Welcome to Ask An Accountant, where we take your payroll and accounting queries and help you make sense of them. Whether you’re doing payroll for the first time or you’re a seasoned veteran, we’re here to make sure you never have to worry about something going over your head.
As an employer, you’ve probably considered providing your employees with benefits such as a mobile phone, transit passes, or even room and board. What you might not have considered is whether the benefit is taxable or not. To help you better understand taxable benefits if you're not using online payroll to automate their calculations, we asked Knit People’s Senior Accounting Associate Guriqbal ‘Guri’ Singh for more information.
What is a Taxable Benefit?
To start, it’s important to understand what exactly a benefit is. According to the Canada Revenue Agency (CRA), a benefit is defined as paying for or providing an employee (or their spouse, child, or sibling) with something personal in the form of an allowance, a reimbursement, or the free use of property, goods, or services owned by the employer. Breaking things down further:
- An allowance (or advance) is a periodic or lump-sum amount an employee is paid on top of their wages to cover the cost of anticipated expenses. For example, a daily meal allowance to cover the cost of food during a business trip.
- A reimbursement is an amount paid to an employee to repay expenses incurred while carrying out their day-to-day work. For example, if an employee took a client out to lunch, they would provide receipts for the expense and receive a reimbursement.
Whether a benefit is an allowance, a reimbursement, or the free use of the employer’s property, goods, or services, employers must consider the following:
1. Determine if the benefit is taxable.
2. Calculate the value of the benefit.
3. Calculate the payroll deductions.
4. If applicable, file an information return.
Determining if a Benefit is Taxable
In Canada, taxable benefits are benefits provided to employees that the employer has to add to the employee’s income each period to determine the total amount of income that is subject to source tax deductions. Makes sense, but how do you know if the specific benefit you provide your employees is taxable? Well according to the CRA, if an employee receives "an economic advantage that can be measured in money" and is the primary beneficiary of the benefit, it's a taxable benefit. Common examples of taxable benefits include transit passes, boarding, lodging, rent-free or low-rent housing, use of a company vehicle for non-work related purposes, group insurance premiums paid by the employer, and gym memberships paid for or subsidized by employers.
If you are unsure whether a benefit is considered taxable, you can always consult the T4130 Employers’ Guide - Taxable Benefits and Allowances.
Calculating the Value of a Benefit
In most cases, the value of a taxable benefit is considered to be its Fair Market Value (FMV), which is the price that the goods or service would fetch in an open market. In the event that the CRA asks, you must be able to support the value you have assigned to a given benefit, and, if applicable, include an amount for the GST/HST and PST in the value of the taxable benefit. Once the value of the benefit (including taxes) is determined, employers should add this amount to the employee’s income for each pay period or when the benefit is received. This result is the total amount of income subject to payroll deductions.
Calculating the Payroll Deductions
In addition to calculating the value of a benefit, you will also need to know whether or not you need to deduct Canada Pension Plan (CPP) and Employment Insurance (EI). These deductions vary based on the benefit, so you will need to consult the Benefits Chart in the ‘CRA's T4130 Employers' Guide - Taxable Benefits and Allowances’ to know whether you need to deduct CPP and EI from a taxable benefit. The employer then withholds the necessary deductions from the employee’s total pay in the pay period in the normal manner. However, it is important to note that the deductions withheld depends on whether the benefit provided is cash or non-cash.
For more information about taxable benefits in Canada, please consult the CRA's T4130 Employers’ Guide - Taxable Benefits and Allowances.
Disclaimer: This article provides general information and should not be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.