Finance Committee on May 25th, 2023

[Lindsay Gwyer, Director General, Legislation, Tax Legislation Division, Tax Policy Branch, Department of Finance]

Clause 2 makes technical amendments to the Income Tax Act related to the standby charge. This is the rule that provides what an employee has to include in their income benefits when they are provided a car by their employer. There are detailed rules that determine how they calculate the benefit.

Under the current rules, there is a loophole where, if the car is provided by someone who is not related to the employer or is provided to a person who doesn't deal at arm's length with the employee, then there has been a case law that has held that the benefit does not get included in income. This is a technical amendment that addresses that loophole to make it clear that, where an automobile is provided to an employee in the course of their employment or if it's provided to someone who does not deal at arm's length with the employee, then that benefit gets included in their income.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I'm sorry. I didn't quite understand the loophole this is trying to address. This is an employee who does not deal at arm's length with the employer...? I don't completely understand.

[Lindsay Gwyer]

It addresses some narrow situations where there have been employers who have engaged.... In an attempt to avoid the current rules, they have had a person who is not related to the employer provide the vehicle to the employee, or they have provided the vehicle to someone who is not related to the employee. That has made it so that this rule doesn't result in an inclusion in their income. This amendment is clarifying that, if the automobile is provided to the employee in the course of their employment or is provided to someone who doesn't deal at arm's length with the employee, then it causes the amount to be included in their income.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I'm still a little confused as to who this is meant to capture.

You have a business owner. Then they have another third party, who is not at arm's length with the employer, and they give a car to the employer for them to use in the course of their work. We want to capture that.

Do you know the name of the case in which this came about or the facts of the case?

[Lindsay Gwyer]

I don't have that information in front of me. I think it's situations that involve car dealerships in particular, where cars are provided to employees and the person providing the car is not the employer and is technically not related to the employer. As a result of a technical deficiency in the rule, that means the amount doesn't get picked up in the employee's income, even though they are clearly getting a car in the course of their employment.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

We have this car dealership, if I understand this. We have an employee, perhaps a mechanic or a sales professional of some sort, and there's an unrelated third party who, for whatever reason, gives a car for the usage of the employee of the car dealership, so they are getting an employee benefit from this and we now want to charge back.

Why did the third party want to give the car to the employee? Was there money put back for it, or am I not understanding correctly?

[Lindsay Gwyer]

There are some kinds of situations where there was effectively an arrangement between the person's employer and a third party to have the third party provide the car to the employee in an attempt to avoid the rules by having the car be provided by the third party so that the rules don't technically apply. There may have been some sort of payment arrangement or something in place between the employer and the third party providing the vehicle.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

How much revenue is expected to be generated by putting this change in place?

[Lindsay Gwyer]

There's no specific revenue estimate for this measure. I think it's really a clarifying change that is consistent with the policy of the rules as they were initially intended. I think it's not something that's intended to capture a large segment of people. It's addressing a very narrow avoidance situation.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

How many situations will this impact or affect?

[Lindsay Gwyer]

I don't have that exact number in front of me. I think it's expected that not a lot of people would be doing this right now, so it's not expected to impact a lot of people. Basically, a possible loophole exists, so in part, it's being fixed to ensure more people don't try to structure into that type of arrangement to avoid the employee benefit rules.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Don't you believe, though, Ms. Gwyer, that this will add additional complication to the Income Tax Act? I have no doubt and agree with you that integrity is important, but so is simplicity, and the Income Tax Act is already a very complex document. By adding this relatively niche section to the Income Tax Act that will affect very few people, won't it add to the complexity of the Income Tax Act?

[Lindsay Gwyer]

I don't think it would make a material difference in terms of the complexity. The rules already exist. They're just being amended to effectively say that, if the employee is receiving the benefit in the course of their employment, then the rules apply, and if the benefit is provided to a non-arm's-length person, the rules apply. It's really a minor amendment to the existing scheme that deals with the standby charge rules for employees.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

What are the unintended consequences? If, in fact, you had someone who was not related to the employer—so it could be anyone if I'm not incorrect in that—who gave an employee a car to use, the employee could potentially be caught by this provision—couldn't they?

[Lindsay Gwyer]

The car would have to be provided in the course of the employee's employment, so if there's no connection to their employment, then the rule wouldn't apply.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

How do you define “in the course of employment”?

[Lindsay Gwyer]

A number of the rules in the Income Tax Act that create employment benefits look at whether something is being provided to the employee as compensation, effectively, for their employment, so I think it would be determined in the same manner as the other rules. It would be a factual question as to whether it's reasonable to determine that they're getting this benefit because of their employment.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

If someone is getting the car from a third party, other than the fact that it is being used in the course of employment, how do you determine that it is in compensation for their employment?

[Lindsay Gwyer]

I think it would depend on the facts of the situation, but I think one example would be this: If someone is receiving a car from a third party and they're not paying to use that car, then it would be reasonable to assume that there is some sort of quid pro quo in that situation, some reason why that car is being provided.

I think it would be a question of fact, whether there's some link with the employer that would make it reasonable to conclude that the car is being provided because of the employment relationship.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

What type of relationships are we actually seeing? Are you familiar at all with the case law for where this came from? I'm just having trouble with this. If it becomes a situation of facts, what's the defining characteristic of a situation in which a third party has just given an individual a car, for whatever reason, and the individual happens to be using it in employment versus a situation in which a third party is trying to game the system, as it were, and avoid paying an employment benefit? I'm just struggling to see the difference in these two potential fact situations.

[Lindsay Gwyer]

I think, again, you would need to look at the situation. We don't expect that there are a lot of situations in which someone receives a car from a third party and does not pay for it and it is unclear as to why they're getting it. I think we're talking about a niche situation here, in which it would be relatively clear that a car is being provided in the course of employment.

Again, there are a number of provisions in the Income Tax Act with respect to employees being taxed on benefits they receive in the course of their employment, so there's extensive CRA guidance and case law to determine whether particular benefits are being provided to people as a result of their employment and are effectively compensation for their employment.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

That's where I'm stuck again.

Do you know what that test is in the case law with respect to how we decide we have an individual who is just giving someone a car that's being used in the course of their employment? Let's say there are a father and a son, and the father gives his son a car, which the son uses in the course of his employment. How do we make sure that person isn't getting an employee benefit?

[Lindsay Gwyer]

In that situation, it doesn't seem as though there would be any reason to think the car was being provided to the son as a benefit through his employment.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Would we be looking for cash payments from the car dealer to the dad in that situation? Is that what we're looking for?

I'm unfamiliar with the case law on this, and you keep saying “facts”. That's fine, but what are those facts that would lead the CRA to say, “Okay, you guys are gaming the system; there is no doubt about it. You're just circumventing the rules that are meant to make the use of an automobile an employee benefit”? Is it that cash payment? They're unrelated; they're at arm's length. That's where I think we would normally look. The third party providing the vehicle is not at arm's length from the employer or the car dealership, in my example, so we know what's going on here.

What are these facts and how do we avoid unintended consequences here?

[Lindsay Gwyer]

The rule would apply with respect to the employee getting the car as a consequence of their employment. I think in the situation that you described, in which a father is providing a car to their child, it wouldn't be reasonable to conclude that the car is being provided as a consequence of employment.

If you have a situation in which a third party is providing a car to an individual and there is no link between that third party and the individual or other separate business reason to think they'd be providing that car, then I think that could be an indication that if there's some connection between that third party and their employer, then that car is being provided to the individual as a consequence of their employment. In practice, I would expect there would be conditions in place such that the car could be used only so long as the person was employed or that the car had to be used in the course of employment. I think facts like that would indicate that a car was being provided in the course of employment.