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 a taxable benefit should arise where an employer in the construction industry sells a house from its inventory to an employee and the employee receives a discount on the installed upgrades relating to that house. The purchase of installed upgrades is provided under a separate agreement to the agreement for purchase of the house and is contracted with an entity related to the employer but not necessarily by the employer directly.
Position: Yes.
Reasons: Once installed, the upgrades are permanent fixtures and become integral to the house such that the administrative position outlined in IT-470R for "Discounts on Merchandise" should not apply. This administrative position was never intended to extend to major capital assets such as residential properties, or by extension, the purchase of installed upgrades forming an integral part thereof. In addition, case law supports the view that a benefit received by virtue of employment is taxable regardless of the source of the benefit.
May 5, 2009
Ms. Lorraine Maisonneuve HEADQUARTERS
Manager Income Tax Rulings
Policy and Legislative Research Directorate
Trust Accounts Division Renee Sigouin
(613) 957-2128
2009-031653
Discounts to Employees on Installed Home Upgrades
We are writing in response to your letter dated April 1, 2009 wherein you requested our comments regarding the taxability of certain discounts offered to employees by entities related to their employer.
Background
XXXXXXXXXX We understand that employees of XXXXXXXXXX may purchase homes from the XXXXXXXXXX inventory (i.e., a "Home") and receive a XXXXXXXXXX % discount on the purchase of installed home upgrades.
The TSO indicates that the sale of a Home gives rise to two separate transactions with two separate legal agreements. The first agreement is an Agreement of Purchase and Sale for the house itself from the XXXXXXXXXX which generally includes standard features and fixtures. The second agreement relates to the purchase of installed upgrades from the XXXXXXXXXX , which is a separate legal entity in XXXXXXXXXX . Therefore, the entity providing the discount is not necessarily an employee's direct employer but an entity related to the employer in XXXXXXXXXX .
We understand that all employees in XXXXXXXXXX are offered a XXXXXXXXXX % discount on the purchase of installed upgrades on a new Home and the discount does not permit an employee to purchase the installed upgrades for less than the XXXXXXXXXX cost. In addition, the discount is not offered on the purchase of the Home itself. When a buyer takes possession of a Home, the installed upgrades are considered an integral part of the Home. The discount is also offered to employees of a non-related, non-associated company (the "Administrative Services Company") that provides administrative services to XXXXXXXXXX .
Some examples of the upgrades are air conditioners, stone cast fireplaces, crown moldings, humidifiers, central vacuums, water softeners as well as upgrades on kitchen counter tops, flooring, back-splash tiles and so on. The TSO proposes to assess the discount as a taxable benefit to the employees of XXXXXXXXXX and the Administrative Services Company on the basis that the installed upgrades are an integral part of, and form part of the cost of, the Home purchase.
The XXXXXXXXXX Representative believes that the benefit is non-taxable as it relates to discounts on merchandise and as such falls within the administrative position outlined in paragraph 27 of IT-470R (Consolidated) - Employee's Fringe Benefits ("IT-470R"). In support of this position, the Representative states that the purchase of a Home (i.e., the first agreement) and its upgrades (i.e., the second agreement) is made under two separate contracts with two separate entities XXXXXXXXXX such that the second agreement relates only to the purchase of merchandise by employees for their Homes. The Representative's view is that the upgraded items are merchandise for the Home but do not form an integral part of the Home because the upgraded items are not necessary for the habitability of the Home as they are either not required at all, or the standard provided by XXXXXXXXXX is adequate for the Home.
It is also the Representative's position that had the employees purchased the upgrades from a third party, it is likely that they would have paid less money such that a benefit is not really conferred. In addition, XXXXXXXXXX states that all home purchasers, not just employees, can negotiate price. For example, some purchasers may be offered a XXXXXXXXXX % discount for 1 upgrade, a XXXXXXXXXX % discount for 2 upgrades and others a free finished basement.
The policy of the Canada Revenue Agency on the taxable status of "discounts on merchandise" is outlined at paragraph 27 of IT-470R, which states as follows:
"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. However, this does not extend to an extraordinary arrangement with a particular employee or a select group of employees nor to an arrangement by which an employee is permitted to purchase merchandise (other than old or soiled merchandise) for less than the employer's cost. Furthermore, this treatment does not extend to a reciprocal arrangement between two or more employers whereby the employees of one can exercise such a privilege with another by whom the employees are not employed."
The Income Tax Rulings Directorate's views on the taxability of discounts provided to employees by employers in the construction industry on homes or other buildings from their inventory is outlined in Documents 9318945 and 2001-0098297.
As noted in these documents, the strict application of paragraph 6(1)(a) of the Act requires the inclusion of all employee benefits into income. Any exceptions to the general inclusion requirements of paragraph 6(1)(a) of the Act are based on administrative convenience (such as where the value of the benefit cannot be determined), where there is no additional cost to the employer, where the privileges are not a form of extra remuneration, for general policy objectives (such as those applicable for employees working at remote work sites) or more specific tax policies (as relate to certain deferred income plans). The comments in paragraph 27 of IT-470R reflect an administrative practice of long standing wherein an employer in a merchandising business may sell its merchandise to employees at a discount. In these instances, the benefits that an employee derives from exercising this privilege are not normally regarded as taxable benefits.
In our view, the discount provided to employees of XXXXXXXXXX and the Administrative Services Company in respect of the purchase of installed upgrades on Homes gives rise to a taxable benefit for the following reasons:
a) The installed upgrades are an integral part of the Home and should therefore be considered part of the total Home purchase. Accordingly, the position adopted in Documents 9318945 and 2001-0098297 should apply;
b) The discount on installed upgrades confers a benefit to employees that has a value (i.e., other than nil and the value is determinable); and
c) A benefit received by virtue of employment is taxable regardless of the source of the benefit. Accordingly, a benefit may still be conferred notwithstanding the recipients of the discount may not receive the discount from their employer.
Based on our review of the information provided by you and additional information available on XXXXXXXXXX website, it is our view that the installed upgrades are an integral part of the Homes and should therefore be considered part of the total Home purchase. While certain upgrades such as air conditioners, stone cast fireplaces, crown moldings and central vacuums are not required for the habitability of a Home, they are purchased specifically for installation and once they are installed they become a permanent and integral part of a Home. In addition, upgrades to items that were otherwise adequate for the habitability of a Home (i.e., standard kitchen countertops and flooring) once installed also become permanent and integral parts of a Home. Whether the standard features that they are replacing were otherwise adequate for the habitability of the Home is irrelevant in determining their character. In addition, the employees are not simply purchasing the upgrades (i.e., as merchandise) but also their installation such that they become a permanent and integral part of the Home.
The purchase of a Home and its installed upgrades is undertaken under two separate agreements with two separate entities XXXXXXXXXX . However, the contracts each relate to the purchase of the same ultimate and completed asset (i.e., a new Home) and are necessarily inter-related. That is, it is assumed that an individual would never enter into a contact with the XXXXXXXXXX with respect to the purchase and installation of upgrades to a non-XXXXXXXXXX home on a non-XXXXXXXXXX subdivision, or without purchasing a house at all.
We also understand that in some cases, the Purchase and Sale Agreement for a Home (i.e., the first agreement) is amended to include the cost of installed upgrades such that their cost may be consolidated into a purchaser's Home mortgage. Although consolidation of the contracts is not necessary to our conclusion regarding a taxable benefit, for reasons described in the preceding paragraph, in these situations, there is one agreement for the Purchase of a Home. This agreement would include the cost of installed upgrades such that the administrative position outlined in IT-470R for "Discounts on Merchandise" would clearly not apply.
Discounts provided by any entity XXXXXXXXXX to any employee of XXXXXXXXXX or the Administrative Services Company can be considered to have been received by the employees by virtue of their employment and therefore within the purview of paragraph 6(1)(a) of the Act. This is supported by the Tax Court of Canada's decision in Norris v. R. [1994] 1 C.T.C. 2495, where the Court stated that the phrase "in respect of" is also applicable to payments made by a third party to an employee. The TCC stated at paragraphs 35-37:
"Case law has given the application of paragraph 6(1)(a) a wide-reaching scope. It is noteworthy that the phrase "in respect of" has been given a very broad definition. The Supreme Court in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, at page 39 (C.T.C. 25 (D.T.C. 5045), although not an employment benefit case, stated the following on the scope of the term:
The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.
The fact that the benefit is conferred not by the employer but by a third party does not change the characteristic of an amount received as a benefit. The Nowegijick, supra, case words "with reference" have application here. Therefore a benefit received by virtue of employment is taxable regardless of the source of the benefit. Authority for this is found in the cases of Waffle and Goldman, both supra.
In Waffle the Court held that the mere fact that the payor is not the employer of the recipient, does not preclude such payment accruing to the recipient "in respect of, in the course of, or by virtue of his office or employment".
For purposes of valuing the benefit, while valuation is not within the expertise of this Directorate, it would seem appropriate to consider what the cost to a member of the public would have been for the same installed upgrades compared to the price charged to the employee. Obviously, many factors would come into this determination, including incentives available to members of the public.
In summary, it is our view that the installed upgrades should be considered part of the cost of the purchase of a Home. We note that the reasoning for not taxing some fringe benefits is non-statutory, and in this case, we do not believe that the discount on installed home upgrades falls within the administrative position on "Discounts on Merchandise". It was never intended that the position extend to major capital assets such as a residential property or, by extension, the purchase of installed upgrades forming an integral part thereof. In addition, we do not believe that this position should be extended in this case for general policy or specific tax objectives. Consequently, it is our view that where an employer in the construction industry sells a house or other building or a unit in a building from its inventory to an employee and the employee receives a discount on installed upgrades relating to that house by virtue of their employment, whether received directly by their employer or otherwise, a taxable benefit will result to that employee. We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2009
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2009
Email this Content