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Canada Revenue Agency Proposed Change to Tax

Employers to follow the Employers' Guide and section 6 of the Income Tax Act when computing income from employment


On October 8, 2017, several news agencies broke the story that the Canada Revenue Agency (“CRA”) had proposed changes to its interpretation of existing tax law concerning taxable employee benefits. Although employee benefits have always been subject to tax, the latest interpretation would result in merchandise discounts to staff being reported as taxable benefits.

According to the CRA’s T4130 Employers’ Guide — Taxable Benefits and Allowances1 (last updated November 30, 2016), the CRA considers discounts to be taxable in all the following situations:

  • a special arrangement with an employee or a group of employees to buy merchandise at a discount;
  • an arrangement that allows an employee to buy merchandise (other than old or soiled merchandise) for less than your cost; and
  • a reciprocal arrangement with one or more other employers so that employees of one employer can buy merchandise at a discount from another employer.

However, where the discount does not fall into these situations (for example, the typical discount given to employees that results in a sale price that is above the employer’s cost), the CRA does not view there to be a taxable benefit received by the employee.

Unfortunately for employees, the CRA announced in its recent Income Tax Folio S2-F3-C22 that it was going to change this policy and tax all employee discounts. The folio stated:

When an employee receives a discount on merchandise because of their employment, the value of the discount is generally included in the employee’s income under paragraph 6(1)(a). The discount may be provided by the employer or by a third-party. The value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee.3

A spokesperson for the CRA told The Globe and Mail in an e-mail that the new folio is “correct and represents CRA’s interpretation of the law.”4 The spokesperson added that the Employers’ Guide and the CRA website will be updated “to ensure that the practical guidance is consistent with the folio.”5

In response to the CRA’s folio, Canada’s National Revenue Minister Diane Lebouthillier immediately took an opposing position on the matter. The Minister stated that she never approved the new interpretation of the Income Tax Act, and added that she is “deeply disappointed” employees at the CRA issued the directive.6 Prime Minister Justin Trudeau also took to Twitter to state, “Let me be blunt: we are not going to tax anyone’s employee discounts.”7

It appears that the Minister’s office has since instructed the CRA to pull the documents from their website and the folio has been removed. According to the CRA’s webpage, Folio S2-F3-C2 is currently under review. The CRA advises that, “Employers should continue to follow current practices consistent with the information available in Guide T4130, Employers’ Guide — Taxable Benefits and Allowances.”8

Until a new policy directive or folio is issued, employers must continue to follow the Employers’ Guide and section 6 of the Income Tax Act when computing income from employment. This includes computing taxable benefits such as:

  • automobiles or other motor vehicles;
  • board and lodging;
  • gifts and awards;
  • group term life insurance policies;
  • interest-free or low-interest loans;
  • meals;
  • security options;
  • tool reimbursement or allowance;
  • transit passes; and
  • tuition fees.

Despite the confusion and media spotlight, there appears to be no significant changes pending for taxable employee benefits. Nonetheless, we will continue to monitor these discussions closely. Please do not hesitate to contact us with respect to the proper calculation of employee benefits for any of the taxable benefit items listed above.

1 Canada Revenue Agency, T4130(E) Rev 16, ”“Employers’ Guide — Taxable Benefits and Allowances.

2 Canada Revenue Agency, Folio S2-F3-C2, “Benefits and Allowances Received from Employment”.


4 Campbell Clark, “CRA under fire for new rule to tax employee discounts”, The Globe and Mail, October 8, 2017.


6 John Paul Tasker, “Liberal government tells CRA to back off plan to tax employee discounts”, CBC News, October 11, 2017.

7 Justin Trudeau, “Let me be blunt: we are not going to tax anyone's employee discounts. Minister @DiLebouthillier has asked the CRA to fix this.” (October 11, 2017 at 4:51pm).

8Folio S2-F3-C2, supra note 2.