Canadian Tax and Estate Planning

Employers wishing to extend additional benefits to their employees have many options available to them in the form of taxable benefits. To help guide employers this tax season, the Fuller Landau Tax team has summarized some of the most common taxable benefits.

What is a taxable benefit?

A benefit is a type of compensation that an employer provides to employees in the form of cash or non-cash goods and services. For a benefit to be taxable, it must primarily benefit the employee recipient, or someone not dealing at arm’s length with the employee, and have measurable economic value.

Employer responsibilities

• Determine if the benefit is taxable.
• Calculate the value of the benefit.
• Calculate payroll deductions as applicable.
• Report the value of the benefit on an information return.

Allowances and reimbursements

A taxable benefit may include amounts given to employees in the form of allowances and reimbursements.

An allowance is a periodic payment to an employee to cover employment-related expenses (e.g., receiving $200/month to cover car expenses).  Allowances do not require supporting documentation, allowing the employee to use the money in whatever manner they see fit.

Most allowances may be taxable benefits unless they are considered to have been measured ‘reasonably’.  Canada Revenue Agency (CRA) generally issues specific guidance for scenarios where a reasonable measurement may be accepted.

A reimbursement occurs when an employee pays for job-related expenses out of pocket and the employer pays them back.  Reimbursements require proof of purchase, meaning the employee must retain proper documentation to give to their employer in support of the expenses.

When the expenses reimbursed are reasonable and incurred as a part of conducting business, the payment will generally not be considered a taxable benefit.  Whether or not there is a benefit to the employee may not always be clear.

Automobile or motor vehicle benefits

There are two common scenarios that may give rise to a taxable automobile benefit:

• The employee uses a company-provided vehicle for personal reasons (e.g., running errands, driving to-from work, etc.)

In this scenario, a standby charge and operating benefit will need to be calculated based on the employee’s personal use.  The calculation of the benefit requires a ratio of business versus personal mileage, meaning the employee should keep an up-to-date log to ensure accurate records.

• The employee uses their personal vehicle for work and is provided an allowance to cover the cost of the business use.

Any flat rate allowance provided to an employee that is not based on kilometres driven will be considered a taxable benefit.  CRA issues specific guidance with respect to reasonable ‘per kilometre’ allowance rates each year. Any amount paid in addition to those rates should be included in the employee’s income as a taxable benefit.

If the vehicle in question is not classified as an automobile by CRA standards, reporting of the taxable benefit may differ.

Group term benefits

Employer-paid premiums for group term insurance policies sometimes include more than basic health insurance.  Below is a list of some of the common group term premiums, where if paid on behalf of an employee would be considered taxable benefits:

• Group term life insurance
• Accidental death and dismemberment insurance (AD&D)
• Critical illness

Security options

There are three common scenarios where an employee may obtain securities that give rise to a taxable benefit:

• Employee stock purchase plan: employees have the option to purchase stock for less than the fair market value.
• Stock option plan: employees can purchase stock at a predetermined price, regardless of any increase in value.
• Stock bonus plan: employees receive stock as bonus compensation, with no requirement to pay.

The taxable benefit for security options may arise on acquisition of shares or in the year they are sold. The total value of the benefit and when it should be included in employment income will depend on several factors, including whether the corporation is a Canadian Controlled Private Corporation.

Gifts and awards

Gifts and awards given to employees may be considered taxable benefits.  Regardless of the amount, any cash or near cash gift (gift cards) are considered taxable benefits.  Non-cash gifts are taxable benefits when the cumulative value exceeds $500 per year.

Education benefits

Education benefits provided to employees (scholarships, bursaries, tuition, etc.) may be considered taxable benefits if the courses do not relate to developing skills relevant to the position.

Board and lodging

Providing free or subsidized board and lodging to employees is generally considered a taxable benefit.  In the case where board and lodging is provided at a special or remote work location, it may not be a taxable benefit, subject to specific criteria.

Meals

If employees are provided meals during overtime and the overtime has become frequent (more than three times per week), these meals may be considered a taxable benefit.

Similarly, if employers provide subsidized meals, for example in a cafeteria, and the meals are priced at an unreasonably low amount, the meals may be a taxable benefit.

Childcare expenses

Any amount or service provided to employees for childcare would generally be considered a taxable benefit, unless the childcare provided meets all the following criteria:

• Located at place of employment
• Managed by the business
• Provided to all employee and is not available to the public
• No to low cost for employees

Temporary COVID-19 measures

• Reimbursements for home office expenses:

Considering the increase in people working from home, CRA has released guidance stating they will not consider an employee to have received a taxable benefit on home office reimbursements up to a maximum of $500 (cumulative, per employee) between March 15 – Dec 31, 2020.  This is provided the amounts are supported with receipts and incurred to perform employment duties.  Any amount reimbursed more than $500, even if supported by receipts, would be considered a taxable benefit.

• Automobile benefits:

In light of the effect lockdowns have had on employee driving requirements for business, CRA has released guidance allowing employees to use their 2019 automobile usage to qualify for a discounted standby charge if they otherwise would not have qualified in 2020 or 2021.

We’ve summarized some of the more common taxable benefits in brief, but there are many more benefits and factors to consider.  If you are looking for guidance on whether a benefit provided to your employees may be taxable and how to calculate the value,  please refer to detailed CRA guidance or reach out to the Fuller Landau tax team.

About the authors

Georgia Simpson is a Junior Tax Specialist in our Tax Group.  She can be reached at 647-417-0406 or gsimpson@fullerllp.com.

Kimberley Pahl is a Tax Manager in our Tax Group.  She can be reached at 416-645-6528 or kpahl@fullerllp.com.