The Canada Revenue Agency treats employee benefits and allowances in different ways. Some benefits are not taxable, but other benefits are subject to income tax, Canada Pension Plan contributions, and Employment Insurance premiums. Helping your clients understand these distinctions can be critical.
When evaluating employee benefits, use the following four steps:
1. Identify if the benefit is taxable.
2. Estimate the benefit’s value.
3. Calculate payroll deductions.
4. Report the benefit on an informational return.
As a general rule of thumb, a benefit is taxable if the employee is the primary recipient and the benefit provides a clear economic advantage to the employee. One notable exception is for noncash gifts and awards. For example, if you provide food and board to an employee, that’s usually a taxable benefit, but if you give an employee a coffee cup as a birthday gift, that’s not a taxable benefit. Some benefits are only partially taxable. For instance, if you provide a car or cellphone to your employees, only the portion of the vehicle or phone used for personal purposes is taxable.
When establishing the value of an employee benefit, use the fair market value. This is the amount an unrelated third party would pay for that benefit in an open market.
For noncash benefits, you should also add in the GST/HST payable on the benefit.
To calculate CPP and EI payments, you need to add the value of the benefit to your employee’s pay. To explain, imagine a business owner paid his employee $1,000 in a pay period and also provided $200 worth of taxable benefits. In this situation, you need to base payroll taxes on $1,200 of income. Generally, if a benefit is taxable, it’s also pensionable, and you need to calculate and remit CPP as usual. Only cash and near-cash benefits are insurable. That means you don’t have to calculate EI for noncash benefits. At tax time, include these benefits in box 14 of each employee’s T4 slips.
If you have clients who provide their employees with cash or noncash benefits, help them work through this four-step process. Both your clients and their employees need to know if an employee benefit is taxable or insurable so they can plan accordingly.