Employee benefits can be broken down into two types: taxable and non-taxable - but what’s the difference? Unfortunately, the rules and exceptions of taxable benefits are constantly changing, which can make figuring out the difference between them pretty complicated. We’ve created this guide to help you understand the ins and outs of taxable benefits and hopefully help you make the distinction for your own benefit plan so you can ensure that your money is well spent.
What are Taxable Benefits
The Canadian Revenue Agency (CRA) defines a taxable benefit as “a benefit where an employee receives an economic advantage that can be measured in money such as cash or a different type of payment like a gift certificate”. In other words, an employer-provided compensation that is subject to income tax.
Here is a list of some common taxable benefits.
You can also check out the CRA’s website to find more detailed information about each of these benefits.
Lifestyle Spending Account (LSA) - this monetary benefit is included in an employee’s health plan, which is then taxed as income.
Company vehicles - if an employee has a company vehicle that is also for personal use it is considered to be a taxable benefit.
Accommodations - free board and lodging (for permanent housing, not including travel) is a taxable benefit as well as subsidized lodging.
Cell phone and internet - regular cell phones are non-taxable, but reimbursement for the employee’s own cell phone cost is considered taxable. Internet service is taxable if the service is used for personal use.
Child care expenses - if child care expenses are not provided by the business or are not available to the general public then it is considered taxable.
Gifts - almost all gifts or awards that you give to employees are taxable. However, some non-cash gifts are exempt from this. You can give an unlimited amount of non-cash gifts with a combined value of $500 annually which do not include small items such as coffee, t-shirts or mugs.
Group insurance - premiums paid by the employer are taxable.
Parking - employer-provided parking is usually taxable, but there are a few exceptions, like if the employee has a disability.
Transit passes - transit passes are almost always considered to be taxable.
Meals - meals are only considered to be taxable if overtime and meal subsidy occurs frequently.
Non-taxable benefits on the other hand are not subject to any tax and are mainly for health benefits. Here is a list of some common non-taxable benefits.
Health Spending Account (HSA) - similar to an LSA, these benefits allow for flexibility.
Gifts under $500 - small gifts like coffee, company apparel are not included in this yearly amount.
Short Term and Long Term Disability Insurance - when an employee pays 100% of the insurance premium then it is not taxable.
If you’re planning on including taxable benefits in your benefits package, there are a couple extra steps you have to complete. First, you have to calculate the value of the benefit, which is considered to be it’s Fair Market Value (FMV), or the price that the benefit would be in an open market. For example, a $500 cell phone would hold a value of $500. This value is then to be added to the employee’s income which is subject to payroll deductions.
Next, you have to calculate any payroll deductions the benefit is subject to. When a benefit is taxable, it is also pensionable, insurable, and subject to income tax. This means you may have to deduct Canadian Pension Plan contributions, Employment Insurance premiums, and income tax from the employee’s pay. These taxable benefits also may have to include GST or PST depending on the type of benefit or the amount of money that benefit is worth. For more details about specific benefits and their corresponding GST/HST values, we recommend checking out the CRA’s handy benefits chart or the CRA’s Employer’s guide to taxable benefits and allowances.
Should you Offer Taxable Benefits
Some taxable benefits are growing in popularity with employees, especially flex plans like Lifestyle Spending Accounts. Millennials are very attracted to these plans as well, and are more likely to accept a job that offers these benefits. Every year, more and more employers are offering Lifestyle Spending Accounts in order to keep themselves relevant and up to date with the latest benefits trends. If you’re an employer looking for top talent, you should start looking into different taxable benefits that could fit with your business.
Understanding and staying on top of taxable Employee Benefits can be complicated, and a lot of work! But that doesn’t mean it’s not possible. We hope this guide helped you understand the latest rules and guidelines for taxable benefits so you can make sure your money is going to the right places.
Simply Benefits offers customizable products for health benefits that fits every organization’s needs such as traditional, modular flex or cafeteria flex. You can pick and choose which benefits you want to include, whether taxable or non-taxable, to make sure your employees are getting the best benefits possible.
Disclaimer: Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. Please consult a CRA or tax advisor for more specific information about your business.