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National Revenue Minister Diane Lebouthillier speaks during question period in the House of Commons on Parliament Hill in Ottawa, on Sept. 29, 2017.

Adrian Wyld/The Canadian Press

The federal Revenue Minister is accusing the Canada Revenue Agency of acting on its own to issue an edict taxing employee benefits, laying bare a rift between the government and its bureaucrats amid a wider controversy over tax policy.

In a statement to The Globe and Mail, a staff member in the office of Revenue Minister Diane Lebouthillier claims the CRA went ahead with the plan without the minister's consent. "This was a decision taken by the Agency without the Minister's approval," the staff member said. "There has been no change to the tax policy and our government is not going after Canadians who work in the retail sector. We are deeply disappointed that the Agency posted something that has been misinterpreted like this."

Globe editorial: Taxing employee benefits is a truly terrible idea

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Explainer: How the Liberals want to change the tax code -- and why

The comments, which were provided Tuesday evening, went much further than a statement issued earlier in the day by the minister's office in Ms. Lebouthillier's name. "The Agency issued a guidance document to mainly provide assistance for employers and is committed to further clarifying the wording of the guidance to reflect this," the earlier statement said.

The latest tax controversy involving the federal government came after The Globe and Mail reported that the CRA recently updated its written interpretation of existing tax laws by stating that employee discounts "generally" be reported as income, meaning they should be treated as a taxable benefit. The government was already on the defensive over proposed changes to small-business tax rules, which have sparked widespread opposition in the business community.

This interpretation, contained in a technical agency document called a folio, directly contradicts another CRA document called The Employers' Guide – Taxable Benefits and Allowances. That document says that "if you sell merchandise to your employee at a discount, the benefit he or she gets from this is not usually considered a taxable benefit," as long as the item is not sold below cost.

The Globe asked the CRA to respond to the assertions made by the minister's office but did not receive an immediate response.

The Retail Council of Canada and the Canadian Payroll Association strongly objected to the new wording in the folio.

The statement early Tuesday said that the government's goal "is to ensure that the Agency does not impose additional administrative burdens on businesses."

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Rachel De Grâce, manager of advocacy and legislative content with the Canadian Payroll Association, said employee discounts are sometimes included as part of collective bargaining agreements, raising questions as to how the CRA expected that it could change its policy as of Jan. 1, 2018. She also questioned how the CRA would enforce whether employee discounts are treated as income.

"It sounds like a very onerous exercise," she said. "I think we're all just scratching our heads trying to make heads or tails of what the new requirements are. And, why the change?"

Larry Rosen, chief executive officer of Toronto-based men's wear retailer Harry Rosen Inc., said he welcomed Ottawa's reversal.

Mr. Rosen said in a phone interview that a tax on employee discounts would have demoralized employees and created an unworkable amount of record keeping for all employers.

Harry Rosen, which has stores in five provinces, requires sales staff to wear its clothing and offers them a discount to ensure doing so is affordable.

"It's imperative for your ambassadors to sport your image through their apparel and, obviously in our case, being at the better end of the market, it's a stretch for our associates if they had to pay retail or if there were extra tax on it," said Mr. Rosen, declining to say what the discount is.

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Earlier on Tuesday, Conservative Leader Andrew Scheer said the CRA edict on employee discounts represents another example of how the Liberal government is searching for ways to raise taxes.

"It's petty. It's mean-spirited," he told reporters while standing next to stacks of tires inside a Speedy Auto Service franchise in Edmonton.

The Conservative leader's comments followed a news conference that was primarily focused on criticizing another tax issue that has dogged the Liberal government in recent weeks. Finance Minister Bill Morneau outlined several proposals in July that would change the tax treatment of incorporated small businesses. Mr. Morneau has promised to rework that plan in response to vocal criticism from business owners.

Mr. Scheer said he used to work in the restaurant business and knows that free meals for staff are common. "What is it with this government?" he asked. "I don't understand it."

Retail Council of Canada vice-president Karl Littler said after the initial statement from the minister on Tuesday afternoon that his sense from conversations with federal officials was that the CRA developed its revised guidelines on its own without direction from political staff. He said the minister's statement appeared to suggest the political level had suddenly become engaged on the file and was aiming to contain the criticism.

"My sense is there was no political oversight of this at all," he said. "I don't have any sense whatsoever that there's political buy-in to this. I see this as having been generated inside CRA at a kind-of mid-level."

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With a report from Eric Atkins

Som Seif, CEO of Purpose Investments, says proposed changes to small business taxes would have negative consequences to the Canadian economy and that all Canadians should be paying attention

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