11 Oct Trending in Business: Taxing Employee Discounts? Small Taxation, Major Damage to Business

Editors update to this story.

The folio Grant writes about was released earlier this week and other like-minded individuals have been up in arms. As a result of articles like this one, the CRA has announced that they will be revoking the policy and returning to the standards that Grant has so strongly urged below.

We were indeed waiting for their call – and it came.

The Editor

By Grant T. Smith

On Monday, October 9, 2017 the Globe and Mail reported that “the CRA has issued a … tax ‘folio’ indicating that employee discounts are to be considered taxable benefits, and part of their income.”

Up until now, the treatment of store discounts has been that unless the items were sold below cost, neither the employee nor the employer had to consider them as taxable benefits.

That means if this new policy goes forward, every time a store clerk buys a sweater with a staff discount, the event would trigger a taxable event. Every time a server uses the staff discount on a meal, it would create a taxable event.

The store would have to record the amount of the benefit, so presumably they would need to be able to track all staff purchases, by staff and by discount, so they could report the information on a T4.  The cost of this compliance would probably exceed the value to the staff and likely cause stores to stop giving staff discounts.  

When I worked in retail – which I did for close to a decade – there were some commonalities amongst the majority of employees:

• They were low to middle income, because retail employment does not make anyone rich.
• Long-term staff liked the product they were selling and the employee discount was important to them; they could not afford the product without the discount.
• The benefit of the discount accrued to the employer more than the employee, as it provided a measure of support that engaged staff who had little reason for loyalty.

Before I really get started, I must acknowledge that the concept of taxing this is consistent with the tax act, so it would be technically correct. The employee is getting a benefit, related to employment, and that would normally be considered a taxable benefit.

However, the resultant taxation would be very small yet the damages to business would not, as I shall support.

This rule change, which I would call administrative, would be destructive to the morale and operation of the service sector. The Liberal government has spent the summer espousing that they want to ensure higher income individuals pay their fair share of taxation. I have used my limited resources to indicate that I support such a policy, since I agree that a fundamental principle of taxation should be that with greater income comes greater taxation. This change flies in the face of all of those arguments.

This is an attack on small business, for the cost of compliance would harm them far more than it would the large retailer. This is an attack on service employees, who are almost never in the higher income brackets. This focuses and those with lower incomes and the small business owner and is not consistent with trying to make the tax act fairer for taxpayers. I might also add that another principle of taxation, as detailed by Adam Smith, was the requirement for it to be easily calculated – good luck!

Ottawa, for the moment I choose to believe that a bureaucrat in the CRA has overstepped their boundaries and they will be quickly rebuked. I expect the agency will issue an apology for the difficulties created by this folio. CRA, we await your reply.