Common Taxable Benefits in Canada
What is a Taxable Benefit?
A taxable benefit is a payout by an employer to an employee that may be cash or some payment which is considered a positive benefit. Taxable benefits are expected benefits in Canada, which must be disclosed when a citizen files his income taxes.
Benefits are taxable, and a taxpayer, or their employer, should include them in the taxpayer’s income. Expected taxable benefits include:
- Use of a business car or other motor vehicle for private use
- Boarding or lodging free of charge or reimbursed (non-business related)
- Presents and Rewards
- Tax-free or loans with reduced interest rates
- The Meals
- Transit passes or slots for parking
- Group term insurance plans for life
- Memberships to the Club
These are examples but aren’t an exhaustive list of benefits that taxpayers need to include in income.
Do you give your employee a benefit, an allowance, or an expense reimbursement?
If you pay for or provide something personal in nature, your employee has earned a benefit.
- Pay directly to your employee.
- Pay to an individual who does not deal at arm’s length with the employee (for Example, employee’s spouse, child, or sibling).
A benefit is a good or service that you offer to your employee or arrange to give to a third party, such as free use of the property you own. A benefit includes an allowance or a reimbursement of an employee’s expense. A benefit or an advance is any annual or lump sum you give to your employee in addition to wages or salaries to help the employee pay for certain planned expenses without funding the expenses.
An allowance or advance is:
- An estimated value is typically predetermined without the real cost being used.
- Typically for a particular reason.
- They are used as the employee chooses since the employee does not provide receipts.
An allowance may be calculated based on distance, time, or something else, such as the allowance for a motor vehicle using the driving distance or the allowance for a meal using the category and number of meals per day.
Employer Responsibilities
When an employer benefits his workers or employees who are holding an office in this business, he should take the following steps.
- It must first decide whether the benefit matches the taxable benefit definition, and after this, the value of the benefits and the payroll deductions must be calculated.
- When necessary, he must file an information return.
- The employee is deemed to have earned a profit whether the employer-paid or provided the employee or an individual who does not interact with the employee at arm’s length, such as the spouse, child, or sibling of the employee, with something personal in nature.
- You can pay the benefits in cash mode to the workers, for Example, meal allowance or compensation of personal mobile phone bills, or it can be offered in a way other than cash, for Example, parking space or gift, referred to as a non-cash benefit.
Once it is determined that a benefit is taxable, calculate the value of the specific benefit.
It would be best to calculate the value of the particular benefit until you decide that the benefit is taxable.
In general, the value of a profit is its fair market value (FMV). This is usually the sum that the employee would have had to pay for the same benefit if there were no employer-employee relationship under the same circumstances.
The fee to you for the exacting property, good, or service could be used to reflect the fair market value of the item or service.
Common Taxable Benefits
- Tips
- Life insurance premiums
- Boarding, lodging, and low-rent or rent-free housing
- Expenses from personal travel
- Personal use of a company car
- Gifts over $500 per year
- use of a company-owned vacation property
Typical non-taxable benefits include:
- Meals that are subsidized at any onsite cafeteria
- Meals or allowances paid for overtime work (unless it is a daily occurrence)
- Fees for the personal use of the internet or a mobile phone (unless it exceeds what is included in a basic plan for fixed expenses)
Home Office Set Up and Expenses Update
An employer’s allowance to buy home office equipment is taxable, although there is a new Covid-19 exemption for purchasing computer equipment.
In general, a reimbursement earned from an employer by an employee for the purchase of home office equipment (i.e., office furniture or computer equipment) would be a taxable benefit because the employee would benefit from the purchase and possession. CRA has recognized that due to the COVID-19 pandemic, many employees may not have the essential tools and equipment to work from home effectively.
Because of this reason, the CRA has clarified that with the issuance of a purchase receipt, an employer reimbursing an employee for the purchase of any home office equipment up to a sum of $500 would not result in a taxable benefit to the employee as the purchase of equipment primarily benefits the employer.
Also Read: TFSA VS RRSP: HOW TO DECIDE BETWEEN THE TWO
Health and Dental Benefits
Provincial and territorial governments offer basic health coverage. Many employers provide private, employer-sponsored group insurance policies, which are generally considered non-taxable employee benefits, to help pay for costs beyond medical care.
As an employer, the premiums you pay for these policies count as company costs. The premiums you pay on behalf of the workers are not recognized as a taxable benefit outside of Quebec.
You can also present health care expenditure, and wellness expenses account as employee benefits.
1. Health Spending Account (HSA)
Although HSAs can be set up as stand-alone programs to improve flexibility, they are typically added to a care plan. They must be set up in compliance with the Canada Income Tax Act to be classified as non-taxable benefits for health-care-related expenses reimbursed by these plans.
HSA’s are easy to use and set up. HSAs offer tax-free dollars that can be used on any qualifying health expense by employees. You may choose an annual limit on how much workers can be reimbursed by their HSA as an employer. And though monthly premiums are not included, when an employee submits a covered cost, the employer can charge an administrative fee to the HSA provider.
2. Wellness Spending Account
WSA’s provide an allowance that, when used, is added to an employee’s taxable income. Employees directly pay for their lifestyle expenses and then make claims through their WSA provider. Transit passes, childcare, personal training sessions, and financial planning advice are examples of covered expenses. Eligible expenses are reimbursed using the allowance from the employee. As with the HSA account, each time an employee files a claim for reimbursement, employers pay a fee to the provider.
Are Taxable Benefits Subject to CPP and EI Deductions?
Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and deductions from income tax may be subject to taxable benefits and allowances. For a full run-down, check out the CRA’s benefits chart.
Conclusion
It can be daunting to stay on top of the rules about taxable benefits in Canada. But it should not be impossible! You’re well on your way to success now that you hear about the new guidelines.
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