Taxable employee benefits are becoming more popular as companies look to enhance compensation packages and give workers greater flexibility and choice.
However, administering taxable employee benefits creates additional complexity for payroll, tax compliance, and reporting.
This comprehensive guide will explain taxable employee benefits, who has to pay taxes on them when they are taxed, how the taxation works, and why Canada taxes non-cash compensation.
Read on for a detailed overview of taxable employee benefits taxation.
What about Non-taxable Employee Benefits? - Learn now on The Ultimate Guide to Non-Taxable Employee Benefits in Canada 2024.
What are taxable employee benefits?
Taxable employee benefits or fringe benefits are forms of non-cash compensation provided by an employer that are considered taxable under Canadian tax laws. Taxable employee benefits can take various forms, including:
- Company cars or vehicles provided for personal use
- Subsidized housing, rent-free accommodations
- Low or interest-free loans
- Gift cards, gifts, awards
- Club memberships
- Child care expenses
- Stock options
- Personal use of company aircraft or property
- Transit passes
- Meal allowances
- Loan forgiveness
Essentially, a taxable benefit provides an employee some economic advantage or value that can be quantified and is not explicitly excluded from tax. Benefits that confer an advantage measurable in money terms are considered taxable by the Canada Revenue Agency.
Who has to pay taxes on employee benefits?
The individual employee who receives taxable employee benefits from their employer is responsible for paying income tax on the value of the benefits. Employers have payroll responsibilities related to taxable employee benefits provided to staff:
- Determining the fair market value of benefits provided
- Including the value of benefits in taxable income used to calculate payroll deductions
- Deducting applicable income tax, CPP contributions, and EI premiums from employees’ total taxable compensation, including benefits
- Issuing T4 slips that include taxable employee benefits in Box 14 and reflect total deductions
- Remitting withheld amounts to the CRA on employees’ behalf
So, while the employee ultimately pays tax on taxable employee benefits received, the employer has a vital role in adequately withholding, reporting, and remitting taxes related to employee benefits as part of overall payroll responsibilities.
When are employee benefits taxed?
The timing of taxation on employee benefits received depends on the nature and timing of when the benefit is provided:
- Ongoing benefits like a company car, discounted rent, or cell phone service are taxed in the pay periods they are provided.
- One-time or periodic benefits like gift cards, club memberships, or awards are taxed in the pay period they are received.
- Significant benefits like stock options are taxed during exercise or vesting based on fair market value minus any amounts paid by the employee.
- Allowances paid regularly or as lump sums are taxed upon receiving the allowance.
- End-of-year bonuses or gifts are taxed in the pay period they are received, even if provided retroactively.
Correctly reporting benefits on T4 slips in the correct tax year is crucial for tax compliance. Benefits are taxable in the year they are received, used, or enjoyed by the employee.
How are taxable employee benefits taxed?
The main steps involved in taxing employee benefits correctly are:
- The employer determines the fair market value of each taxable benefit provided.
- The total value of taxable employee benefits is added to the employee’s other regular taxable income for the year.
- Based on the employee’s total taxable income, including benefits, the employer calculates and withholds income tax, CPP contributions, and EI premiums.
- The employer reports the value of all taxable employee benefits in Box 14 of the employee’s T4 slip, along with total income tax, CPP, and EI deducted for the year.
- The employee reports the value of taxable employee benefits received as indicated on their T4 slip when filing their personal income tax return.
Why are employee benefits taxed?
There are several reasons and rationales for taxing employee benefits in Canada:
- Benefits increase an employee’s overall compensation – Taxing benefits puts them on par with regular wages in terms of taxation.
- Ensures horizontal equity – Employees who receive similar total compensation packages pay comparable taxes, whether the compensation comes 100% in cash or includes taxable employee benefits.
- Benefits provide the ability to pay additional taxes – The economic advantage and value received through benefits give employees the ability to pay taxes on them.
- Maintains progressivity – Taxing benefits allows total employee compensation to be taxed at the appropriate marginal rate rather than only regular salary being taxed.
- Prevents tax avoidance – If benefits were not taxable, employers and employees could shift compensation heavily toward non-cash benefits to avoid income taxes.
- Generates government revenue – Taxing a wide range of benefits broadens the tax base and increases overall taxes collected to fund public expenditures.
Common Taxable Employee Benefits in Canada
There are many different taxable employee benefits that Canadian employers may offer their staff. Let’s break down the most popular taxable employee benefits along with the key features of each.
Group Insurance Benefits
Certain premiums paid by the employer for group insurance plans are considered taxable employee benefits. These include:
Life Insurance Premiums: If the employer pays for all or a portion of an employee’s life insurance premiums, this is a taxable benefit. For example, if the employer pays 50% of a $1,000 annual life insurance premium, the taxable benefit is $500.
Accidental Death & Dismemberment (AD&D): Like life insurance, if the employer covers all or part of AD&D insurance premiums, those amounts count as taxable employee benefits for employees.
Critical Illness Insurance: Premiums paid by the employer for critical illness insurance, which pays out a lump sum benefit if the employee is diagnosed with a covered critical illness, are taxable employee benefits.
It’s important to note that if employees pay 100% of these premiums themselves, they are not taxable employee benefits.
Lifestyle Spending Accounts
A lifestyle spending account (LSA) gives employees additional funds for health and wellness expenses. Typical amounts are $500-1000 per year.
The employer deposits funds into the LSA account, and the funds are taxed as regular income. Employees get reimbursed from the LSA for eligible expenses. Money left at the plan year’s end is usually forfeited back to the employer. LSAs give employees more flexibility and choice in benefits spending.
Company Vehicles
If an employer provides an employee with a company car or vehicle that the employee can use personally, this is considered a taxable benefit. The CRA has detailed rules around calculating the standby charge, which is essentially the value of having personal access to a company vehicle.
There are also taxable employee benefits related to operating costs if the employee does not reimburse the employer for personal use. Company vehicles are one of the most common taxable employee benefits.
Subsidized Accommodations
If an employer provides employees free housing or subsidized lodging, it results in a taxable benefit. This includes:
- Free housing or rental accommodations provided by the employer
- Discounted rental rates on apartments, rooms, houses
- Subsidized mortgages or down payments
- Employer-covered utility bills and maintenance fees
The taxable benefit is based on the fair market rental value minus any amounts the employee pays.
Cell Phones and the Internet
Employer reimbursements for an employee’s cell phone expenses are taxable employee benefits.
Internet services reimbursed or paid for by the employer that employees use personally are taxable.
Company-owned and regular cell phone plans are not taxable employee benefits if primarily for business.
Child Care Expenses
Child care services offered at the place of work can become taxable employee benefits if:
- The services are not available to the general public
- The services are not managed directly by the employer
If the employer subsidizes child care services from a third-party provider, any subsidy amounts count as taxable employee benefits.
Gifts and Awards
The CRA considers most gifts and awards provided by an employer to be taxable employee benefits. However, there are exemptions for non-cash gifts under $500.
Cash and near-cash gifts like gift cards are always taxable, no matter the amount.
Non-cash gifts and awards with a total combined value of $500 or less annually per employee are non-taxable.
Non-cash long service awards for employees after 5+ years of service up to $500 are non-taxable.
So, non-cash gifts under $500 are not taxable employee benefits, but anything over the limit or near-cash/cash is taxable.
Parking
Parking spaces provided by an employer for employees are generally taxable employee benefits. The amount included is based on the value of the parking spot.
Exceptions include parking for employees with disabilities or in cases where parking is not assigned and available on a “first come, first served” basis. But in most cases, employer parking is a taxable benefit.
Transit Passes
Employers may provide employees with public transit passes, such as buses, subways, trains, and ferry services. Whether fully or partially subsidized, the value of these transit passes is treated as a taxable benefit. The exception is employers in the transportation industry providing passes to employees or retirees.
Meal Subsidies
If an employer regularly subsidizes meal expenses, it can become a taxable benefit—for example, frequent free lunches or meal allowances provided to employees. However, reasonable meal allowances provided only during overtime or occasional work events are generally not taxable employee benefits. The frequency of meal subsidies is critical.
How Taxable Employee Benefits Affect Payroll
Adding taxable benefits into the mix requires some extra steps when running payroll. There are two main additional tasks:
Calculating the Value of the Benefit
For most taxable benefits, the value is the fair market value or the amount the employee would have had to pay in normal circumstances. For certain benefits like company cars, the CRA has detailed calculation methods.
Determining Payroll Deductions
When a benefit is taxable, employers also have to withhold applicable payroll deductions:
Income Tax: Taxable benefits are included in an employee’s T4 income, so income tax has to be withheld.
CPP Contributions: Taxable benefits are pensionable, so CPP premiums must be deducted.
EI Premiums: Taxable cash and near-cash benefits are also insurable, meaning EI premiums must be deducted.
GST/HST: GST/HST must also be added to the value and remitted for many taxable benefits.
These deductions affect the employee’s net pay and increase the employer’s payroll costs associated with taxable benefits.
Reporting on T4 Slips
Come tax time, employers have to report taxable benefits on an employee’s T4 slip. The total value of taxable benefits goes in Box 14 (Employment Income) of the T4.
The corresponding taxable benefit codes (such as 30 for housing, 32 for transit passes, etc.) must also be included in the “Other Information” section at the bottom of the T4 slip. This allows the CRA to identify what makes up the taxable benefits amount.
Proper T4 reporting ensures employees can accurately complete their tax returns and avoid issues.
Should You Offer Taxable Benefits?
Just because a benefit is taxable does not automatically mean it’s a wrong choice for your organization. Here are some reasons why taxable benefits are growing in popularity among Canadian employers:
Employee Expectations are Changing
Today’s workers, especially millennials, expect more choice and flexibility regarding benefits. Taxable benefits like lifestyle spending accounts give employees options to customize their coverage.
Flex Plans are Becoming More Popular
Rather than one-size-fits-all coverage, modular plans allow employees to select taxable and non-taxable benefits tailored to their needs. Workers value this flexibility.
Staying Competitive
Companies often need to enhance their benefits offerings to attract and retain top talent. The ability to offer nontraditional taxable benefits can provide a competitive edge.
Of course, costs associated with taxable benefits need to be weighed. But often, the boost to employee satisfaction and retention outweighs the costs. Forward-thinking employers are embracing taxable benefits to give the workforce benefits that are meaningful to them.
Understanding CRA Rules and Policies
Dealing with taxable employee benefits requires familiarity with CRA guidelines and protocols. Here are some key facts:
CRA Definition of a Taxable Benefit: A taxable benefit provides the employee an economic advantage measured in money. If a benefit is not explicitly excluded from taxation, it’s taxable.
CRA Administrative Policies: CRA has policies that identify cases where certain typically taxable benefits may not be taxed under specific conditions.
Resources for Determining Taxability: The CRA provides documents like IT-470R Employee Benefits, Guide T4130 Employer’s Guide – Taxable Benefits and Allowances, RC4065 Employee or Self-Employed?, and a Taxable Benefits Chart outlining the tax status of various benefits.
Consulting these CRA resources helps ensure you classify employee benefits appropriately. When in doubt, seek guidance from a tax professional.
Taxable Employee Benefits – The Key Takeaways
We’ve covered a lot of important ground in this guide on taxable employee benefits. Let’s recap some key takeaways:
- Taxable benefits are employer-provided non-cash forms of compensation that are considered taxable income for employees.
- Expected taxable benefits include company vehicles, subsidized housing, gift cards, rewards points, club memberships, stock options, transit passes, and more.
- Employee income must include taxable benefits and are subject to payroll deductions for income tax, CPP contributions, and EI premiums.
- Proper valuation and T4 reporting of taxable benefits is crucial for tax compliance.
- Taxable benefits are becoming popular as employers offer more flexibility and choice through cafeteria-style benefits plans.
- Employers must understand CRA rules and administrative policies when providing taxable employee benefits.
- With proper planning, taxable benefits can enhance recruitment, retention and employee satisfaction.
While dealing with taxable benefits adds complexity for Canadian payroll and HR administrators, the payoff in terms of employee engagement is often worth the additional effort.
By taking the time to comprehend tax rules and strategically incorporate taxable benefits, organizations can craft rewarding compensation packages tailored to their team’s needs.
What are taxable employee benefits?
Taxable employee benefits or fringe benefits are forms of non-cash compensation provided by an employer that are considered taxable under Canadian tax laws.
Who has to pay taxes on employee benefits?
The individual employee who receives taxable employee benefits from their employer is responsible for paying income tax on the value of the benefits.
When are employee benefits taxed?
The timing of taxation on employee benefits received depends on the nature and timing of when the benefit is provided:
Ongoing benefits like a company car, discounted rent, or cell phone service are taxed in the pay periods they are provided.
One-time or periodic benefits like gift cards, club memberships, or awards are taxed in the pay period they are received.
Significant benefits like stock options are taxed during exercise or vesting based on fair market value minus any amounts paid by the employee.
Allowances paid regularly or as lump sums are taxed upon receiving the allowance.
End-of-year bonuses or gifts are taxed in the pay period they are received, even if provided retroactively.
Why are employee benefits taxed?
There are several reasons and rationales for taxing employee benefits in Canada: Benefits increase an employee’s overall compensation – Taxing benefits puts them on par with regular wages in terms of taxation.
Ensures horizontal equity – Employees who receive similar total compensation packages pay comparable taxes, whether the compensation comes 100% in cash or includes taxable employee benefits.
Benefits provide the ability to pay additional taxes – The economic advantage and value received through benefits give employees the ability to pay taxes on them.
Maintains progressivity – Taxing benefits allows total employee compensation to be taxed at the appropriate marginal rate rather than only regular salary being taxed.
Prevents tax avoidance – If benefits were not taxable, employers and employees could shift compensation heavily toward non-cash benefits to avoid income taxes.
Generates government revenue – Taxing a wide range of benefits broadens the tax base and increases overall taxes collected to fund public expenditures.
Article Sources
At Ebsource, our mission is to provide Canadians with comprehensive and truthful information to help them make prudent choices about employee benefits. We tap into the expertise of veteran financial professionals to ensure our advice aligns with industry best practices. The statistics we cite come from respected government and industry organizations like Statistics Canada and the CLHIA to guarantee accuracy.
Our recommendations stem from in-depth, unbiased research on all the major employee benefits providers in Canada. This allows us to tailor suggestions to individuals’ specific budgets and needs. Ebsource upholds rigorous standards of objectivity, transparency, and independence in all our materials. We pride ourselves on producing advice readers can trust by referencing reputable sources and adhering to sound editorial principles. As Canada’s most reliable source for employee benefits news, we are dedicated to empowering Canadians to make the best benefits decisions.
Employers’ Guide Taxable Benefits and Allowances – canada.ca
A Guide to Taxable Benefits in Canada – simplybenefits.ca