CRA Announces New Simplified Process for Claiming Work From Home Expenses and Formalizes the Tax Treatment of Certain Employer Provided Employee Benefits During the COVID-19 Pandemic
By: Kevin Yip, Devon LaBuik, and Kathryn Walker
On December 15, the Canada Revenue Agency (the “CRA”) released additional details regarding the availability of employee deductions for work from home expenses and the taxation of certain employer provided employee benefits during the COVID-19 pandemic.
The COVID-19 pandemic has revealed the fault lines of the globalized economy and triggered a rise of protectionist trade policies. The latest chapter in this trend away from a multilateralism is the U.S. withdrawal from OECD negotiations over the tax challenges of the digitalisation of the economy, which in turn has provoked European nations to retreat to unilateral solutions.
The Globalized Economy and COVID-19
In the period between the end of the Second World War and the on-set of the COVID-19 pandemic, the globalization of production created deep economic interdependencies, binding domestic economies to a global supply chain. Consequently, when the COVID-19 pandemic broke, the structure of global trade was such that a disruption in one link of the supply chain created effects all down the line.
In March 2020, the six nations hit hardest by COVID-19 were the U.S., China, Korea, Italy, Japan, and Germany. At the time, these six nations accounted for 55 percent of world supply and demand, 60 percent of world manufacturing and 50 percent of world manufacturing exports.[1] China, where the virus first emerged, was largest contributor to global trade, the “workshop of the world,” making up 41 percent of world manufacturing exports and 20 percent of global trade in manufacturing intermediate products.[2] Due to the globalization of production, when the pandemic decreased production in these six nations, and China in particular, the effects reverberated globally.
In January 2020, the OECD/G20 Inclusive Framework on BEPS, a group of 137 countries including Canada, endorsed a statement, which affirmed their commitment to build a global solution to the tax challenges created by the digitalisation of the economy. This work has been underway since 2015 and is slated to be finalized by the end of 2020.
The statement, itself a political expression of on-going commitment, was accompanied by additional documents which, provide an outline of the “architecture” of the currently agreed upon Unified Approach under Pillar One, a programme of work descriptions, details on the multinational enterprises (“MNEs”) that will be impacted by the initiatives under Pillar One, and a progress report on Pillar Two work (collectively the “January 2020 Statement”). The biggest development presented in this set of documents is the architecture of the Pillar One solution, including a clarified explanation of a new taxing right for market jurisdictions.
On April 22, 2020, the Canada Revenue
Agency (“CRA”) indicated that it would allow special favorable tax treatment to
employees working from home during the COVID-19 crisis.[1]
In particular, the CRA will accept that
the reimbursement of an employee, for amounts spent on personal computer
equipment to enable the employee to work from home, mainly benefits the
employer. As a result, the reimbursed amount will not be a taxable benefit to
the employee. This relief is to apply
for amounts up to $500 and only in respect of amounts for which the employee
provides receipts.
In the normal course, an employer can
provide an employee with an allowance for home office expenses, which is a
taxable benefit for the employee.[2] Alternatively, the employer can decide to
reimburse an employee expense upon presentation of an invoice, in which case
the reimbursement will be a taxable benefit if it primarily benefits the
employee rather than the employer.[3] Usually if an employee receives a
reimbursement for home office equipment, it is characterized as a personal
expense, primarily for the employee’s benefit, and therefore a taxable benefit.
The CRA’s announcement does not change
the tax consequences for employers. An
employer providing an employee with reimbursements for home office expenses,
even certain capital expenses such as the acquisition of tools, will normally
be entitled to deduct the full amount of the reimbursements as a business
expense, provided the amount is reasonable in the circumstances.[4]
[2] See CRA Interpretation, 2011-0402581I7 —
Allowance for workspace in the home, July 12, 2011. See also, CRA,
Interpretation Bulletin, IT-352R2 — Employee’s Expenses, Including Work Space
in Home Expenses, August 26, 1994.
[3] See CRA, Tech Interp, 1999-0013955 —
Construction and expenses — workspace, February 3, 2000.
With the increase in working at home arrangements due to
current events, employers and their employees may have questions about the tax
treatment of home office expenses for these employees.
Generally, an employer can compensate an employee for home
office expenses by way of an allowance or a reimbursement. An employee can also
be given an “accountable” advance which is treated as a reimbursement assuming
that the employee can provide itemized receipts and the balance is returned to
the employer.
If an employee receives an allowance or if he or she pays
for the expenses out-of-pocket, then the expenses may be deductible subject to
certain requirements discussed below. If an allowance or reimbursement is
considered a taxable benefit and not deductible to the employee, the employer
can mitigate the cost to the employee by compensating the employee for the
additional tax but will have to do so on a “gross up” basis as paying an
employee’s tax is also itself a taxable benefit.
