What is a Taxable Benefit – Part 3
If you are an employer, you have probably considered providing your employees with benefits. If so, it is important to understand that you may have obligations to deduct, withhold, and remit the value of the benefit to the Canada Revenue Agency (“CRA”). We previously wrote about taxable benefits here, and here, but these were in relation to the employee. This blog will focus on the employer’s side.
What is a Benefit?
An employee receives 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 that employee (this can be an employee’s spouse, child or sibling). Benefits provided by employers to employees are either taxable or non-taxable. Depending on characterization, employers may be required to add the value of the benefit to the employee’s income for each period and determine the total amount of income that is subject to payroll deductions.
An employer must consider the following when providing a benefit to their employee:
- If the benefit is taxable or non-taxable;
- Calculating the value of the benefit;
- Calculate payroll deductions; and
- If necessary, file an information return.
Is the Benefit Taxable or Non-Taxable?
According to the CRA, a benefit is taxable if an employee or officer receives an economic advantage that can be measured monetarily, and that individual is the primary beneficiary of the benefit. Some examples of taxable benefits include employer-provided transit passes, boarding and lodging, childcare expenses, and cellular phone and internet services.
Calculating the value of the Benefit
The value of the benefit is its fair market value (“FMV”). This is the amount an employee would have had to pay for the same benefit in the same circumstances if there was no relationship between the employee and employer. The FMV includes the GST/HST and PST payable by an employer even if they are exempt from paying taxes because of the type of employer they are, or the nature of the use or property. GST/HST can be excluded when an employer is providing cash remuneration (such as salary, wages, or allowances) or a taxable benefit that is an “exempt supply” or “zero-rated supply” under the Excise Tax Act.
Calculating Payroll Deductions
The FMV of the benefit, and any applicable taxes are added to the employee’s total income for that pay period or when the benefit is received or enjoyed. This will give the employer the total amount of income from which they must make payroll deductions. The employer then withholds deductions from the employee’s total pay in that pay period in the normal manner. The deductions withheld, Canada Pension Plan (“CPP”) and Employment Insurance (“EI”), vary depending on the type of benefit being provided.
Depending on the type of benefit being provided, Employers can consult the benefits chart on the CRA’s t4130 Employer’s Guide to Taxable Benefits to determine their obligations for deducting payroll.
File an Information Return
An employer should report the FMV and applicable tax of the benefit in box 14 (“employment income”) on an employee’s T4 Slip. The employer should also report the value of the taxable benefit in the “other information” area at the bottom of the employee’s slip and use code 40.
Determining your specific obligations as an employer when providing benefits to your employees can be a tall task. A tax professional can be critical in helping determine your obligations to withhold and remit the necessary source deductions to the CRA. If you have questions or need help with the determining your obligations when providing taxable benefits to your employees, give us a call today!
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.