A solid benefits package is one of the most powerful tools in your repertoire for attracting and retaining great employees. But when it comes time to report taxable income, you may wonder whether it’s more trouble than it’s worth. Which benefits are taxable or tax deductible and which aren’t? And what exactly are your responsibilities?
Here, we’ve broken down the most important things you need to know about taxable benefits and allowances in Canada right now.
What Are Taxable Benefits?
The Canadian government considers a benefit to be a good or service you give, or arrange a third party to give to your employees. This differs from an allowance, which is a predetermined amount typically unaffected by the actual expense, or a reimbursement, used to repay employee expenses.
In the case of taxable benefits, anything you give to your employee that is of positive monetary value is a taxable benefit and must be counted as part of the employee’s income. The employee and/or close relatives of the employee must also be the primary beneficiaries of that benefit. The benefit must be measurable in terms of money, or offer an economic advantage. In other words, most employer-sponsored benefits are taxable.
Some examples of taxable benefits in Canada include:
- Transit passes
- Boarding, lodging, rent-free or low-rent housing
- Use of a company vehicle for non-work related purposes
- Group insurance premiums paid by the employer
- Gym memberships paid for or subsidized by employers
- Stock options or retirement plan contributions
As an employer, your responsibilities when selecting benefits are as follows:
- Determine if the benefit is taxable
- Calculate the value of the benefit
- Calculate payroll deductions
- File an information return
Unfortunately, the rules behind which benefits are and aren’t taxable isn’t a straightforward answer. Check out this chart from the Canadian government to learn whether your benefit, gift, or allowance is Canada Pension Plan, EI, HST, or GST deductible.
Private Health Service Plans
The most commonly offered non-taxable employee benefit is a formal health coverage plan, often referred to as a Private Health Services Plan (PHSP) by the Canadian Income Tax Act. Often, this appears in the form of a health and dental benefit plan, which is not covered by the government and can be paid out tax-free to employees.
A plan will meet the non-taxable requirements if backed by an insurance contract, where 90% or more of the premiums paid are eligible for the Medical Expense Tax Credit (METC). Below is an example plan that demonstrates a total premium of 92% (70 + 10 +12). The actual quantity of benefits paid out is irrelevant in determining the total 90%.
Plans that are not backed by an insurance contract, or a self-insured plan, must ensure 90% or more of total benefits paid out in a calendar year total at least 90% to be eligible for the METC. Were the example below, the self-insured plan, it would not be eligible for the METC, at a total pay out of 87% METC eligible benefits. Read more about PHSPs here.
Health Care Spending Account
You also have the option of setting up a Health Care Spending Account (HSA) for your employees. These plans can be added to your group health insurance plan, or purchased as a standalone. They allow employees to be reimbursed for certain eligible health expenses. Reimbursement through an HSA works similarly to a self-insured plan. The total amount of benefits paid in the calendar year must equal 90% or more of the ceiling amount (the total amount of money in the pot). Employers can take measures to design their HSA so employees have allocated budgets to spend on tax-free expenses, and taxable expenses. This can assure employers the total spend on benefits will always exceed 90% of the total.
Are Life and Disability Insurance Benefits Taxable?
In the case of life insurance policies, premiums are typically taxable. Any life insurance premium paid by the employer (also known as cost-sharing) will be counted as taxable income for the employee. In other words, when employees receive a monthly contribution towards a life insurance policy from their employer, this amount counts as income during tax time.
Disability insurance is a more complicated case. When policy premiums are paid 100% by employees, any payout received from the policy can be reported as non-taxable income.
If you as the employer pay any portion of the premium for a group disability insurance policy, the cost of those premiums will count as taxable income. In addition, any benefit that is paid out of the insurance policy will be taxable too.
A good workaround is to have employees pay their own premiums for life, accidental death and disability insurance via payroll deduction. In this case, any benefits paid out through the policies are tax-free.
Are Pension Plans And RRSPs Taxable?
In general, contributions that you make to your employees’ Registered Retirement Savings Plans (RRSPs) are counted as taxable income. The exception is if you take this contribution out of employees’ remuneration.
Another exception is if contributions go into a group RRSP from which employees cannot draw funds until they are no longer employed. In that case, contributions to employee RRSPs would not be taxable.
If an employer matches employee contributions in a group RRSP, then these contributions are taxable; but if the employee has any contribution room in a given year, they can use that to offset the added income.
Is Home Office Equipment Taxable?
Usually, any reimbursed expenses for home office equipment is taxable. In 2020 exclusively, the CRA allowed a flat rate tax-free reimbursement of $2 per day for each day of working from home. This reimbursement could be used towards the purchase of home office equipment if certain conditions are met.
The rules governing taxable benefits and allowances in Canada are vast and complex. But these basic understandings cover most of the common questions about what counts as taxable income and what doesn’t.