Tax cheat dragnet snags clerks
The Liberals have invested $1 billion in the last two budgets to crack down on tax cheats.
But it’s probably fair to say that no one in government expected the tax-avoidance measures to target minimum wage store employees who get a 20 per cent discount on a pair of jeans, or restaurant workers coming off shift who get a meal at the end of the night.
Yet that appears to be the consequence of a new interpretation of the Income Tax Act by the Canada Revenue Agency.
The Retail Council of Canada recently raised the issue at the House of Commons finance committee.
Karl Littler, vice-president of public affairs, cited the latest version of the CRA tax folio that advises employers that “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.”
He said the CRA has not treated these discounts as taxable benefits in the past but has indicated it will do so starting Jan. 1.
The response has been predictable: employees on modest incomes lighting up switchboards of talk radio phone-ins to complain about the grasping Liberals.
The Conservatives were quick to jump on the story. “When the Liberals said they would go after ‘wealthy tax cheats’ this is what they meant: hard-working waitresses having a pizza at midnight after an eight-hour shift or a fitness trainer who gets a gym membership with his job,” said Pierre Poilievre, the Conservative finance critic.
“The Liberals cannot simply blame this decision on the CRA. The prime minister has set the tone.
“By attacking our local businesses and family farmers and calling them tax cheats, he has unleashed the tax collectors to hound all hard-working Canadians for more money.”
This is gold for the opposition — it links the government’s penchant for spending to a tax grab on small businesses and now store employees. It is a potentially costly unforced error by the Liberals. They have already upset the nation’s farmers, doctors and convenience store owners. Now, two million sales clerks hate them too. So what happened? The suggestion from a number of well-placed sources is that the CRA decided to interpret the taxable benefits and allowances clause in the Income Tax Act more rigorously but with a view to clamping down on discounts on expensive products like cars. “It isn’t meant to be nearly as big a deal as the Retail Council is making it,” said one person with knowledge of the change. He pointed out that if a retailer has an annual sale during the year, those goods would not have to be included as employee income under the new interpretation. To CRA bureaucrats, employee discounts should, in theory, be taxable — they’re a benefit.
But practically it doesn’t make sense. It would be an administrative nightmare for employers and taxing them would, inevitably, lead to them being phased out.
The news is understood to have been a complete shock to the Liberals, including the office of Revenue Minister Diane Lebouthillier, which is perhaps not surprising since she merely administers the law, she doesn’t get to make or amend it.
Lebouthillier issued a statement that suggests the government may be more flexible in the application of its policy going forward.
The government’s political opponents will claim this as another embarrassing U-turn, in the tradition of climb-downs on electoral reform, parliamentary reform and, coming soon, small business tax reform.
“There have been no changes to the law governing taxable benefits to retail employees. We are not targeting individuals working in retail,” said the statement.
“The agency issued a guidance document to mainly provide assistance for employers and is committed to further clarifying the wording of the guidance to reflect this.” If common sense prevails, the clarification of the new wording will make clear that employees still qualify for small perks, tax-free.
But the political damage is done. Poilievre is right that the Liberals cannot absolve themselves of the CRA’s actions. The consequences of the government’s crackdown were predictable — so predictable that they were, in fact, predicted.
The finance committee’s review of the first $444-million budgetary injection aimed at prosecuting tax evasion included a submission by the Conservatives.
It pointed out that the Harper government’s actions may have helped close the tax gap already.
“If these measures do not bear sufficient fruit … a more robust CRA may begin to target ordinary Canadians and small business, rather than any large corporations and high net worth individuals practising tax evasion,” it suggested.
The CRA has had some success in its crackdown, the latest statistics reveal.
In the last fiscal year, it completed 111,712 audits, leading to 37 convictions, 50 years of prison time and a “fiscal impact” of $12.5 billion. (Fiscal impact means taxes identified by audit but not necessarily collected by the agency.) CRA has, by all accounts, met, and even surpassed, its revenue targets.
But the law of diminishing returns is beginning to apply.
The low-hanging fruit has been picked and the CRA knows it is going to have to work harder to meet its future revenue targets, which may explain the employee discount gambit.
None of this is good news for the governing party. By including employee discounts as taxable benefits for minimum wage workers they appear mean; by not including them after saying they would, the Liberals look like corks dancing in a torrent they don’t control.