Why tax and uncertainty don’t mix

A fresh look at the standing guidelines on employee benefits

 
(Photo: David Paul Morris/Getty Images)

If you work in retail and get a staff discount on shoes, the CRA was warning you should be taxed on the benefit. That would create a major headache for small businesses. The CRA has since backed off.    (Photo: David Paul Morris/Getty Images)

Canadians are a compliant lot.  According to the Canada Revenue Agency, in 2012–13, 92% of Canadians filed their taxes on time and 95% paid their reported taxes in full; a remarkable record for a tax system based on self-assessment and voluntary compliance. But the recent controversy that erupted over the taxation of employee discounts on merchandise is part of a disturbing trend that began with changes to the taxation of private corporations in July.

When politics and the certainty of Canadian tax law collide, what’s left is the potential for erosion in the confidence Canadians have in their tax system.

The culprit for the current controversy, began with CRA’s interpretation of changes to Folio S2-F3-C2 which has recently been taken down “for review”.  It had directed that employee pricing below any price offered to the public would be taxable, which would include staff discounts on merchandise.

Interested parties are now being directed to last year’s CRA Employer’s Guide 4130, where the instructions are clear: merchandise sold to employees at a discount will not be taxable unless the following instances apply:

■ merchandise (other than old or soiled items) is acquired by the employee for less than the employer’s cost.

■ when a special arrangement is made with an employee or a group of employees to buy merchandise at a discount, or if a reciprocal arrangement is made between two employers to enable employees of either firm to by discounted merchandise from either employer.

That should put many minds at ease.  However, this is all a compliance headache for small business owners:  the taxable benefit reported on the T4 slips must be calculated as the difference between FMV (Fair Market Value, defined by CRA to be “the price that can be obtained in an open market between two individuals dealing at arm’s length”) and what is paid by the employee.

The employer must prove that FMV to a tax auditor; other taxes are at stake, too:   the correct amount of GST/HST to include in the benefit, and whether payroll deductions are required.  In short, if the owner of your corner store mom and pop shop gets it wrong, heavy penalties and interest could apply, especially if CRA audits retroactively.

If the onus of proof for tax law compliance is on the employer, there must be certainty in tax law, as well as fairness and equity.  The onus for that responsibility rests with Finance Canada and CRA – the first in the chain of compliance who must get it right.

It will be interesting to see how this shakes out, because discounts on merchandise not offered to anyone else have an economic value that does, in fact, enrich employees.

 

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