As a business owner, getting taxable benefits right can help you attract better talent with perks that potential employees might not get anywhere else. But getting it wrong could leave you or your employees in bad shape with the CRA.
Our payroll team has fielded more questions on taxable benefits than on just about any other issue. We've answered the most common ones here.
1. What is a taxable benefit?
A taxable benefit is a payment or allowance for a service, membership, or product that your employees might buy themselves but that you buy for them. Popular examples include gas for their car, a gym membership, or daily lunches.
The value of these employee perks is added to their compensation to arrive at their total taxable income.
For example, consider an employee who:
- earns $100,000 a year; and
- receives a free lunch every day, valued at $12.99
This employee would be taxed on $103,182.55 of income: their $100,000 salary plus $3,182.55 for the lunches ($12.99 multiplied by 245 working days a year). If they also received a gym membership valued at $39.95 a month, they would pay tax on $100,000 plus $3,182.55 plus $479.40 ($39.95/month x 12 months).
2. How do I know if a benefit is taxable?
While not hard and fast rules, three factors help you assess the taxability of a benefit:
- Advantage to you as the employer
- Tangible monetary value
- Ability to preserve the health of the employee
Advantage to the employer
Some employers will subsidize their employees' ongoing education. The assumption is that the employee will apply their new skills to your business, thereby improving it and benefitting you. For this reason, education is a non-taxable benefit.
A golf club membership can be a non-taxable benefit for the same reason if you can show it primarily benefits you as the employer — for example, as an avenue for business development. But remember: this ‘primary' condition is a difficult test to meet.
Tangible monetary value
The benefit needs to have a monetary value for it to be taxable.
Parking spots in the company lot are a classic example of this. The spot has no value because it's not for sale, so it's non-taxable. On the other hand, a parking spot in a third-party lot needs to be paid for, has monetary value, and is therefore a taxable benefit. The spot must be guaranteed to render it of monetary value. If the lot does not have enough spots for all employees, the spot won't qualify as a taxable benefit.
Parking spots are a particularly complicated taxable benefit. In some cases, even a spot with clear monetary value won't be a taxable benefit – as long as the employer is the primary beneficiary. One common example: a salesperson who travels within the city to visit clients but also regularly visits the office to meet with the team.
Ability to preserve health
When properly set up, health and dental plans (including mental health counselling) are non-taxable because they directly preserve health. Insurance plans are taxable because they don't directly preserve health.
Interestingly, personal loans are non-taxable as well. The thinking here is that an employee coming to you for a loan must really need it, and not getting the loan could harm their mental health.
However, if the employer charges a below-market rate of interest or no interest at all, the interest not paid would become a taxable benefit.
3. Why should I or shouldn't I be offering taxable benefits?
Benefits as part of an employment offer will attract more candidates because: (a) they demonstrate commitment and care for the employee; and (b) everyone likes to receive free items. The more non-taxable benefits you can offer, the better. But taxable benefits are better than no benefits.
Some employers will offer employees additional benefits to supplement below-market compensation. You can calculate if the value pushes your employees into a higher tax bracket.
As an employer, it's your responsibility to inform your employees if a benefit you offer will be taxed. Failure to do so can and most likely will surprise them at tax time.
4. How big do I have to be to offer benefits?
Companies of any size can offer benefits, taxable or otherwise.
If you want to alleviate the income increase for your employees, offer more benefits that are non-taxable or have very little fair market value.
5. What are some of the most common taxable benefits?
The most common taxable benefits are allowances that offer convenience or employee recognition.
If you want to give your employees a company vehicle, the assumption is they'll use it for more than just business. This creates a taxable benefit. But where does business need end and personal need begin? The CRA uses a formula to calculate the amount of the taxable benefit – and this calculation can be complicated.
Employers – and employees – sometimes forget that vehicle expenses encompass two parts: the cost of the vehicle and the cost to operate and maintain it, such as paying for gas.
As an employer, it's your responsibility to make it easy for your employees to report usage. It's your employee's responsibility to report it honestly. Recordkeeping becomes an essential when tracking these expenses.
Many companies issue their employees phones or laptops rather than compensate them for the minutes or data they use on their own phones. They do this because it keeps the allowance non-taxable.
To maintain non-taxable status, the plan must be basic, the cost must be reasonable and fixed, and the employee's personal usage must not incur overages. The CRA may question you about these three elements.
Given the high costs of child care, this is a well-received benefit. To keep it non-taxable:
- provide and manage the service yourself;
- don't charge for the service or charge minimally; and
- offer the service only to employees.
Discounts on merchandise
This is a common benefit afforded to employees of manufacturers or retailers. An argument could be made that getting more of your merchandise out there for other consumers to see is a business benefit to you, which is why this could be non-taxable if it's set up properly.
Gifts and awards
Employees always appreciate being recognized for their accomplishments or longevity of service. These days, many companies promote these occasions — and help their branding in the process – on social media.
This recognition generally comes in three categories:
- Cash gifts - straight cash, like a yearly bonus, are taxable.
- Near-cash gifts - also taxable, and include items like gift cards that can be used to buy anything a store sells.
- Non-cash gifts - vouchers for a specific item or experience, like tickets to a concert or coupons for a specific item. The CRA uses the example of a voucher for a free turkey at Christmas. These are non-taxable, because they can't be converted into cash or used as cash; they're only good for their intended use. But non-cash gifts are taxable if the value reaches $500.
Shares in the company
Large enterprises like banks will often offer their employees shares in the company on a yearly basis to encourage loyalty. Startups will also often offer their employees shares in lieu of salary bumps, since the may not be able to offer raises. In both cases, the shares are taxable but, depending on structure, could be taxed upon issue or upon sale by the employee.
6. How do deductions work for taxable benefits?
Taxable benefits are almost always subject to Canada Pension Plan, Employment Insurance, and income tax deductions. This means that either the fair market value of the benefit or the difference in value between professional and personal use of the benefit must be considered when calculating pensionable, insurable, and taxable income.
Deductions can get tricky depending on your benefit packages and how your employees use them, so make sure to reach out to a payroll manager who can set you on the right track.
7. How does GST/HST work for taxable benefits?
This might be the most complicated element of taxable benefits, because so many different conditions exist. In some cases, you will have already accounted for GST/HST in the purchase of the benefit. In other cases, the employee will pay the GST/HST upon using the benefit. Each affects your GST/HST obligations, so make sure to remit properly to avoid GST/HST surprises for you or your employees.
8. What should employees know about their taxable benefits?
They should know which of their benefits are taxable and to what extent they're fully or partially taxed. An exact dollar figure would be helpful for them, so they can report properly and not be stuck with a surprisingly high tax bill.
9. Who should you talk to about taxable benefits?
You should be talking to a payroll professional about taxable benefits before you offer them. Getting it right will make your company more attractive for top candidates. But getting it wrong could damage your credibility and reputation – with both your employees and those in-demand top candidates.
Have questions about taxable or non-taxable benefits?
Our payroll managers re happy to answer them and help you get your systems right.