When is an employee benefit taxable?

MC&A September Newsletter - When is an employee benefit taxable?

When is an employee benefit taxable?

When is an employee benefit taxable?

Canada’s Income Tax Act is generally not a place people turn to for easy answers, so figuring out whether benefits provided to employees are taxable or not can prove a challenge.
“There are a lot of different rules and exceptions,” says Kevin Stienstra, a senior tax manager at Grant Thornton LLP in Beamsville, Ont. “That can make it very difficult to establish which benefits are taxable and which ones are not,” he adds.

The act doesn’t provide much help on precisely what constitutes a benefit, so determinations on taxability rely on the strength of case law in Canadian courts, as well as the Canada Revenue Agency’s administrative policies.

A rule of thumb

Over many years of decisions, the most helpful rule of thumb to emerge dictates that any benefit that primarily benefits the employer is non-taxable to the employee. For example, when employers pay for an employee’s professional membership fees, such as Stienstra’s own professional dues as a chartered accountant, the benefit isn’t taxable as membership constitutes a condition of employment.

The CRA’s take on some of the more common offered by employers:

Automobile Allowance

Payments made to employees who use their own vehicle for business travel are non-taxable, as long as the amount is based on a reasonable rate per kilometer, which for 2016 stands at 54 cents for the first 5,000 kilometers and 48 cents after that.

Group healthcare

Employer contributions to private health services plans, such as for medical or dental coverage, aren’t taxable benefits. However, employer-paid premiums for benefits such as life insurance, accidental death and dismemberment and critical illness are all taxable.

Pensions

Employer contributions to pooled registered pension plans aren’t taxable, but registered retirement savings plan contributions and administration fees paid by employers are taxable benefits.

Cellphones

The CRA will generally consider personal use of company cellphone to be a non-taxable benefit, as long as the cost is reasonable and the personal use doesn’t cause extra charges outside of the cost of the plan.

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“You can also look at the facts around a particular benefit to see whether an argument can be made that it’s non-taxable,” says Stienstra.

Just make sure to expect a little resistance from the CRA. Until 2012, Toronto’s Steam Whistle Brewing provided employees with weekly vouchers to redeem for 12-packs of pilsner from its manufacturing premises.

“They tried to argue the employer was the primary beneficiary because this was part of their quality control process,” says Stienstra.

Tragically, the party-poopers at the CRA disagreed and convinced the Tax Court of Canada that the free booze was in fact a taxable benefit. While Steam Whistle “undoubtedly derived some benefit” from both a quality control and marketing perspective, the court decided any benefit to the company was incidental to that of the employees, the primary beneficiaries of the free beer. The brewer’s failure to monitor employees’ use of the tickets and the small number of quality reports actually filed undermined its case.

CRA exemptions

When the chief beneficiary is the employee, things get a little more difficult because they’ll need to rely on specific exemptions in order to avoid a tax hit on the value of the benefit.

“It’s important to do a little digging and see if you can find an exception that fits,” says Stienstra.

For some of the exceptions listed by the CRA, monetary limits apply. For example, employers don’t want to go too crazy on the holiday party or any other major social events for employees, since they’re non-taxable only up to a price of $100 per employee. If the cost crosses that threshold, the whole amount becomes taxable, not just the portion over the limit.

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Cash or near-cash awards, such as gift certificates, will always be taxable, according to the CRA, but non-cash gifts and awards will escape tax as long as their total value adds up to less than $500 in a given year. The gifts must be for special occasions, and awards must tread the fine line of recognizing an employee’s contributions to the workplace rather than job performance.

excerpts provided by: Benefits Canada –September 2016

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