With labour shortages in various industries prevailing, providing a competitive pay package to employees can make the difference in securing a highly sought-after candidate for your company. In Canada, an employee’s salary and wages received in cash are taxed as employment income and included on an employee’s T4 slip for tax filing purposes. However, employers can provide employees with many benefits and allowances on a non-taxable basis.
The Canadian Revenue Agency (CRA) defines a benefit as goods or services that you give or provide to your employees (or a close relative of the employee - spouse, child, or sibling) that are personal. Benefits include allowances and reimbursement of an employee's expenses. Benefits can be cash benefits, near cash benefits, and non-cash benefits. Many benefits can be taxable or non-taxable depending on the specific circumstances of their issuance. For instance, overtime meals are non-taxable if their cost is reasonable and overtime occurs infrequently.
The CRA considers a benefit taxable if:
- It is received or enjoyed by an employee.
- It is a measurable economic benefit (has a dollar value).
- It is primarily for the personal advantage of the employee (the benefit is not intended to assist with the job-related tasks).
The CRA uses several criteria to assess whether a benefit is taxable.
- Primary Beneficiary Test: Who Benefits Most? If the employee is the primary beneficiary of the benefit, it will be treated as taxable. The benefit is usually non-taxable if the employer is the primary beneficiary (e.g., tools necessary for work).
- Economic Advantage: The benefit must have a quantifiable (dollar) value. The CRA considers the benefit's fair market value when determining its taxable value.
- Nature of the Benefit: Cash benefits are usually taxable. Non-cash benefits may be taxable depending on their nature and use.
- Employment Relationship: The employee must receive the benefit as a result of the employment relationship.
- Reasonableness: Benefits that exceed reasonable limits may become taxable. They should align with common practices within the industry.
- Frequency and Regularity: Regular benefits are more likely to be taxable.
- Intent and Purpose: A benefit may be non-taxable if it serves a legitimate business purpose. Personal advantages derived from business assets can render it a benefit taxable.
In this article, we will talk about the common non-taxable benefits that you, as an employer, may provide your employees.
Common Non-Taxable Benefits in Canada
1. Cell Phone and Internet Services
When you provide your employees with a cell phone that you own to carry out their work, the cost of the device is not considered a taxable benefit. However, if you reimburse your employees for the cost of their device, the cost is considered a taxable benefit to the employee. An allowance for cell phone services is also considered a taxable benefit.
You can reimburse your employees for the service cost of cell phone and internet services to help them carry out their work. The reimbursement for the service costs is considered non-taxable if you require employees to use a cell phone to complete their work, the plan has a reasonable fixed cost, and employees' usage of these devices does not add to the cost of the phone plans.
2. Education and Professional Development Costs
Education costs related to upgrading or maintaining your employees’ skills are non-taxable benefits. These include tuition, textbooks, meals, travel, and accommodations. Education costs for general employment training, such as general business courses, stress management, first aid, employment equity, and language courses, are generally considered to be for the employer's benefit and are considered a non-taxable benefit.
Education costs reimbursed for personal interests and not related to employment are considered a taxable benefit. For example, education costs for an improv comedy course or a silent meditation retreat would fall into this category.
3. Professional Dues
Generally, professional membership dues are considered a taxable benefit, but professional dues reimbursed to your employees that benefit the employer are deemed non-taxable benefits. This would be the case if membership in a professional organization is a condition of employment or if you, the employer, have determined that you are the primary beneficiary of this membership.
4. Recreational Facilities and Club Dues
Keeping your employees healthy through fitness can greatly enhance productivity and staff morale. Suppose you provide an in-house gym or recreational facility or arrange for your employees to use a recreational facility. In that case, the costs covered are not considered taxable benefits if the employer is the primary beneficiary. In-house recreational facilities that you provide to all employees are a non-taxable benefit. Social or fitness club memberships are non-taxable if you can demonstrate that you, the employer, are the prime beneficiary.
5. Gifts and Awards
Generally, non-cash gifts and awards under $500 annually are non-taxable benefits. Trivial gifts such as corporate logo clothing, mugs, and coffee will not count towards the $500 limit.
As a reward for long-serving employees, you may reward your employees every five years with non-cash gifts up to a maximum of $500. These long-service awards are also tax-free. The long-service award does not count towards the annual $500 limit.
6. Automobile Allowances
You can reimburse your employees a reasonable automobile allowance as long as it is based on the business usage mileage at a reasonable CRA-prescribed mileage rate. You can use the CRA's automobile benefits online calculator to calculate the benefit accordingly. A rate that is considered unreasonable will be included in the employee’s income. Parking spaces provided to your employees are also taxable, provided your employee is disabled or regularly requires a vehicle for business purposes.
7. Counselling Services
Employees can receive counselling services as a non-taxable benefit if it is for the purposes of re-employment, retirement or physical/mental health. Specifically, mental health services include counselling for stress management or tobacco, drug, or alcohol addiction.
8. Loyalty Points
Credit card loyalty points earned from business expense reimbursements are generally not taxable to the employees. However, if the points are converted into cash or earned as part of a tax-avoidance arrangement, the value of the points will be considered a taxable benefit.
9. Private Health Services Plan
The premium you pay on behalf of your employees for a private health and dental services plan is a non-taxable benefit for your employees if it is a group plan. A private health services plan becomes a taxable benefit if you offer it to individual employees as a non-group plan.
10. Short-Term and Long-Term Disability Insurance
The premiums you pay on behalf of your employees for short-term or long-term disability insurance are not taxable benefits. However, if the employee files a claim and receives the disability insurance benefit, the benefit is taxable.
11. Transportation Passes
Employer-provided public transportation passes that are used to commute to and from work.
Handling Non-Taxable Benefits in Bookkeeping
Accurate Classification Using Separate Accounts
Create general ledger accounts for non-taxable benefits to differentiate them from taxable and regular wages. Example accounts:
- Employee Benefits – Non-Taxable
- Employee Benefits – Taxable
Documentation and Record-Keeping
Keep all relevant documents, such as invoices, receipts, agreements, and communication regarding the benefits. Documentation should specify the nature of the benefit, the recipients, and the reason it qualifies as non-taxable. Ensure there is a clear audit trail that can substantiate the non-taxable status of the benefits in case of a CRA review.
Payroll Processing: Exclude from Taxable Income
Configure your payroll system to exclude non-taxable benefits from income tax, CPP, and EI calculations. Use specific payroll codes designated for non-taxable benefits.
Reporting Obligations: T4 Slips
Generally, non-taxable benefits are not included on the T4 slip. However, some benefits may need to be reported in certain boxes even if they are non-taxable (e.g., code 40 for other taxable allowances and benefits, which may include some non-cash benefits).
GST/HST Considerations: Input Tax Credits (ITCs)
Employers may claim ITCs for the GST/HST paid on goods and services provided as non-taxable benefits. Some benefits, while non-taxable for income tax purposes, may still have GST/HST implications.
Steps to Determine Whether a Benefit is Taxable or Not
- Identify the Benefit: Clearly define what the benefit is and its intended purpose.
- Assess Who Benefits: Determine if the employee or employer is the primary beneficiary. Does the benefit result in the employee's personal enjoyment, or does it help her complete assigned tasks at work?
- Evaluate Economic Advantage: Does the benefit provide a measurable economic gain to the employee?
- Check CRA Guidelines: If in doubt, refer to CRA publications specific to the benefit in question.
- Consider Frequency and Amount: Regular, substantial benefits are more likely to be taxable.
- Consult Professionals: When in doubt, seek advice from tax professionals or the CRA directly.
Final Thoughts
For more information, you can use the CRA's T4130 Employer's Guide for a comprehensive list of non-taxable benefits, as well as taxable benefits. Some taxable benefits will require GST/HST to be included. After you've calculated the value of the taxable benefits and the GST/HST, you will have to calculate payroll deductions.
If you're still unsure about benefits, payroll, and the tax act, we can help! At Enkel, we can help you manage your company's payroll and handle tax-related matters! Contact us to learn more about how we can help you.
