CRA turns the page on IT-470R

New online tax folio replaces agency’s long-used technical guide on taxable benefits

After close to 30 years of providing technical interpretation of federal taxable benefit requirements, the Canada Revenue Agency (CRA) has retired its Employees’ Fringe Benefits Interpretation Bulletin (IT-470R—Consolidated ).
As of July 7, the agency replaced it with a new Income Tax Folio chapter called Benefits and Allowances Received from Employment (S2-F3-C2).  The CRA began replacing its Interpretation Bulletins with Income Tax Folios a couple of years ago. 
The new benefits and allowances chapter is part of a folio called Employment Benefits in Series 2, which covers issues related to employers and employees. The agency says this new way of classifying information should make it easier for people to find what they are looking for.
Like Information Bulletins, folios provide the CRA’s interpretation of issues covered under the federal Income Tax Act and its regulations. However, the new benefits and allowances chapter does not simply repeat the content of IT-470R in a new format. Instead, it provides more background information on taxable benefit and allowance rules, including citing relevant sections of the Income Tax Act and court cases that helped to shape the CRA’s interpretation of income tax requirements. 
For instance, the basis for taxing benefits comes from paragraph 6(1)(a) of the Income Tax Act: “The value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office or employment,” are to be included in an individual’s income for a tax year unless specifically exempted by the act. 
It also states that paragraph 6(1)(b) includes in an employee’s income “all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose,” except for allowances specifically excluded under the act.
The CRA says the paragraphs and their subsequent interpretation by the Supreme Court of Canada allow for a broad range of benefits and allowances to be taxable. The chapter also sets out factors the CRA considers when determining if a benefit or an allowance is taxable, such as an individual’s relationship to the employer. Is he an employee or a self-employed person? The taxable benefit and allowance rules apply to employees. 
If the individual is an employee, is he an employee-shareholder? For employees who are also shareholders of a corporation, the employer will have to determine if the benefits and/or allowances it provided to the individual were given to the person as an employee or as a shareholder. 
This is important because the tax treatment of the benefit/allowance can differ depending on whether it was provided to an employee or a shareholder. 
Another factor the CRA examines is whether the employee receives an economic advantage from a benefit or an allowance or whether it merely restores the employee to her previous economic situation. The chapter states that an employee receives an economic advantage “when an employer pays for or reimburses the cost of an employee-owned asset, even if that asset is used for employment purposes.” 
For instance, if an employer reimbursed an employee for the cost of a new home computer that the employee’s family uses, but on which the employee also occasionally checks a work e-mail account, the CRA states the employee would receive an economic advantage, making the reimbursement a taxable benefit.  
By contrast, if an employer reimbursed an employee for the cost of a taxi to go to a client’s office, the employee would be repaid for money she spent rather than receiving an economic advantage, so the reimbursement would not be a taxable benefit.
Another factor the CRA takes into account is the primary beneficiary of the benefit. If it is the employee, the benefit or allowance is taxable. If it is the employer, it is not taxable. The CRA says employers must look at each situation individually, taking into account all of the relevant facts. 
“Although no single factor may be conclusive, a positive answer to one or more of the following questions may suggest that the employer is the primary beneficiary of the benefit,” the chapter states. It suggests employers ask themselves questions such as:
• Is there a business purpose for providing the benefit?
• Is the benefit necessary for the employee to be able to carry out his employment duties more effectively?
• Does the benefit fulfill a condition of employment?
• Does the employer have “a moral or contractual obligation” to provide the employee with the benefit as a way to ensure that she is “not unduly subject to harm” from doing her job?
To illustrate how harm and a moral or contractual obligation may be factors, the CRA provides an example of a situation where an employer reimburses an employee who is a prosecutor for the cost of installing a home security system. 
“The system is purchased because the prosecutor’s safety at home was at risk due to his employment duties,” the agency writes.
“The employer was morally and contractually obligated to provide security for its employees. As a result, the employer was the primary beneficiary and the reimbursement is not included in the prosecutor’s income under paragraph 6(1).”
The CRA also takes into consideration whether an employee is receiving a benefit or an allowance in their capacity as an employee or as an individual. This is important because the benefit or allowance is only included in the person’s income if they receive it as an employee.
For someone who is not a person of influence (such as an executive who controls employer decisions) and who deals with the employer at arm’s length, the chapter states that the CRA will consider the person to receive a benefit or an amount in their capacity as an individual rather than as an employee if it is:
• provided voluntarily for humanitarian or philanthropic reasons,
• not based on employment factors (e.g., years of service, performance, etc.), and
• not provided in exchange for employment services.
If an employer confers a benefit or an amount on someone who is a person of influence or someone who does not deal at arm’s length with the employer, the CRA will consider the person to receive the benefit or amount in their capacity as an individual rather than an as employee if the previously stated conditions apply and if the person received it on the same basis as other employees who deal at arm’s length with the employer.
The chapter also discusses the CRA’s rationale for taxing some benefits provided by third parties. It states that based on a Supreme Court of Canada interpretation of the phrase “in respect of” in paragraph 6(1)(a) of the Income Tax Act, “there only needs to be a small connection between a benefit and the employment for the benefit to be included in the employee’s income.”
As a result, benefits employees receive from third parties may be taxable even though the employer is not the one providing them. For instance, the CRA states that if an employee receives a discount on merchandise from an employer’s supplier, the value of the discount is generally included in the employee’s income as a taxable benefit unless the discount is available to the general public or to specific public groups.
When benefits are taxable, employers must determine the value of them to include in an employee’s income. The chapter explains that based on court cases, the value of a benefit is its fair market value less any amount the employee paid for it.
The chapter says fair market value “is the highest price expressed in terms of money that can be obtained in an open and unrestricted market between informed and prudent parties, who are dealing at arm’s length and under no compulsion to buy or sell.”
Besides providing the legislative and legal rationale for taxing benefits and allowances, the chapter discusses how the CRA treats specific benefits and allowances, including those related to automobiles, group term life insurance, and board and lodging. It also provides links to CRA administrative policies on a number of other benefits and allowances.
With all new folios, the CRA provides a three-month window for individuals and organizations to send in comments on the structure and content. Readers have until Oct. 7 to provide feedback on the new benefits and allowances folio.aces agency’s long-used technical guide on taxable benefits

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