Canada: Data Breach Protection Services: Taxable In Canada?

Last Updated: March 23 2016
Article by Aaron Wenner (Articling Student)

Most Read Contributor in Canada, September 2018

A recent IRS announcement raises questions about how Canadian tax authorities will treat the free data protection services that organizations often provide in order to mitigate data breaches.

Here's a less-than-cheerful thought: data breaches are now more common and costly than ever before—and one of the most common ways of mitigating the damage, offering free identity theft and fraud protection services, may have significant tax consequences for organizations, employees, and customers alike.

Credit Monitoring and Identity Theft Protection Services

According to a recent report by the Ponemon Institute and IBM, the total cost of a data breach increased 23% between 2013 and 2015, with the average cost to organizations now US$3.79 million. Credit monitoring and identity theft protection services (collectively, "data protection services") can help mitigate risk to customers and to organizations in a few ways:

  • They can protect customers against fraud and identity theft by monitoring credit reports, financial services, and other personal data records for signs of suspicious activity, and sometimes by scanning the darker corners of the internet for evidence of stolen data.
  • They can also help avoid expensive lawsuits. According to one study, the likelihood of litigation drops by a factor of six if an organization provides free credit monitoring promptly after the breach.
  • They can also act like "early warning systems". Some organizations proactively offer data protection services to employees and customers, which can help detect any occurrence of a breach in their information systems.

Current Tax Treatment: Canada versus the United States

In the United States, the Internal Revenue Service (IRS) recently announced that complimentary data protection services offered by organizations to those people affected by a data breach will not be taxable, even if the services are provided before a breach occurs. Specifically, the IRS clarified that individuals who receive identity protection services will not have to report the value of the services in their gross income, and that employers will not need to include the value of the services in their employees' gross income and wages.

The Canada Revenue Agency (CRA) hasn't (yet) announced a similar policy, leaving Canadian organizations uncertain about the tax status of identity protection services. One thing is clear, though: when drafting organizational data breach preparation plans, organizations should factor the potential tax consequences into the equation.

Are Data Protection Services a Taxable Benefit?

Since data protection services can be expensive when purchased directly, they might be considered a form of taxable benefit if organizations provide them for free.

However, under Announcement 2015-22 found in the latest Internal Revenue Bulletin , the IRS has stated that it "will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach. Additionally, the IRS will not assert that an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer's (or employer's agent or service provider's) recordkeeping system must include the value of the identity protection services in the employees' gross income and wages."

The situation is clearer in the United States than it is for Canada. In Canada, the CRA has not announced a similar policy. Some key issues therefore remain unclear for Canadian organizations that want to offer identity protection services (either before or after a breach occurs) as part of their data security strategy:

  • Who benefits from data protection services? Under the Income Tax Act's (ITA) rules on employer-provided services, a service that primarily benefits an employee is taxable to the employee as income from employment, while a service that primarily benefits the employer is tax-deductible as a business expense (for more information, see the CRA's guide for employers on taxable benefits and allowances). Data protection services offered before a data breach occurs seem to primarily benefit an employer: the services' purpose is to alert the organization if a breach occurs, and since a breach hasn't occurred, from the point of view of an employee the services are of neutral value. Once a breach occurs, employees may benefit more from data protection services than employers: an employee would need protection from identity theft and other misuse of their personal information, while from the employer's perspective, data protection services won't do much good if the data has already been breached. Clarity is therefore needed from the CRA regarding the property characterization of data protection services, and regarding how the benefits from data protection services should be apportioned between employers and employees.
  • Where do customers and other third parties fit in? Organizations that suffer (or anticipate suffering) data breaches often offer data protection services not just to employees, but also to their customers and other affected parties. It's unclear whether these services would be taxable in Canada. Broadly speaking, income isn't taxable if doesn't fall under one of one of the four traditional sources of income: office, employment, business, and property. If a customer receives data protection services from an organization following a breach, the CRA might not consider the value of the services to be "income from a source", meaning that the data protection services offered to third parties might be tax-free. Clarity is therefore needed from the CRA regarding how, and under what circumstances, it will categorize the value of data protection services.
  • Are data protection services a "benefit" or a form of settlement? If the data protection services come with a promise to indemnify the organization from future liability, the CRA's rules regarding settlement payments may come into play—creating potentially significant tax implications for the organization and the person receiving the services. Again, some clarity is needed from the CRA on how it will classify data protection services.

In the absence of clear guidance, organizations may wish to obtain advance rulings from the CRA regarding the tax treatment of data protection services. In any case, it's clear that data breaches will have tax consequences that an organization should be ready for. The IRS announcement is an important reminder that tax planning is an essential part of data breach preparation.

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions