As an employer, you know that you need to offer a great benefits package to attract and retain great employees. But do you understand the difference between taxable and non-taxable benefits?
The rules around taxable benefits in Canada are constantly changing, and staying up-to-date is no easy task. If you’re not aware of the most recent guidelines, it can cost your company dearly.
In this article, we’ll take a look at what is and isn’t taxable, so that you can rest easy knowing your money is well-spent.
What is a Taxable Benefit?
Any benefit an employee receives that has monetary value can be considered taxable. This rule applies any time the employee is the primary beneficiary of the benefit.
As an employer, you’re responsible for:
- Determining whether your employees’ benefits are taxable
- Calculating their value
- Making appropriate payroll deductions
- Filing an information return
Which Benefits Count as Taxable?
Not sure what’s taxable and what’s not? Let’s dive into some typical examples.
Typical taxable benefits include:
- 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:
- Subsidized meals in an onsite cafeteria
- Meals or allowance provided for working overtime (unless it’s a regular occurrence)
- Fees from personal use of the internet or a cell phone (as long as it doesn’t exceed what’s included in a basic, fixed-cost plan)
Home Office Set Up And Expenses Update
Allowances provided by an employer to purchase home office equipment are taxable but there is a new Covid-19 exception for the purchase of computer equipment..
A reimbursement received by an employee from an employer for the purchase of home office equipment (i.e example office furniture or computer equipment) would generally be a taxable benefit due to the employee benefiting from purchasing and owning it. However, the CRA has acknowledged that due to COVID-19 in Canada, a number of employees may not have the necessary tools and equipment to work from home successfully.
Due to this reasoning, the CRA has stated that an employer reimbursing an employee for the purchase of any home office equipment up to an amount of $500,with the presentation of a purchase receipt, will not result in a taxable benefit to the employee as the equipment purchase mainly benefits the employer.
Health and Dental Benefits
Provincial and territorial governments provide basic health coverage. To help pay for expenses beyond basic care, many firms offer private, employer-sponsored group insurance plans which are usually considered non-taxable employee benefits.
As an employer, the premiums you pay for these plans count as business expenses and, outside of Quebec, the premiums you pay on your employees' behalf are not considered to be a taxable benefit.
You can also offer health care spending and wellness spending accounts as employee benefits.
1. Health Spending Account (HSA)While HSAs can be set up as stand-alone plans, they are usually added to a core plan to increase flexibility. They must be set up in accordance with the Canada income tax act in order for health-care related expenses reimbursed through these plans to be considered non-taxable benefits.
HSA’s are simple to use and set up. HSAs provide tax-free dollars that employees can use on any eligible health expense. As an employer, you can choose an annual limit for how much employees can be reimbursed through their HSA. And while they do not involve payment of monthly premiums, an administration fee is paid by the employer to the HSA provider whenever an employee submits a covered expense.
2. Wellness Spending Account
Similar in set up and operation to HSAs, Wellness Spending Accounts (WSA’s) differ in that they are taxable benefits. Still, many employers use them to attract and retain talent.
WSA’s provide an allowance that, when used, is added to an employee’s taxable income. Employees pay for their lifestyle expenses personally, then make claims through their WSA provider. Examples of covered expenses include transit passes, childcare, personal training sessions, and financial planning advice. Eligible expenses are reimbursed using the employee’s allowance. As with the HSA account, employers pay a fee to the provider each time an employee files a claim for reimbursement.
Group Life and Disability Insurance Benefits
Disability policies have two meanings for “taxable” and “non-taxable” – the premiums, and the benefit. If the policy is structured as a “taxable” benefit, the employer can pay 100% of the premiums but the benefit at time of claim will be considered taxable income. If the policy is structured as a “non-taxable” benefit, the employee pays the premiums – but the benefit is tax-free at time of claim.
Life and Accidental, Death & Dismemberment (AD&D) premiums are considered a taxable benefit when paid by the employer as any benefits received by the employee’s beneficiaries is tax-free.
In order to maximize the benefits received while disabled, most employers will have employees pay the STD and LTD premiums via payroll deduction in order to ensure that any disability payments received are tax-free. Of course, this is only possible if there is premium cost sharing between the employer and the employee. In the case that the employer pays 100% of all health and dental plan premiums, it is important that the employer ensure that the LTD schedule is higher to account for the taxability of the disability benefits.
As with disability premiums, best practice is to have the employee pay the life and AD&D premiums via payroll deduction. However, if the employer is paying all premiums, it is important to ensure that these premium amounts are recorded as a taxable benefit on the employees T-4.
Pension Plans or Group Registered Retirement Savings Plan (RRSP)
Do you contribute to an employee’s RRSP? That cost, as well as any related administration fees, is taxable. However, that same employer contribution made to a Pension Plan or Deferred Profit Sharing Plan (DPSP) is not considered to be a taxable benefit to your employees.
These are just a few of the most common taxable benefits in Canada. If you’re ever unsure whether a benefit qualifies, the Canada Revenue Agency’s guidelines can help.
Are Taxable Benefits Subject to CPP and EI Deductions?
Some benefits and allowances are subject to Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, the new BC Health Tax, and income tax deductions. For a full run-down, check out the CRA’s benefits chart.
Staying on top of the rules around taxable benefits in Canada can be daunting. But it doesn’t have to be impossible! Now that you know about the latest guidelines, you’re already well on your way to success.
Want to keep your Canadian employees happy and productive? Providing employee benefits is key to achieving that. Download our free guide below to learn more.