In today’s competitive job market, companies must offer compelling and creative employee benefits packages to attract and retain top talent. One way to enhance your employee benefits offering is through non-taxable employee benefits – perks that provide value to employees while allowing employers to deduct the costs.
What are non-taxable employee benefits?
Non-taxable employee benefits are perks that are not treated as taxable income. This means employees can enjoy these benefits without having to pay extra tax. Employers can deduct the costs of providing non-taxable employee benefits as business expenses.
Non-taxable employee benefits can be an attractive way to structure compensation packages. Since they come tax-free, employees perceive non-taxable perks as being more valuable than cash. Meanwhile, employers can contain costs yet still offer benefits with high perceived value.
Top Non-Taxable Employee Benefits in Canada
Canadian companies can provide employees with many different perks and allowances on a non-taxable basis.
Here are some of the most common and popular non-taxable employee benefits offered:
Cell Phone and Internet Services
Employers can provide a tax-free benefit for cell phone and internet services used for business purposes.
You can provide employees with a phone and monthly service plan for cell phones without creating a taxable benefit. If employees use their cell for work, you can reimburse them for reasonable monthly service costs. Providing remote employees with high-speed internet access at home can also be tax-free.
Education and Training Costs
Paying for career-related courses, training, certifications, and tuition costs for employees is considered non-taxable if the employer is the primary beneficiary.
This includes seminars, conferences, workshops, classes, and tuition fees. Necessary materials like textbooks, stationery, and supplies can also be covered.
Professional Membership Dues
The employer can pay professional association and license fees related to an employee’s role without becoming taxable income. This includes dues for accounting, legal, engineering, and healthcare professional bodies.
Recreational Facilities and Club Dues
On-site gym facilities provided for all employees are generally non-taxable. You can also cover employees’ membership fees for fitness clubs, gyms, golf courses, ski resorts, and recreational facilities, provided a business-related rationale.
Gifts and Awards
Employers can provide employees up to $500 worth of non-cash gifts and tax-free yearly awards for work recognition, birthdays, holidays, and service milestones. After five years of service, an additional $500 milestone award can be given.
Automobile Allowances
Employees receiving reasonable per-kilometer allowances for driving their vehicle for business purposes don’t have to treat these payments as taxable income. Rates up to $0.61/km are generally deemed reasonable by the CRA.
Counselling Services
A non-taxable employee benefit covers professional counselling or therapy services for employees related to physical health, mental health, career guidance, retirement planning, or addiction treatment.
Loyalty Points
Loyalty rewards points that employees accumulate through employer-paid business travel and expenses are generally not taxable. This assumes the points are not converted to cash.
Private Health Services Plans
Premiums employers pay for supplementary health, dental, and medical insurance plans, and Private Health Services Plans (PHSPs) for employees are considered non-taxable employee benefits.
Disability Insurance
Disability insurance premiums paid by the employer are non-taxable to employees. Disability benefits, including long-term and short-term, paid out if a claim is made are taxable.
Other Common Non-Taxable Employee Benefits
There are a variety of other employer-provided perks that can be structured to avoid becoming taxable income:
- Parking/transit passes
- Staff discounts
- Moving expense reimbursements
- Relocation allowances
- Childcare subsidies
- Employee profit-sharing
- Group RRSP contributions
- Preventative health screenings
- Employee assistance programs
- On-site meals and snacks
- Employee stock option plans (within limits)
- Uniforms and special clothing
- Tuition fee reimbursement for dependents
- Professional development conferences
Rules and Requirements for Non-Taxable Employee Benefits
While non-taxable employee benefits offer compelling advantages, specific CRA rules and requirements must be followed to avoid unintended tax implications. Here are some critical guidelines for employers:
CRA Guidelines
The Canada Revenue Agency outlines which fringe benefits and allowances can be provided tax-free to employees. Sections 6 and 7 of the Canadian Income Tax Act cover rules and published CRA interpretation bulletins.
Employers must understand CRA’s criteria for each benefit and how to structure programs accordingly. Key factors include determining whether the benefit is for personal or business use if the employee is the primary beneficiary, and what documentation should be maintained.
Federal vs. Provincial Differences
While CRA sets federal tax guidelines, there can be slight provincial variances to be aware of. For example, Quebec has different thresholds for tax-free gifts and awards and treats professional dues differently.
Employers must be familiar with any distinct provincial regulations that may impact how benefits are administered and reported for tax purposes in their jurisdiction.
Employer Deductions
Employers must ensure proper documentation is maintained to deduct non-taxable employee benefits costs as business expenses. This includes recording benefits provided, confirming eligible expenses, and retaining invoices and receipts.
Having detailed records will ensure that CRA allows costs related to non-taxable employee benefits to be deducted as business expenses. The onus is on employers to prove an expense is eligible should CRA inquire into a deduction.
Limits and Restrictions
Non-taxable employee benefits usually come with specific limits in terms of maximum dollar amounts or frequency. For instance, per CRA rules, gifts and awards are capped at $500 annually. Exceeding thresholds or offering excessive perks can lead to taxable consequences for employees.
It’s essential to be aware of applicable limits defined by CRA and structure your programs accordingly. Consulting a tax advisor can help determine appropriate boundaries.
Proper Documentation
Employers must maintain sufficient documentation to validate expenses related to non-taxable employee benefits. This includes receipts, invoices, proof of payment, and evidence confirming business purpose.
Meticulous record-keeping is critical to demonstrating CRA compliance and defending your tax deductions during an audit. The burden of proof falls on employers to substantiate the nature of expenses.
Implementing a Non-Taxable Employee Benefits Program
Developing an effective non-taxable employee benefits program requires planning and consideration. Here are some best practices to follow:
Conducting Employee Surveys
Survey your staff to identify which non-taxable employee benefits they value and utilize. This input can help you choose perks that will resonate and be appreciated—gauge interest in professional development, transit programs, fitness credits, childcare stipends and continuing education.
Budgeting and Cost Considerations
Review your budgets and determine how much can be allocated towards non-taxable employee benefits. Factor in the costs of core offerings first, then decide which supplemental perks are affordable.
Gauge the perceived value versus actual cost for each option and focus on the high-value-added benefits employees will utilize.
Communicating Offerings
Employees will only take advantage of benefits they understand and are aware of. Develop a detailed communication plan to inform staff about available benefits.
Create online resources they can refer to all year explaining programs, reimbursement processes, and eligibility. Promote offerings through multiple channels like email, intranet, brochures, and one-on-one meetings.
Tracking and Reporting
Implement a system to track employee benefits usage, expenses, and reimbursement payments. This data can help measure ROI and identify which benefits provide the most value.
Regularly report statistics to management to showcase the utilization and effectiveness of non-taxable employee benefits offerings.
Avoiding Pitfalls
While non-taxable employee benefits offer advantages, there are potential legal, tax and HR pitfalls to be aware of. These include perceiving programs as discriminatory, failing CRA compliance, inefficient administration, excessive costs, and inadequate promotion. Consult experts to mitigate risks and incorporate best practices when designing your offerings.
The Future of Non-Taxable Employee Benefits
The landscape for non-taxable employee benefits will continue evolving in the coming years. Some notable trends to expect:
Growing Employee Demand
With accelerated talent competition, workers will demand more decadent benefits packages from employers. Unique non-taxable perks can become deciding factors for candidates assessing job offers. Employees will also negotiate to customize their total compensation with tax-advantaged options.
Leveraging Technology
Look for innovative ways to integrate technology into benefit delivery, from personalized portals to apps to virtual platforms. For instance, they provide free access to online learning or professional development courses. Tech-enabled benefits create convenience and broader access.
Creative and Innovative Offerings
Expect progressive companies to experiment with new non-traditional tax-free perks to differentiate themselves.
Possibilities include paid sabbaticals, home office furnished and decor allowances, pet insurance, identity theft protection, and childcare or eldercare services subsidies.
Greater Customization and Personalization
Benefits strategies will shift towards targeted offerings for specific employee segments and personas. For instance, student loan repayment assistance focuses on recent graduates.
The most competitive employers will provide a catalogue of non-taxable employee benefits for staff based on individual needs and life stage.
