA bureaucrats, not the government’s policy intention. One day later, Folio S2-F3-C2 had been taken down from the CRA website, replaced by as a statement that it was “currently under review.”
We now have written affirmation that employee discounts are not on the CRA’s radar. Two letters were published in the last couple of months, from the Minister of Revenue herself. The letters are almost verbatim one another, with one providing a bit of additional reassurance to restaurant employees. The Minister states that the “longstanding administrative policy that employee discounts on merchandise are generally not taxed … is still in place and is explained in Guide T4130.”
T4130 Employers’ Guide - Taxable Benefits and Allowances
This Guide advises an employer that if it sells “merchandise to your employee at a discount, the benefit he or she gets from this is not usually considered a taxable benefit.” If the discount is below the employer’s cost, there would be a taxable benefit for the difference between fair market value and the price paid.
- Generally, benefits received by an employee from an employer are taxable.
- Discounts for an employer’s merchandise and meal discounts for restaurant employees continue to be non-taxable, per the CRA’s longstanding policy.
- If a discount is below employer cost then a taxable benefit may still arise.