22 February 1994 External T.I. 9322395 - COMPUTERS AND EMPLOYEE BENEFITS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

M. Eisner
XXXXXXXXXX 932239

Attention: XXXXXXXXXX

February 22, 1994

Dear Sirs:

Re: Sales Staff - Computer Purchase Program

This is in reply to your letters of August 3, 1993 and February 8, 1994 in which you asked for our comments on a proposed computer purchase program under which sales staff employed by XXXXXXXXXX would purchase lap top computers from their employer. We also acknowledge our meeting held on February 2, 1994. We apologize for the delay in replying.

As we previously advised, confirmation of the tax consequences of proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 and the related Special Release dated September 30, 1992. We are, however, prepared to provide you with the following general comments.

Our Comments

As we understand it, the employees in question will carry out their employment duties primarily at their homes and at customer premises. With respect to their employment duties, each employee will be required to purchase a computer from the employer for its market price less the amount of a discount. The employer will receive payment for the computer over a 24-month period by deducting amounts from the employee's salary on a monthly basis. Interest will not be charged by the employer and each employee will also receive equal monthly reimbursements over the 24-month period which, in total, will be 75% of the purchase price to take into account the fact that a personal element with respect to the employee is involved. With respect to the personal element, our comments set out below are based on the assumption that the net cost of the computer (i.e., taking into account the reimbursements made by the employer) at any particular time will essentially be equivalent to its fair market value at that time.

In the above situation, one consideration is whether or not an employee, as a result of the reimbursements, should be regarded as having received a taxable benefit for the purposes of paragraph 6(1)(a) of the Income Tax Act (the Act). With respect to this consideration, the monthly reimbursements made to an employee relate to a capital asset (the computer) owned by an employee. In such circumstances, it is our view that the reimbursements received by the employee would constitute benefits which would be taxable under paragraph 6(1)(a) of the Act.

In setting out the above position, we have also considered the Huffman (90 DTC 6405), Splane (90 DTC 6442), Ransom (67 DTC 5235) and Phillips (90 DTC 1274) cases. In this regard, the Department has only accepted the Huffman, Ransom, and Splane cases in so far as the circumstances of a particular situation are essentially identical with the facts of whichever of these three cases is considered to be relevant. In other situations, it is necessary to review the pertinent details before it can be determined whether an employee has received a taxable benefit as a consequence of a reimbursement. With respect to the Phillips case, the Department has appealed the decision rendered by the Federal Court - Trial Division to the Federal Court of Appeal. Accordingly, the Department has not accepted that decision.

You have also referred to the Department's position on tools which is set out in paragraph 23 of Interpretation Bulletin IT-470R "Employees Fringe Benefits". This paragraph indicates that a reimbursement made to an employee in respect of tools represents a taxable benefit. While this view is consistent with the above position on computers, you believe that it is inconsistent with the Department's position on chain saws which is set out in Information Circular 74-6R2 "Power Saw Expenses" and the tax treatment set out in paragraph 8(1)(p) of the Act in respect of musical instruments.

In the case of chain saws, the Department considers that they generally qualify as supplies (i.e., in view of the short life of a chain saw, it can be regarded as a current expense) for the purposes of subparagraph 8(1)(i)(iii) of the Act while the life of computers is such that, in our view, they are to be regarded as being capital assets. In the case of musical instruments, capital cost allowance may be claimed by an employee provided he or she meets the relevant requirements. On the other hand, paragraphs 8(1)(f) and (j) of the Act preclude a deduction by an employee in respect of a computer. In our view, it follows that the Department's position on chain saws, which is based on the applicable provisions of the Act, and the tax treatment of musical instruments are not relevant for the purposes of determining whether or not a reimbursement made to an employee in respect of tools or a computer constitute taxable benefits.

We are also making the following additional comments on the situation set out above:

(a)It is our general view that the reimbursements by the employer would be deductible in computing the employer's business income pursuant to paragraph 18(1)(a) of the Act. However, with respect to the timing of the deductibility of the reimbursements, we refer you to Interpretation Bulletin IT-417R "Prepaid Expenses and Deferred Charges";

(b)With respect to the amount of indebtedness related to the purchase of a computer, benefits would be received by the employee calculated pursuant to subsection 80.4(1) of the Act. The amount of a benefit would be the interest for the particular year involved on the indebtedness calculated at a rate prescribed by the Act. The Department's general position on such benefits is explained in Interpretation Bulletin IT-421R2; and

(c)A discount on merchandise sold by an employer to an employee may not result in taxable benefits provided the discount is reasonable. The Department's general position in this regard is set out in the following extract from paragraph 27 of Interpretation Bulletin IT-470R:

"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 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."

It is also our view that the above comments would not vary if the computer purchase program were to be established on a voluntary basis.

We hope that our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch