Aug 16th, 2023
Oct 17th, 2017
By David H. Sohmer
One of the objectives of tax policy is to ensure a neutral tax treatment across similar situations. This is the principle of horizontal equity and it requires that equally-well off taxpayers be taxed equally. Horizontal equity is the objective of the recent legislative proposals blocking the conversion of income into capital gains.
“However, integration does not occur if corporate surplus is paid out in the form of tax-exempt, or lower-taxed, income. In effect, the income is not subject to the appropriate personal income tax and the income is subject to less tax than if the individual had earned the income directly.”
Horizontal equity was also the objective of the change in the tax treatment of employee discounts which was announced in a revised income tax folio dated July, 7, 2016.
“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 under paragraph 6 (1) (a)….The value of the benefit is equal to the fair market value of the merchandise purchased, less the amount paid by the employee. However, no amount is included in the employee’s income if the discount is also available to the general public or to specific pubic groups.”
Prior to the change in the interpretation of the law, the “Employers’ Guide-Taxable Benefits and Allowances” provided that “if you sell merchandise to your employee at a discount, the benefit he or she gets from this is not usually considered a taxable benefit”.
Both the proposals to block surplus stripping and the change in the tax treatment of employee discounts gave rise to a public outcry. In the case of the surplus stripping proposals the government doubled-down and refused to do more than tweak the provisions to accommodate “genuine” intergenerational transfers. However, in the case of employee discounts the government withdrew the change within hours after the change was publicized in the media. The reason why horizontal equity is being vigorously defended in one case but was vigorously rejected in the other case is politics. Consider the following.
In an emailed statement with respect to the employee discount matter, a spokesperson for the Minister of National Revenue stated:
“This document was not approved by the minister and we are deeply disappointed that the agency posted something that has been misinterpreted like this….The agency issued a guidance document that does not reflect our government’s intentions and the Minister of National Revenue has instructed officials to clarify the wording.”
The CRA web site states that the CRA is responsible for the administration of tax programs and “promotes compliance with Canada’s tax legislation and regulations” while the Minister of National Revenue is “accountable to Parliament for all the CRA’s activities, including the administration and enforcement of the Income Tax Act.”. The CRA’s revised position was undoubtedly based on an opinion from the Department of Justice and the CRA bureaucrats just did what they were mandated to do. The Minister’s deep disappointment is a Trumpian attempt to avoid personal accountability. If the Minister disagreed with the law she should have asked the Government to introduce remedial legislation.
While tax-free employee discounts violate the principle of horizontal equity, they do not arouse passionate opposition. Why this is so may be a sense that it is fair for the little guy to game a system which is perceived to be stacked in favor of the wealthy. Even a principled politician would recognize that in the current environment Leviticus 19:15 is a recipe for political suicide:
“Do not pervert justice; do not show partiality to the poor or favoritism to the great, but judge your neighbor fairly”.
A panelist at a recent tax conference noted that all tax is politics. AMEN!