Employers, especially those in the not-for-profit sector, often look for creative ways to remunerate staff. Non-cash benefits can fit the bill. It is important to understand the tax consequences of employee benefits being offered or your organization and staff could be in for a surprise at tax time.
Following is a list of benefits and related employee tax consequences:
Employer paid RRSP contributions are fully taxable in the hands of the employee and must be included in the employee’s income for the year on his or her T4. The employee will receive an RRSP receipt directly from the RRSP carrier at year end. This will result in a reduction in the employee’s taxable income for the year to the extent that he or she is eligible for the RRSP deduction.
Group Term Life Insurance
Premiums paid by employers for employee group term life insurance are taxable benefits to employees. To avoid the administrative effort of adding small amounts to employees’ earnings every pay period, consider including a lump sum in one pay period for the annual premium.
If you pay your employees’ group term life premiums and they in turn reimburse the organization then no taxable benefit will result.
Note: the taxable benefit exemption on the first $25,000 of group term life insurance premiums was removed in 1994.
Long-term Disability Premiums
Payment of long-term disability premiums by an employer for an employee does not necessarily result in a taxable benefit to the employee. If an employer has paid the premiums on an employee’s behalf and a claim is made on the policy then the employee would have to pay tax on benefits received. The cost of paying tax on the claim payments generally significantly exceeds the benefit to the employee of having the employer pay the monthly premiums. Consideration should, therefore, be given to having the employee pay their own long-term disability premiums. In this case the employee would not be subject to tax on payments received in the event of a claim on the policy.
Private Medical and Dental Plans
Insurance premiums paid by employers for private medical and dental plans do not result in a taxable benefit to the employee. This is one of the most common tax-free benefits offered to employees.
Directors’ and Officers’ Liability Insurance
Employees and directors are not deemed to have received a taxable benefit if their employer/organization pays the premiums for directors’ and officers’ liability insurance.
Travel and Transportation
Where general parking is provided and an employee does not have exclusive access to a specific space then no taxable benefit will be assessed. However, where an employer pays for individual spaces and assigns a space specifically for the use of a particular employee then that employee may be deemed to have received a taxable benefit. The taxable benefit is equal to the market value of the parking spot.
If you do provide employees with parking and intend the parking spaces to be on a tax-free basis then you should ensure that parking spaces are not reserved exclusively for benefit of specific employees.
Traveling with a Spouse
Employer reimbursement of the costs for an employee to take his or her spouse to a conference is taxable to the employee unless the spouse is actively engaged in the conference. To avoid having a taxable benefit assessed make sure that the non-employee spouse takes an active and professional role in the conference and that the conference relates to the employee’s job.
Transportation Assistance for Daily Commuting
Providing employees with transportation passes (e.g. TTC passes) for commuting between home and the workplace results in a taxable benefit to the employee equal to the full market value of the pass. Although the employee must pay tax on the value of the pass, that will still be a fraction of the actual cost of the pass.
Employers can reimburse an employee for transportation other than from home to the fixed place of employment without creating a taxable benefit. For example, there is no tax consequence to a social worker who travels from home to a client’s house and then to work and is reimbursed by his or her employer for the full cost of the transportation. On the other hand, if the social worker goes from home to work, from work to the client’s house, back to work and then home from work at the end of the day, he or she can be reimbursed only for the midday trip without incurring a taxable benefit.
In situations where not-for-profit organizations cover a portion of an employee’s travel costs, some planning can result in a good portion of the reimbursement being non taxable. Not-for-profit organizations should, however, ensure that they have well documented and clear travel policies to avoid employees misunderstanding and incorrectly applying for reimbursement of travel costs.
Employees are not deemed to have received a taxable benefit if they receive a “reasonable” car allowance reimbursing them for transportation costs other than just from home to the fixed place of employment and back. Revenue Canada periodically publishes maximum amounts employers are allowed to deduct as an expense on reimbursement of employee travel. CRA automobile allowance rates can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html.
Work Environment and Staff Development
Improving your organization’s work environment generally does not give rise to a taxable benefit. Often a fresh coat of paint, some donated art and “new” donated office furniture can do a lot to increase morale by making a workspace look clean and new with only a modest cost to the organization.
Employers can pay for professional development for their employees without creating a taxable benefit provided the courses/conferences are related to the employee’s job. For example, a children’s mental health organization could send a staff member to an all-expenses-paid conference on children’s mental health. Attendance at the conference would presumably increase the employee’s effectiveness and value to the organization. The employee would receive the “perk” at no monetary cost.
Paying for employees to attend post secondary courses is more problematic.The courts have held that the value of an MBA course paid by an employer on behalf of an employee was a taxable benefit to the employee. Revenue Canada reasoned that the employee received significant personal benefit from attending the course. The ruling was challenged vigorously and we understand that Revenue Canada is currently re-evaluating its position.
Your organization should tailor its employee development spending to its budget. Payment of employee tuition can be a very expensive proposition for employers. However, attendance at conferences and workshops need not be expensive.
Company Fitness Facilities
Providing employees with a fitness facility at the place of work does not result in a taxable benefit to the employees. Unfortunately, not-for-profit organizations are generally too short of space and finances to provide such a facility.
If your organization pays an employee’s recreational club dues then payment of the dues will be non-taxable provided you can demonstrate that having your employee as a member of a club directly benefits your organization. Please note, however, that golf club memberships paid by an employer are always taxable.
Payment of Employee’s Counseling Costs
Providing an employee with counseling services for tobacco, drug or alcohol abuse, for stress management or for retirement or re-employment will not result in a taxable benefit to the employee.
Use of Employer’s Childcare Facilities
Permitting employees to use a childcare facility fully paid for by the employer will not result in a taxable benefit to the employee. Regrettably, there are very few workplace childcare centres fully funded by employers.
Some employers do provide a space for childcare, set a per diem fee and charge all parents the same fee. Any preferential fee discounts to employees are taxable.
Awards, Prizes, Gifts and Employee Discounts
Prizes for Achievement
Employees receiving cash or other prizes of significant value for achievement (e.g. an all-expenses paid trip) must have the value of those prizes included in their taxable income. Receipt of a trophy or a plaque with limited resale value will not result in a taxable benefit.
Annual Tax Free Gift
Revenue Canada allows employers to gift employees a non-cash amount of up to $300 annually as a non-taxable gift. This is a Revenue Canada administrative practice and is not specifically provided for in the Income Tax Act. The gift is permitted only if the employer does not claim the amount as a business expense. As not-for-profit organizations generally do not pay corporate tax, the $300 tax-free gift can be given to the employee with no negative tax consequences to your organization.
Providing your employees with the opportunity to obtain services from your organization at a value less than cost will result in them receiving a taxable benefit. Consider a childcare centre as an example [ref to article]. Not-for-profit childcare centres sometimes provide childcare to their employee’s families at a discount. Offering an employee a 10% discount on an $800 monthly fee would result in the employee incurring a taxable benefit of $80 per month.
The same applies to providing employees with meals at work. Childcare centres often have excess food after a meal. Consumption of leftover food would generally not result in a taxable benefit. However, having daily meals provided for employees would. Take the example of a childcare centre providing catered food at a cost of $3 per day per child. If the same food is provided to the employees then they should have included in their taxable income an amount equal to the cost of the food. This could be as much as $600 a year in taxable benefits if employees eat daily at the centre.
The following table summarizes which benefits are taxable, which are not and which could be either:
This list of taxable and non-taxable benefits is far from complete. If you have questions on these or other benefits call Revenue Canada directly.