8 April 2008 External T.I. 2007-0260051E5 - Employee Incentive Program

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 incentive program is a taxable benefit.

Position: No.

Reasons: Notwithstanding that in a rebate situation the employee is in receipt of a monetary payment, the series of transactions and its purpose is to provide an employee discount.

								2007-026005
XXXXXXXXXX 							Kathryn McCarthy CA
(613) 948-6106
April 4, 2008

Dear XXXXXXXXXX :

Re: Employee Incentive Program

This is in response to your e-mail of November 16, 2007, and further to our subsequent telephone conversations (McCarthy/XXXXXXXXXX ). Your Company manufactures and sells large appliances at their wholesale value to retail dealers. The Company is proposing to implement a new employee incentive program (the "Program") whereby the employee may purchase one of the Company's appliances at retail cost from a dealer and will then (upon proof of purchase) be partially rebated by the Company in cash. The Program will be available to all employees of the Company as well as their immediate families. The net cost to the employee will represent a value in excess of the total of the Company's cost to manufacture the appliance plus any delivery, service or preparation costs that would be required to ready the appliance for use by the employee. You enquire as to whether the Program is a taxable benefit for an employee under the Income Tax Act ("the Act").

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and transactions that have already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance. Employees are generally taxable under the Act on the value of all benefits received by virtue of employment, subject to certain exceptions. For example, paragraph 27 of Interpretation Bulletin IT-470R, Employees' Fringe Benefits, indicates "where it is the practice of an employer to sell merchandise to employees at a discount, the benefits that an employee may derive from exercising such a privilege are not normally regarded as taxable benefits." Nonetheless, it is always a question of fact whether a particular employee incentive program is a taxable benefit for an employee.

We compared the Program to the discounts described in paragraph 27 of IT-470R and found that rebate payments under the Program are the same in substance as non-taxable discounts. Accordingly in our view, if an employee receives a cash rebate under the Program, it will generally not be included in employment income under paragraph 6(1)(a) of the Act.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch