[In technical interpretation 2017-0729441E5, March 26, 2019] the CRA acknowledges that its administrative position on employee discount programs is that an employee may exclude from income discounts on merchandise and commissions from personal purchases, but that administrative position does not apply to a discount on a service, such as an employer-waived commission on the acquisition of an insurance policy.
Marlene Cepparo “CRA’s Employee Discount Position Not Applicable to Services” Canadian Tax Highlights 27:6 (June 2019)
An employee derives a benefit from free parking unless the employee must use the space “regularly” to perform his or her employment duties (ie for business purposes). Parking “to facilitate working irregular or extended hours is [not] parking for business purposes.” CRA technical interpretation dated January 24, 2018 (2016-0645911E5), translated and summarized at taxinterpretations.com here.
Update July 21, 2018 For a discussion of this technical interpretation, see Georgina Tollstam, “After-Hours Parking Spot Is Taxable Benefit” 26:6 Canadian Tax Highlights (June 2018). She points out that the CRA position is contrary to the Tax Court decision in Chow v R, 2001 DTC 164 (informal procedure).
It appears the CRA has backed off its employment expenses project. A colleague of mine sent a release he received from CRA Audit, which read in part as follows:
Effective immediately, the Agency will stop reviewing and disallowing “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. We will also reverse those reassessments specific to line 229 already issued during the review period September 1, 2017 to February 10, 2018. Specifically, taxpayers who were major shareholder and owners of a corporation and received a letter from the Special Assessment Program of the Canada Revenue Agency dated between September 1, 2017 and February 10, 2018 indicating that they were reviewed for “other employment expenses” claimed on line 229 of the T1 Individual Income Tax and Benefits Return.
Taxpayers involved in these reviews will be contacted by letter to inform them of this decision.
Consultation will be undertaken with stakeholders in the tax professional community to clarify the requirement of employer certification under Subsection 8(10) of the Income Tax Act as it relates to shareholder-employees. It is expected that clarification will be issued to take effect in the 2019 tax year.
The Agency will issue guidance products on this issue well in advance of any future reviews to allow taxpayers, and their representatives, reasonable time to adjust to their tax filing requirements.
I have not been able to find a copy of the foregoing on the CRA website.
The CRA has a new ‘project’ underway. This time the target is employees who deduct employment expenses under section 8 of the Income Tax Act. The CRA seems to be on the lookout for employees who are also shareholders of the corporate employer. The impetus for this scrutiny appears to be Adler v R, 2009 TCC 613 (informal procedure). The taxpayer was an employee of a corporation of which he was also the sole shareholder, director and officer. The taxpayer had deducted employment expenses under section 8. Was he entitled to deduct the expenses? At ¶22 of his judgment, Justice Webb (as he then was) wrote:
[I]t seems to me that in order for the Appellant to satisfy the requirement that he was required to pay for the expenditures that were incurred the Appellant would have to establish that there would be some consequences that would be detrimental to the Appellant if he failed to fulfill the obligation. In this particular case, what consequences would arise if the Appellant refused to incur the expenditures? Since the Appellant was the sole officer, director and shareholder of his employer it seems obvious that if the Appellant were to refuse to incur the expenditures that there would be no adverse consequences for him. One cannot imagine the Appellant, as President of Island Ink-Jet Manitoba Ltd., seeking to have the company sue the Appellant for breach of contract, taking any disciplinary action, or writing a poor performance review of the Appellant. Therefore, it seems to me that he chose to pay these amounts personally rather than have the company pay for these expenditures (either directly or by reimbursing the Appellant) and that the Appellant was not required to do so as an employee. There would be no consequences detrimental to the Appellant, if he did not personally pay the expenses or carry out the duties.
On the basis of the foregoing reasoning the Court dismissed the taxpayer’s appeal.
Update 2018 01 13 From the CRA website:
The Canada Revenue Agency (CRA) announced that David Gnanaratnam of Toronto, Ontario, was sentenced November 30, 2017 in the Ontario Court of Justice in Toronto to a conditional sentence of six months and a court imposed fine of $30,000. Mr. Gnanaratnam had previously pleaded guilty on November 23, 2017, to one count of evading income tax under the Income Tax Act.
A CRA investigation revealed that in the course of operating a tax preparation business, Mr. Gnanaratnam claimed false employment expenses on the personal tax returns of 24 of his clients for the 2013 tax year. As a result, Mr. Gnanaratnam wilfully evaded or attempted to evade payment of taxes by his clients totalling $36,035.
Kathryn Walker, “Employee Discounts for Merchandise: The Law” Canadian Tax Focus 7:4 (November, 2017) argues that the CRA’s new policy in Income Tax Folio S2-F3-C2, “Benefits and Allowances Received from Employment” on employee discounts simply reflected a change in the jurisprudence. She refers to R v Spence, 2011 FCA 200, Steam Whistle Brewing Inc. v MNR, 2012 CarswellNat 2772, and Anthony v R, 2010 TCC 533, aff’d 2011 FCA 336.
The Trudeau government was quick to blame bureaucrats for the change and to promise a reversal. Will the change take the form of legislation to overturn the cases referred to above?
In Dino Infanti “Employee Stock Option Rules and Legally Binding Agreements” Tax for the Owner-Manager 17:2 (April 2017), the author summarizes CRA technical interpretation 2016-0641841I7 (September 19, 2016). The technical interpretation, in light of Transalta Corporation v R, 2012 TCC 86, states that s 7 and s 110(1)(d) of the Income Tax Act (Canada) apply only if there is a legally binding agreement to issue shares. Continue reading
Neal Armstrong notes that the CRA, in technical interpretation 2015-062357 (dated April 26, 2016), takes the position that an employee advance is taxable when received even if the amount must be repaid if the services aren’t performed.
Mark Tonkovich, “Theft by Owners or Senior Employees: Deductibility of Losses” (Feb 2016) 6:1 Canadian Tax Focus, analyzes employee theft as discussed in Income Tax Folio S3-F9-C1, “Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime”. The Folio sets out criteria for deciding when an employer can deduct an amount stolen by its employee. According to Mr Tonkovich, the Folio focuses too much on the place of an employee in the employer’s management hierarchy. Mr Tonkovich suggests that
If one extrapolates from the jurisprudence, considerations such as the following should be taken into account:
- whether the stolen assets were actively used in the business’s operations, or whether they are better seen as proceeds of completed business activity;
- whether the thief committed the theft in the way that a lower-level employee or a customer might have done, or whether his actions specifically reflected his role as a business owner or executive; and
- the extent to which the thief actually exercised control over the activities that led to the fraud as a principal of the business, rather than merely whether he had the capacity to exercise such control.