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?
In general, anything you give to your employee that is of positive monetary value is a taxable benefit which must be counted as part of the employee’s income, if the employee and/or close relatives of the employee are the primary beneficiaries of that benefit. The benefit can be in the form of cash or some other item of monetary value.
Common examples of tax deductible benefits are:
- Free lodging or low-cost rental housing
- Personal travel expenses
- Any gift over $500
- Use of a company car
- Use of a company-owned vacation property
Are Health Insurance Premiums Taxable?
If you (as the employer) pay the premiums for a group insurance plan for your employees, then these premiums are not taxable income (except in Quebec).
You also have the option of setting up a Health 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 is not taxable income.
Are Life and Disability Insurance Benefits Taxable?
If you as the employer are paying 100% of the premiums for a group life and disability insurance policy, then 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. But in 2020 only, the CRA allowed a flat rate tax-free reimbursement of $2 per day for each day of working from home. This reimbursement can 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.