It may come as a surprise to some Canadian taxpayers when they receive a Notice of Assessment with reported income reassessed to be significantly higher than what their reported take-home pay was. This may be because of the inclusion of a “taxable benefit” in the taxpayer’s income. The Canada Revenue Agency (CRA) is within their rights to tax purported benefits received by taxpayers from their employer by virtue of their employment. Many taxpayers are aware that work perks that provide a financial benefit to the employee are usually taxable by the CRA and do report some amount of taxable benefit on their return. For part 1 of our taxable benefit blog post where we discuss what a taxable benefit is, and what can be done if you disagree about receiving taxable benefits, please click here.
However, not all work-related benefits are taxable. So, how can you tell if a benefit you receive by virtue of your employment is taxable? The answer to this question is determined by evaluating whether the benefit falls within the scope of the meaning of “taxable benefit” under the Income Tax Act. When filing their taxes, Canadian taxpayers must examine (1) the “character” of the alleged benefit; (2) the nexus between the alleged benefit and the taxpayer’s employment; and (3) the valuation of the benefit to be included in the taxpayer’s income.
How do I Identify a Taxable Benefit?
Paragraph 6(1)(a) of the Income Tax Act creates a baseline from which employment benefits are determined to be taxable, taxable in part, or non-taxable. Paragraph 6(1)(a) specifically outlines benefits that may be subject to tax as:
“[T]he value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office of employment.”
Notably, this definition is sufficiently broad to theoretically capture any benefits earned in the course of employment. It becomes necessary to examine how this provision has been interpreted by the courts in order to properly characterize benefits received by virtue of a taxpayer’s employment as either taxable or non-taxable.
Benefits are not restricted to benefits that replace traditional remuneration for employment services. In R. v. Savage, a 1983 Supreme Court of Canada decision, the scope of taxable benefits was explained to include “material acquisition[s] which [confer] an economic benefit on the taxpayer.” Justice Dickson (as he was then) held that material facts determine whether or not the benefit conferred by virtue of employment is “taxable” or “non-taxable”.
The determinative factor is whether or not “something of value” was conveyed by the workplace to the employee. This has taken many forms in Canadian case law including life insurance benefits, health coverage, and even business trips where there is significant personal benefit (usually in the form of “enjoyment”) to the taxpayer.
How do I Determine if the Benefit was Sufficiently Connected to my Employment?
The words in paragraph 6(1)(a) of the Income Tax Act, “in respect of, in the course of, or by virtue of the taxpayer’s office of employment” are sufficiently broad to cover a wide range of direct and indirect benefits received from one’s workplace. In particular, the words “in respect of” have been determined by the Supreme Court of Canada in Nowegijick v The Queen, to be words of the “widest possible scope” and to “import such meanings as ‘in relation to,’ ‘with reference to’ or ‘in connection with’.”
The determinative factor is whether there was any discernable nexus between the benefit conferred to a taxpayer and the taxpayer’s working relationship with the party providing said benefit.
How Much of the Benefit do I Report as Part of my Taxable Income?
There may be some cases where less than the whole of the value of the taxable benefit received by the taxpayer should be included in the taxpayer’s taxable income. The Federal Court of Appeal traditionally held that the value to be included in taxable income should be limited to the cost to the employer. This method was abandoned by the Federal Court of Appeal in Spence v. Canada.
In Spence v. Canada, the court held that the fair market value of the benefit conferred to the taxpayer should be the metric to determine what percentage of the benefit should be included in the taxpayer’s income.
Are Any Employment Benefits Exempt from Taxation?
There are exceptions to the inclusion of employment benefits in taxable income, though they may be susceptible to assessment under other provisions of the Income Tax Act. For example, subparagraph 6(1)(a)(vi) of the Income Tax Act excludes education benefits received by those other than the taxpayer with an employment nexus to the benefit, though this amount may be included as a “scholarship” under paragraph 56(1)(n) of the Income Tax Act.
There are also some prescribed statutory exclusions to the rule in subsection 6(1) of the Income Tax Act. For example, subsection 6(6) excludes any benefits incurred that stem from a “special work site” (typically a remote location that the requires that the taxpayer leave his or her principal place of residence for 36 hours at a time).
If you have questions about taxable benefits, or you’ve been assessed with a benefit that you do not agree with, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
James Pendergast is an Associate Lawyer at R&A Tax Law. James is entering his third and final year at the University of Toronto Faculty of Law. Outside of academics, James is a chair of the Faculty of Law’s Health and Wellness Committee, volunteers with the Law in Action Within Schools (LAWS) program and was an Associate Editor with the University of Toronto Law Review. This year, James competed for the University of Toronto at the 2019 Donald G. H. Bowman National Tax Moot.
Jason Rosen
Jason Rosen is a founding Partner at R&A Tax Law. Jason provides effective and aggressive representation by taking a proactive, client centered approach for his domestic and international clients alike. Throughout his time in the field, Jason has gained a comprehensive understanding of tax procedures and the dispute resolution process.
What is a Taxable Benefit – Part 2
It may come as a surprise to some Canadian taxpayers when they receive a Notice of Assessment with reported income reassessed to be significantly higher than what their reported take-home pay was. This may be because of the inclusion of a “taxable benefit” in the taxpayer’s income. The Canada Revenue Agency (CRA) is within their rights to tax purported benefits received by taxpayers from their employer by virtue of their employment. Many taxpayers are aware that work perks that provide a financial benefit to the employee are usually taxable by the CRA and do report some amount of taxable benefit on their return. For part 1 of our taxable benefit blog post where we discuss what a taxable benefit is, and what can be done if you disagree about receiving taxable benefits, please click here.
However, not all work-related benefits are taxable. So, how can you tell if a benefit you receive by virtue of your employment is taxable? The answer to this question is determined by evaluating whether the benefit falls within the scope of the meaning of “taxable benefit” under the Income Tax Act. When filing their taxes, Canadian taxpayers must examine (1) the “character” of the alleged benefit; (2) the nexus between the alleged benefit and the taxpayer’s employment; and (3) the valuation of the benefit to be included in the taxpayer’s income.
How do I Identify a Taxable Benefit?
Paragraph 6(1)(a) of the Income Tax Act creates a baseline from which employment benefits are determined to be taxable, taxable in part, or non-taxable. Paragraph 6(1)(a) specifically outlines benefits that may be subject to tax as:
“[T]he value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office of employment.”
Notably, this definition is sufficiently broad to theoretically capture any benefits earned in the course of employment. It becomes necessary to examine how this provision has been interpreted by the courts in order to properly characterize benefits received by virtue of a taxpayer’s employment as either taxable or non-taxable.
Benefits are not restricted to benefits that replace traditional remuneration for employment services. In R. v. Savage, a 1983 Supreme Court of Canada decision, the scope of taxable benefits was explained to include “material acquisition[s] which [confer] an economic benefit on the taxpayer.” Justice Dickson (as he was then) held that material facts determine whether or not the benefit conferred by virtue of employment is “taxable” or “non-taxable”.
The determinative factor is whether or not “something of value” was conveyed by the workplace to the employee. This has taken many forms in Canadian case law including life insurance benefits, health coverage, and even business trips where there is significant personal benefit (usually in the form of “enjoyment”) to the taxpayer.
How do I Determine if the Benefit was Sufficiently Connected to my Employment?
The words in paragraph 6(1)(a) of the Income Tax Act, “in respect of, in the course of, or by virtue of the taxpayer’s office of employment” are sufficiently broad to cover a wide range of direct and indirect benefits received from one’s workplace. In particular, the words “in respect of” have been determined by the Supreme Court of Canada in Nowegijick v The Queen, to be words of the “widest possible scope” and to “import such meanings as ‘in relation to,’ ‘with reference to’ or ‘in connection with’.”
The determinative factor is whether there was any discernable nexus between the benefit conferred to a taxpayer and the taxpayer’s working relationship with the party providing said benefit.
How Much of the Benefit do I Report as Part of my Taxable Income?
There may be some cases where less than the whole of the value of the taxable benefit received by the taxpayer should be included in the taxpayer’s taxable income. The Federal Court of Appeal traditionally held that the value to be included in taxable income should be limited to the cost to the employer. This method was abandoned by the Federal Court of Appeal in Spence v. Canada.
In Spence v. Canada, the court held that the fair market value of the benefit conferred to the taxpayer should be the metric to determine what percentage of the benefit should be included in the taxpayer’s income.
Are Any Employment Benefits Exempt from Taxation?
There are exceptions to the inclusion of employment benefits in taxable income, though they may be susceptible to assessment under other provisions of the Income Tax Act. For example, subparagraph 6(1)(a)(vi) of the Income Tax Act excludes education benefits received by those other than the taxpayer with an employment nexus to the benefit, though this amount may be included as a “scholarship” under paragraph 56(1)(n) of the Income Tax Act.
There are also some prescribed statutory exclusions to the rule in subsection 6(1) of the Income Tax Act. For example, subsection 6(6) excludes any benefits incurred that stem from a “special work site” (typically a remote location that the requires that the taxpayer leave his or her principal place of residence for 36 hours at a time).
If you have questions about taxable benefits, or you’ve been assessed with a benefit that you do not agree with, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
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