Thank you, Mr. Chairman, for the opportunity to provide a retail industry perspective in your pre-budget deliberations.
The Retail Council of Canada is engaged on several key files before the government and before Parliament, among them the NAFTA renegotiations and the Canadian payments system. I have had the opportunity to speak to this committee previously about de minimis and interchange rates and would be happy to answer any questions on those, but will focus my remarks today on another matter of concern to our industry.
This being the season of hotly debated tax issues, I want to address a matter arising under the Income Tax Act. That is not the taxation of Canadian-controlled private corporations, but another proposed change that would negatively affect a very different demographic, namely our industry's two million employees.
Since time immemorial the retail industry has provided discounts to its employees, as have restaurants, travel and hospitality, and many other businesses. I can't speak for the other sectors, but these discounts are nearly ubiquitous in retail, whether in general merchandise, grocery, pharmacy, or fashion. For almost as long, the Income Tax Act has not treated these discounts as taxable benefits unless they provide merchandise below wholesale cost or involve reciprocal discounts beyond the employee's own employer. Not only is this rule well understood, but it forms a part of the Canada Revenue Agency's own employers' guide, of which I have attached the relevant sections to the written remarks that you have before you.
More recently, however, CRA has developed what is called a “folio”, which is one way that CRA raises pending changes to its approach. That folio section, which you also have in front of you on the same page, contains a very different interpretation of the Income Tax Act, which would begin to treat employee discounts as taxable benefits come January 1. Initially we thought this might be a typo, and we flagged the inconsistency for CRA. But no, it turns out the CRA does intend to change its long-standing practice in just over three months' time.
How the Income Tax Act, which remains unchanged, can support two opposite interpretations is hard for us to comprehend. What we do know is that the law doesn't simply invert itself without legislative change. Either the long-standing interpretation was correct at the outset but has now drifted to the point of being unrecognizable or a decision has been made that the law was wrongly interpreted from the get-go, which surely requires more consultation, discussion, and debate than simply repurposing the rule in a CRA folio. What is also certain is the negative impact this will have on almost two million retail industry employees and, one imagines, hundreds of thousands if not more employees in other sectors.
For workers of typically modest incomes, these discounts are indeed small perks of the job. Of course, most industries offer some non-taxable perks, be they language training, education, public transit passes, social events, workplace refreshments, and the list goes on. All of these have some notional value, but the government has not seen fit to include them in income.
Why, then, would the government want to abandon its long-standing practice and start to tax a store employee for a 20% discount on a pair of jeans, or a restaurant worker coming off shift for a meal at the end of the night? If these benefits were truly substantial additions to income, that could perhaps be understood, but they are typically of small value in each instance and even over the course of the year. To be taxed on these will reduce income for front-line workers, or they will be forgone altogether to avoid the tax consequences.
The second problem will be an administrative nightmare for retail and other employers. Once the benefit becomes taxable, its value will have to be tracked over an entire workforce and over a large number of low-value transactions. Then there's the question of fair market value. Is it this week's sale price, last week's regular price, or a competitor's price? Does it matter whether a coupon or loyalty points could have been used? And so on. The system works effectively now because employers know to keep the discount at a level above the employer's own cost, so that tracking is not required. You add, then, another complex and in our view needless compliance burden.
However, mainly our concern is with our employee impact. In an industry with low margins but high turnover, these employee discounts are one way to provide a small reward to employees and to engender staff loyalty and attachment to the workplace. We can't help but think that there are other issues of far greater concern than capturing employee discounts in the income tax system.
If the government does not step in to correct this problem, then that is exactly what is going to happen several months before the next budget on which you are deliberating.
Thank you.