Why the CRA thought it could take a bite of your free lunch

The Globe and Mail (Ottawa/Quebec Edition) - - OPINION - TONY KELLER tkeller@globe­and­mail.com

In the­ory, em­ployee dis­counts should be treated as com­pen­sa­tion and taxed as if they were salary. In the­ory, this is a no-brainer.

Af­ter all, if your com­pany gives you a $1 raise, you will pay, de­pend­ing on where you live and which tax bracket you’re in, up to 54 cents of that in pro­vin­cial and fed­eral in­come tax. What if your com­pany, in­stead of giv­ing you a raise, just gave you free mer­chan­dise? Should you pay no tax just be­cause the pay was in kind, rather than in cash?

In the­ory, of course not. In the­ory, that $5 ham­burger a fast-food worker got for free at the end of her shift should be taxed the same as if she got $5 on her pay­cheque.

And yet when the Canada Rev­enue Agency put out a tax in­ter­pre­ta­tion that ap­peared to call for ex­actly that, pretty much ev­ery­one, in­clud­ing the Lib­eral gov­ern­ment, said the CRA had got it wrong. And the CRA, though right in the­ory, did get it wrong. But it’s im­por­tant to spell out why.

It’s es­pe­cially im­por­tant that the Lib­eral gov­ern­ment gets its head around the prac­ti­cal prob­lem with the CRA’s plan. Do­ing so will help it fig­ure out its next steps on its own much more sweep­ing pro­pos­als on small­busi­ness tax­a­tion – in­clud­ing un­der­stand­ing which it should push through, which it should soften, and why.

The idea of tax­ing in­come equally is at the heart of any idea of tax fair­ness. Un­less we want to en­cour­age the cre­ation of tax loop­holes, our tax sys­tem has to try to re­spect it. That’s been the Lib­eral gov­ern­ment’s main ar­gu­ment in favour of its plans to close small-busi­ness tax loop­holes, and it’s a good place to start think­ing about tax fair­ness.

Our tax code al­ready says that if your em­ployer gives you ben­e­fits as part of your em­ploy­ment, those are nor­mally tax­able. If you ask your boss to give you a $50,000 boat in­stead of a $50,000 salary, your ship won’t come sail­ing in, tax-free. That loop­hole was closed long ago.

When I was a teenager, I worked as a waiter at sev­eral restau­rants. (High­est-end joint: Red Lob­ster). Some of­fered a dis­counted meal at the end of a shift. These weren’t treated as tax­able ben­e­fits, but at first blush, you can see why the CRA con­cluded they should be. And then, at sec­ond and third blush, you start to re­al­ize why do­ing so might not make sense.

It comes down to a ques­tion of pro­por­tion­al­ity and rea­son­able­ness.

Take John, work­ing in the kitchen at the neigh­bour­hood Ital­ian restau­rant. At the end of his night, the restau­rant sells him a $20 pasta and salad combo for half price. Op­er­at­ing un­der the guide­lines the CRA orig­i­nally pro­posed, did John get a $10 ben­e­fit from his em­ployer? What if the restau­rant claims it sold him the meal at cost, and lists his tax­able ben­e­fit as $0? What if the restau­rant de­cides to avoid the whole tax is­sue by sim­ply giv­ing him the meal un­der the ta­ble for free, and never even rings it up in the billing sys­tem?

There’s an old Latin ex­pres­sion: De min­imis non cu­rat lex. The law should not con­cern it­self with tri­fles. In the­ory, John’s half-price meal is a ben­e­fit, and thus must be taxed. But fig­ur­ing out how to ex­tract an ex­tra dol­lar or two of in­come tax out of John as a re­sult of his dis­counted meal seems likely to turn into a very costly and com­pli­cated ex­er­cise, re­peated a mil­lion times across the coun­try, for lit­tle or no gain or even a neg­a­tive re­turn to so­ci­ety, which is its own type of un­fair­ness.

Now con­sider Jane, who works as a man­ager at a ma­jor gro­cery chain. Let’s say that as part of her com­pen­sa­tion, her em­ployer de­cides to give her $500 a week of free gro­ceries. That’s $26,000 of free gro­ceries a year.

Should she have to pay tax on that em­ployee ben­e­fit? Yes she should, and yes she will. The CRA al­ready taxes ma­jor em­ployee ben­e­fits, like a car al­lowance or free park­ing (with a few ex­cep­tions such as health and den­tal cov­er­age). Aside from that, the prin­ci­ple of treat­ing cash pay­ments and in-kind ben­e­fits as equally tax­able is gen­er­ally up­held, at least when the perk is large and easy to spot.

But when what’s at is­sue is small, the same prin­ci­ple is of­ten ig­nored, and un­der­stand­ably so. The ques­tion of where to draw the line – what’s a big enough breach to be taxed and what’s pe­riph­eral enough to be bet­ter off left alone – comes down to whether the ben­e­fit to so­ci­ety of that ex­tra dol­lar in tax rev­enue out­weighs the costs im­posed on tax­pay­ers in col­lect­ing it.

That’s the equa­tion the Lib­er­als have to con­sider as they re­fine their small-busi­ness tax pro­pos­als.

When tax law goes af­ter tax tri­fles, it’s likely to cre­ate a whole new set of prob­lems, which will them­selves re­quire a fu­ture fix. As car­pen­ters say, mea­sure twice, cut once.

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