You’ve decided to reward your employees with a benefits plan, maybe a company car, gift cards, and such. Now, before you go and give your employee something, you need to find out if that benefit is considered income to the employee, and, therefore, taxable. Sadly, any kind of benefit you give an employee is considered a taxable benefit, and the employee must be taxed on it, some even are taxable for Canada Pension Plan and Employment Insurance. We’ll talk about what is a benefit and how is it taxable.
Your employee has received a benefit if you pay for or give something that is personal in nature: directly to your employee; or to a person who does not deal at arm’s length with the employee (such as the employee’s spouse, child, or sibling).
A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employee’s personal expense.
An allowance is a limited amount decided in advance that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having him or her support the expenses. An allowance can be calculated based on distance or time or on some other basis such as motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.
A reimbursement is an amount you pay to your employee to repay actual expenses he or she incurred while carrying out the duties of employment. The employee must keep proper records to support the expenses and give them to the employer.
Determine if the benefit is taxable
Your first step is to determine whether the benefit you provide to your employee is taxable and should be included in his or her employment income when the benefit is received or enjoyed. Whether the benefit is taxable depends on its type and the reason an employee or officer receives it. To determine if the benefit is taxable, see Chapters 2 to 4 of Guide T4130, Employers’ Guide Taxable Benefits and Allowances.
The benefit may be paid in cash (such as a meal allowance or reimbursement of personal cellular phone charges), or provided in a manner other than cash, such as a parking space or a gift certificate. The way you pay or provide the benefit to your employee will affect the payroll deductions you should withhold.
Types of benefits and allowances
To find out if benefits and allowances are taxable and how they are declared on T4 or T4A slips, see the Benefits and allowances alphabetical index. There are just too many to go through in this blog post.
Calculate the value of the benefit
Once you determine that the benefit is taxable, you need to calculate the value of the specific benefit. The value of a benefit is generally its fair market value (FMV). This is the price that can be obtained in an open market between two individuals dealing at arm's length. The cost to you for the property, good, or service may be used if it reflects the FMV of the item or service. You must be able to support the value if you are asked.
Goods and services tax/harmonized sales tax (GST/HST) and provincial sales tax (PST)
When you calculate the value of the taxable benefit you provide to an employee, you may have to include:
- the GST/HST payable by you; and
- the PST that would have been payable if you were not exempt from paying the tax because of the type of employer you are or the nature of the use of the property or service.
Use the “Benefits chart,” here to find out if you should include GST/HST in the value of the benefit. Some benefits have further information about GST/HST in the topic specific section.
The amount of the GST/HST you include in the value of the taxable benefits is calculated on the gross amount of the benefits, before any other taxes and before you subtract any amounts the employee reimbursed you for those benefits.
You do not have to include the GST/HST for:
- cash remuneration (such as salary, wages, and allowances); or
- a taxable benefit that is an exempt supply or a zero‑rated supply as defined in the Excise Tax Act.
Policy for non-cash gifts and awards
You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value (FMV) of the gifts and awards you give your employee is greater than $500, the amount over $500 must be included in the employee's income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650-$500).
you can, once every five years, give your employee a non-cash long-service or anniversary award valued at $500 or less, tax free. The award must be for a minimum of five years' service, and it should be at least five years since you gave the employee the last long-service or anniversary award. Any amount over the $500 is a taxable benefit.
If it has not been at least five years since the employee's last long-service or anniversary award, then the award is a taxable benefit. For example, if the 15-year award was given at 17 years of service, and then the next award is given at 20 years of service, the 20-year award will be a taxable benefit, for five years will not have passed since the previous award.
The $500 exemption for long-service awards does not affect the $500 exemption for other gifts and awards in the year you give them. For example, you can give an employee a non-cash long-service award worth $500 in the same year you give him or her other non-cash gifts and awards worth $500. In this case, there is no taxable benefit for the employee. If the value of the long-service award is less than $500, you cannot add the shortfall to the annual $500 exemption for non-cash gifts and awards.
Items of small or trivial value do not have to be included when calculating the total value of gifts and awards given in the year for the exemption. Examples of items for small or trivial value include: coffee or tea; T-shirts with employer's logos; mugs; plaques or trophies.
Basically, anything you give an employee becomes a taxable benefit. Ensure you chat with your bookkeeping/accountant before deciding on any employee benefits, as more than likely, they are taxable.