By Jamie Golombek and Debbie Pearl-Weinberg
The rules in the Income Tax Act require that the value of “benefits of any kind whatever received or enjoyed” by an employee are to be included in income from employment, unless certain set out exceptions apply. This is a very broad provision. The Canada Revenue Agency (CRA) has taken an administrative position that has softened this rule somewhat in the case of employee discounts.
In the Employers’ Guide – Taxable Benefits and Allowances, the CRA reviews many issues involving employee benefits. Where a discount on merchandise has been provided to employees, so long as this does not involve providing a discount to just one employee or a select group of employees, or selling merchandise below its cost, the CRA does not usually consider that a taxable benefit has been provided. For instance, a retail employee of a clothing store may be offered a set discount on regularly-priced clothing. Provided the other criteria above are satisfied, the CRA is of the view that no taxable benefit should be assessed.
This policy extends to situations where commissions are received related to items purchased for personal use. For instance, if a life insurance salesperson purchased a life insurance policy, so long as the salesperson was the owner of the policy, and is required to make the insurance premium payments, then any commission received that is “not significant” will not be taxable. In order for this administrative policy to apply, however, the insurance policy cannot have either an investment component (such as is typical in a universal or whole life policy) or a business use (such as one used to fund a buy-sell arrangement or keyperson insurance).
The CRA does, however, make it clear that this administrative policy does not extend to discounts on services. These will always result in a taxable benefit. Occasionally, however, it may not be clear whether a discount has been provided on merchandise or for services. This distinction was illustrated in a recent CRA Technical Interpretation (TI 2017-0729441E5) released in March 2019.
In the TI, the CRA was asked to comment on whether a taxable benefit arose where the employee of an insurance broker purchased a personal insurance policy, but was not charged a commission. If the same policy was sold to a member of the general public, the CRA noted that the purchaser would pay both premiums to the insurer in consideration for the coverage provided, as well as a commission to the insurance broker as payment for the placement of the insurance. Under the particular employee incentive program, employees of the insurance broker had this commission waived when they purchased insurance for personal use, such as a home or automobile insurance policy. This resulted in the employee paying a total cost for the insurance policy that was less than the amount charged to a non-employee.
At first glance, one might think that this would fall into the CRA’s administrative exception, and that no taxable benefit would arise. That is, could the insurance policy be considered merchandise, and thus this employee incentive fall within the category of a discount on the purchase of merchandise, as discussed above? The CRA, however, took a different position and concluded that in this case, it was to be treated as a discount on services, namely the placement of the insurance. Because the fee for providing this service, or the insurance commission, had been waived, the CRA’s position was that a taxable benefit arose. Interestingly, the CRA specified that this would be its position even if the benefit was provided to all employees of the employer. It would also maintain this position if this employee incentive was offered to employees of a client of the insurance broker.
As for the amount of the taxable employment benefit, CRA indicated that this would be the difference between the amount “customarily charged” by the insurance broker for the placement of insurance, and the amount, if any, that was “paid by the employee in respect of that service.” These closing words of the CRA make it very clear that their position is that this arrangement results in a discount for the provision of services, and not for the provision of merchandise.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is managing director, tax and estate planning, with CIBC Financial Planning and Advice in Toronto. Debbie Pearl-Weinberg, LLB, is executive director, tax and estate planning, with CIBC Financial Planning and Advice in Toronto.