23 November 2011 External T.I. 2011-0399661E5 - Deductibility of employee rebate

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an employee cash rebate paid by a manufacturer to an employee of a related company is an eligible deduction?

Position: Always a question of facts.

Reasons: The law. Previous positions.

XXXXXXXXXX 				  	N. Pulandiran
  						2011-039966

November 23, 2011

Dear XXXXXXXXXX :

Re: Deduction of Employee Cash Rebate

We are writing in response to your letter of March 16, 2011, concerning the deductibility of cash rebates paid by a manufacturer to employees. More specifically, you have enquired whether or not there is any issue with a manufacturer claiming a deduction for tax when the rebate was paid to its employee or an employee of a related company.

In the situation you described, a manufacturer of XXXXXXXXXX offers cash rebates to employees on the purchase of its product for personal use. This rebate is available to all employees equally and is also offered to the employees of all related companies. Regardless of which related company an employee works for, the employee will receive the cash rebate in the form of a cheque from the manufacturer and there is no reciprocal agreement between the companies.

Employees are generally taxable under the Income Tax Act ("the Act") on the value of all economic benefits received by virtue of their employment, subject to certain exceptions. The Canada Revenue Agency's administrative policy is outlined in Interpretation Bulletin IT-470R, Employees' Fringe Benefits (Consolidated), dated October 12, 1999. The benefit that an employee may derive from taking advantage of an employee discount is not normally regarded as a taxable benefit if the discount is also available to the general public or to specific public groups. It is our view that no economic benefit will be received by an employee where the price paid by the employee equals the price paid by the public. Reference should be made to paragraph 27 of IT-470R, which outlines circumstances under which employee discounts will always be considered an economic benefit received by the individual by virtue of their employment. Although IT-470R does not specifically address rebates, they are generally afforded the same tax treatment as discounts. Each employee rebate program must be examined to determine if it results in a taxable benefit for the employee.

If it is determined that the rebate offered is a taxable benefit to be included in the employee's income under paragraph 6(1)(a) of the Act, the manufacturer would be permitted to deduct the corresponding amount for tax.

The rebate paid may still be deductible even if it is determined that the rebate offered is not a taxable benefit for the employee. Paragraph 18(1)(a) of the Act provides a general limitation in computing the income of a taxpayer from a business or property. No deduction is allowed in respect of an outlay or expense except to the extent that the outlay or expense was made or incurred by the taxpayer for the purpose of gaining or producing income from its business or property. An outlay or expense will be "incurred" for the purposes of paragraph 18(1)(a) of the Act where it has actually been paid by the taxpayer or has otherwise become a legal liability of the taxpayer. As described in paragraph 3 of Interpretation Bulletin IT-487, General Limitation on Deduction of Outlays or Expenses, dated April 26, 1982, even if an outlay or expense has been incurred by a taxpayer for these purposes, a deduction may still be denied by another provision of the Act, such as paragraph 18(1)(b) (capital expenditures), paragraph 18(1)(h) (personal or living expenses), section 67 (overall reasonableness) or section 67.1 (meals and entertainment) to name but a few.

You have not stated the purpose for the manufacturer offering the cash rebates to the employees. If the manufacturer can show that the rebates were offered for the purpose of gaining or producing income from its business, for example to increase its sales, then payment of the rebates would likely be deductible in computing its income.

We trust our comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch