What is a Taxable Benefit? — A Canadian Tax Lawyer Explains
Introduction – Taxable Benefits in Canada
A taxable benefit occurs anytime a taxpayer receives a monetarily measurable economic advantage or benefit. The benefit doesn’t have to be for the taxpayer, but also includes taxpayer’s non-arm’s length parties such as children or spouse. Benefits are taxable, and a taxpayer, or their employer, should include it in the taxpayer’s income. Common taxable benefits include:
- Use of company automobile or other motor vehicle for personal use
- Free or reimbursed boarding or lodging (nonbusiness related)
- Gifts and awards
- Interest-free or low-interest loans
- Transit passes or parking spaces
- Group term life insurance policies
- Club memberships
These are examples but aren’t an exhaustive list of benefits that taxpayers need to include in income. A benefit only needs to be an economic advantage or benefit that’s measurable in a dollar amount to be taxable.
The amount that needs to be included in the taxpayer’s income is the fair market value (“FMV”) of the benefit. For example, if a taxpayer received an expensive collectable coin as an award from work, they would need to include the fair market value of that coin in their income. Fair market value is generally determined by what an arm’s length party would pay for the item. If an employer incurs GST/HST in acquiring the benefit, the GST/HST should be included in the value of the benefit.
There are primarily two types of taxable benefits that Canadians usually run into – employee benefits and shareholder benefits. Section 6 of the Income Tax Act governs the rule around employee benefits, while section 15 governs shareholder benefits.
Taxable Benefits as an Employee of a Company
Benefits, Allowances, and Reimbursements
Employees generally receive benefits through any good or service that their employer provides to them. Generally included are allowances and reimbursements.
Allowances are generally monetary payments to an employee on top of their salary or wage. It commonly covers certain expenses without the employee having to prove that expense. Examples include allowances for gym memberships or healthy active living, moving or rental expenses, and much more. Allowance amounts often are arbitrary and determined without the actual cost in mind, are for a specific purpose, and are used at the employee’s discretion.
Reimbursements are an amount that the employer repays the employee for expenses incurred while carrying out duties of employment. To claim a reimbursement, employees should keep detailed receipts to support their reimbursement claim.
How to Properly Provide Benefits to Employees as an Employer
It’s generally the employer’s job to include any taxable benefits in the employee’s income, if the employer manages the employee’s taxes. An employer should go through the following steps when they provide a taxable benefit:
- Determine if the benefit is taxable
- Calculate the value of the benefit
- Calculate Payroll deductions
- File information on return
If a cash benefit to your employee, such as an allowance, is taxable, it’s also pensionable under the Canada Pension Plan (CPP) and insurable under Employment Insurance (EI). As a result, employers must also deduct CPP and EI contributions from the employee’s pay as if the allowance was part of their salary. Further, the employer must contribute to the employees CPP and EI as if that benefit amount was part of their salary.
Not all employee benefits are taxable, however. Businesses often provide employees with items or amenities that are required for their role. It’s important to talk to an experienced Canadian tax lawyer to understand where the line is drawn between a taxable and non-taxable benefit. Some common non-taxable benefits may include
- Cellphones used exclusively for work purposes
- Employee education and professional development tuitions
- Reasonable automobile allowances related to their job
- Professional and union dues
- Distinctive uniforms or special clothing/equipment required for work
- Business-related meals and lodging
Annual non-cash gifts under $500 are generally also non-taxable benefits. Minor gifts, such as company mugs, t-shirts, or other “swag”, doesn’t count towards this $500 limit. Long-severing employees can also receive a non-cash gift of up to $500 once every 5 years on a non-taxable basis to reward their tenure, in addition to the annual $500 limit.
Taxable Benefits as a Shareholder of a Corporation
Generally, if a corporation grants a benefit, such as use of property, to a shareholder, it’s considered a taxable benefit. Individuals in contemplation of becoming a shareholder may fall into these rules as well. This means that shareholders and some potential shareholders must include the fair market value of any benefit from their corporation as part of their income. As with employee benefits, benefits to a shareholder’s non-arm’s length party is also considered a taxable benefit.
Pro Tax Tips – Taxable Benefits
If you’re found to have received an unreported taxable benefit from your employer, the Canada Revenue Agency may reassess you under Section 6 of the Income Tax Act. If you’ve received a taxable benefit from a corporation that you’re a shareholder of or that you’re considering being a shareholder of and didn’t report it in your income, the Canada Revenue Agency may reassess you under Section 15 of the Income Tax Act.
If you’re reassessed under either situation, it’s important to speak to an experienced Canadian tax lawyer who can work with you to appeal the tax assessment or to negotiate for a lower tax reassessment amount.
It’s also important to contact a knowledgeable Canadian tax lawyer to provide tax planning advice for your corporation. A Canadian tax lawyer can ultimately help you avoid tax reassessments related and unrelated to taxable benefits by planning how your corporation can compensate your employees or yourself in the most tax-efficient manner.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. 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 the articles. If you have specific legal questions you should consult a lawyer."