Following is a list of benefits and related employee tax consequences:

RRSP Contributions
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.

Insurance
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
Parking
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.

Automobile Allowances
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
Work Environment
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.

Professional Development
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.

Employee Discounts
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.

Raise Pay Equity Target Rates Annually for Across the Board Wage Increases
Pay equity target rates must be increased annually for across-the-board wage increases given to staff each year. For example, if a centre gives staff a 2% across-the-board wage increase (not related to the annual pay equity raise) then all target rates must be increased by 2%. An ECE target rate of $25 would therefore have to be increased by 50 cents. These maintenace increases can have a significant impact on you pay equity target rates and are required to have been made since year after your centre’s plan commenced (usually 1995 and beyond).

Differentiate Pay Equity From Operating Grants
As noted above, pay equity and direct operating/wage enhancement grant funding are fundamentally different and should be treated differently from a payroll perspective. Confusion arises because pay equity and operating and wage enhancement grant payments are lumped into the same cheque by municipalities. In addition, we understand that municipalities may not receive sufficient information from the Province to differentiate between the two categories.

Childcare centres must pay direct operating and wage enhancement grants to staff as long as the funding continues. Once funding stops then your organization need not, in most circumstances, continue to pay employees an amount equal to the salary grants. You can, however, continue to make the payments if you want to and can finance them.

Pay equity obligations on the other hand result in an increase in base salary regardless of whether or not you receive funding from the government. If pay equity funding stops, your organization is still obligated to make pay equity payments required under the Pay Equity Act.

To help prevent a possible administrative nightmare we suggest you do the following:

• Distinguish between pay equity and salary grant receipts in your accounting records. For instructions on how to identify the pay equity portion of quarterly subsidy payments you should see the pay equity section of the preceding article.
• Organizations that pay direct operating grant and/or wage enhancement grant payments out in lump sum payments should distinguish in their financial records between pay equity amounts and wage grants. The pay equity portion of the quarterly cheques should not be distributed as a lump sum payment on the assumption that it has been incorporated into staff’s regular base pay. Unfortunately some organizations will undoubtedly give their staff an increase in base pay and at the same time distribute the full amount of the quarterly cheques thereby effectively doubling the pay equity payments.
• Organizations that incorporate operating and wage enhancement grant payments into regular pay should continue to clearly distinguish the cumulative annual amount of these payments in their payroll records. Pay equity should, again, be excluded from operating and wage enhancement grants in your payroll records as these payments are base salary and not salary supplements.
• It is possible that Toronto Children’s Services will reduce DOG and WEG payments effective July 1, 2000 where centres are receiving more than they are allowed under provincial guidelines. You want to ensure that quarterly grant payments to staff recorded in your records are not inflated by pay equity receipts thereby making it look like your centre is receiving more than its share of salary grants.

When To Stop Pay Equity Increases
Some organizations are confused as to when pay equity has been achieved for a given employee class. Simply put, each employee job classification has a pay equity target rate. Pay equity for the entire job class has been met when the salary for the highest paid employee in that class reaches that pay equity target rate. Note that “salary” includes an employee’s share of any government salary grants but excludes one-time lump sum payments.

As an example, take an organization with a pay equity target rate of $14.21 for its ECE job classification. There are 3 ECE’s earning $14, $13 and $12 per hour respectively as at December 31, 2008. Assume that the January 1, 2009 pay equity increase is $2.14 per hour. This raise would increase the salary of the highest paid ECE to $14.21, an amount equal to the pay equity rate for the class. Consequently, no employees in the class would be entitled to pay equity raises in 2010 and subsequent years. The 1% pay equity entitlement would still be fully distributed among the other female job classes not yet at their pay equity targets.

This requirement underlines the need to formally establish salary grids for all employee job classes. Pay equity legislation does not attempt to ensure that employees with equal job classifications are paid the same salary (i.e. equal pay for work of equal value is not an objective of pay equity legislation). Differences are allowed for seniority and competence. We recommend that you inform your staff when it is likely that their job class pay equity target will be met (i.e. when the highest paid member of the group will reach the target). This will help prevent surprises when some lower-paid members of a group find that they are ineligible for a pay equity raise.

One final note on pay equity: It is important to clearly distinguish between pay equity salary increases and other pay increases. To ensure there is no confusion you should inform employees of amounts that are pay equity raises in writing before or at the time raises are given. If an increase is not specifically identified as a pay equity increase then it is deemed to be a regular salary increase and not a pay equity increase. In this situation your organization would still be required to make an additional pay increase to cover its pay equity obligations.

Obligations and Rights
Organizations covered by the Act
The Act covers employers in both the private and public sectors in Ontario. In the private sector employers who employed an average of ten or more employees in 1987 or at any time since 1987 are covered by the Act. All organizations in the public sector in Ontario are covered by the Act. A list of entities defined to be in the public sector is included as a schedule to the Act. The list covers a wide range of independently incorporated not-for-profit organizations providing services funded by the Ontario government. The detailed list includes, among many others, all organizations operating:

• a day nursery or private home day care agency licensed under the Day Nurseries Act.
• programs providing service to day nurseries under the Ministry of Community and Social Services Act.
• elderly persons centres funded under the Elderly Persons Centres Act.
• children’s services programs funded and purchased by the Ministry of Community and Social Services under the Child and Family Services Act.

The list in the appendix is lengthy and essentially mandates that all organizations funded in part by a Ministry of the Ontario government must comply with the requirements of the Act.

Note: All organizations in the public sector that were incorporated on or after July 1, 1993 are not required to use the proxy method. The job-to-job and proportional value methods still apply to them.

Intent of the Act and implementation dates
The Act is intended to correct the historical undervaluing and lower pay of work performed by women. The intent of the Act is to specifically address gender imbalances and provide wage parity between women and men working in jobs of equal value. The intent is not to equalize wages between jobs of similar value.

The Pay Equity Act became effective January 1, 1988. The Act requires employers to compare, within the same organization, jobs done by women to those done by men. The “job-to-job comparison method” may not be adequate to achieve pay equity where there are too few male job classes against which to compare all female job classes. The Ontario government passed the Pay Equity Amendment Act on July 1, 1993 to promote pay equity in organizations not able to use the job-to-job comparison method for all female job classes. It provides a mechanism for:

• comparing female to male jobs within a specific organization used the “proportional value method”. This method allows an employer to infer a pay equity job rate for female job classes where there is no exact male job class for comparison purposes.
• employers in the “broader public sector” to compare their own female jobs to female jobs which have already been compared to male jobs in a different organization. This is called the “proxy method”.

The proxy method is only available to employers in the broader public sector. Also, the proxy method must be used for all female job classes where even one female job class cannot be compared to a male job class within the organization.

The proxy method for public sector employers is effective as of January 1, 1994. The implementation process is gradual and could take many years.

Organizations using the job-to-job and proportional value methods, on the other hand, must have achieved pay equity on or before January 1, 1998. For these organizations, pay equity should have been fully implemented by now. Compliance in future will be limited to ensuring pay equity is maintained between male and female jobs of equal value.

Background to the Proxy Method
Most organizations required to use the proxy method have already prepared and commenced implementing a pay equity plan by now. Those required to use the proxy method applied for the proxy method by first notifying the Pay Equity Commission that they tried but could not find a male comparator position for at least one of the female job classifications in their organization. This situation applied to all organizations that have no male job classes at all such as childcare centres. A review officer from the Pay Equity Commission then verified that the organization was an employer in the broader public sector and that it could not achieve pay equity by job-to-job or proportional value methods. The organization was issued an order requiring it to use the proxy method.

Once an organization received its proxy order from the Pay Equity Commission it had to use the proxy method for all job classes in the plan regardless of whether or not a male comparator existed for one or more female job classes. Organizations that did not get a plan in place previously must now go through the application process.

Preparing Pay Equity Plans
Organizations receiving an order requiring use of the proxy method then prepared a pay equity plan using the proxy comparison method. Note that organizations with unionized and non-unionized staff pools must prepare one pay equity plan for non-unionized employees and also negotiate a separate pay equity plan with the bargaining agent for each separate bargaining unit. The steps to complete a pay equity plan are:

• identify your key female job classes
• select your proxy organization and request job information
• assign values to your organization’s job classes
• receive information from your proxy employer
• determine the value of proxy job classes and job rate of proxy job classes
• develop a proxy job rate line and compare your own job classes to the job rate line
• determine required pay equity adjustments for your female job classes
• post your pay equity plan
• begin to make your pay equity adjustments

Most organizations required to have proxy comparison pay equity plans will have already performed the above steps, prepared the pay equity plan and posted it. (“Posting” a plan refers to making it available to all the employees of the organization.) If you have not prepared a pay equity plan and you believe your organization may be required to do so then you should call the Pay Equity Commission (Website http://www.payequity.gov.on.ca/peo/english/contactus.html ) and commence the process now. For an excellent description of how to complete a pay equity plan, ask the Pay Equity Commission to send you a copy of their booklet: A Guide to the Proxy Comparison Method.

Changes Subsequent to Posting a Plan
Organizations creating a new job classification (not to be confused with creating more jobs under an existing job classification) should value the job in a way similar to how existing jobs were valued. The new job classification should then be compared to the proxy job rate line and the new position should receive pay equity adjustments in the normal course of business.

Calculation of annual pay equity adjustments
Once you post your pay equity plan you must calculate and distribute pay equity adjustments. Pay equity salary adjustments (i.e. pay equity salary increases) are required effective January 1, 1994 under the Act. This implementation date is also effective for pay equity plans posted subsequent to January 1, 1994.

Calculating total salary increases
Employers are required to make annual pay equity adjustments by distributing a minimum of 1% of the organization’s previous year’s payroll. The increases must be distributed among all job classes entitled to a pay equity adjustment. Using 2004 as an example, employers should have adjusted job rates in that year by distributing a minimum of 1% of the organization’s 2003 total payroll. For each subsequent year, the organization must make pay equity adjustments again using a pool of funds equal to at least 1% of the previous year’s payroll. The annual adjustment process continues until actual job rates equal their pay equity job rates.

Calculating annual payroll
Your organization’s total annual payroll for purposes of the minimum 1% proxy method job rate adjustment is the gross employment income of employees for that year. In most situations this amount will equal gross employment earnings as noted in Box 14 of your T4 Summary prepared at the end of each calendar year. For example, if the 2006 T4 Summary shows total earnings of $278,500 then in 2007 your organization is required to increase job rates of staff by not less than $2,785.

Note that generally total payroll excludes statutory and non-statutory benefits that are not included in employees’ T4 taxable income. You should also exclude one-time bonuses paid to staff where the bonuses are not expected to occur on a regular basis.

Distribution of pay equity adjustments
The distribution of the minimum 1% annual pay equity adjustment must follow four basic rules:

1.Every job class that requires a pay equity adjustment must receive at least some increase each year.
2. Every employee in the same job class must get the same dollar value adjustment.
3. The lowest paid female job class in each pay equity plan must receive the largest dollar value pay equity adjustment.
4. No pay equity adjustment should be made to male or gender neutral job classes.

The first three rules can make distribution of pay equity adjustments among staff problematic. We recommend you adopt the following method for distribution of pay equity raises:

1. Determine the minimum required amount of the salary increase for the year (1% of your prior year’s total salaries from box 14 of theT4 Summary, less one-time bonuses).
2. Refer to your posted pay equity plan and identify all staff whose current pay is lower than their pay equity job rate.
3. Set the increase for the lowest paid female job class.
4. Allocate increases to all other positions at amounts less than the increase allocated to the lowest paid female job class.

There are several factors to take into account in the process.

• Employees covered: The Act applies to full and part-time staff only. For purposes of the Act, part-time staff are deemed to be those employees working at least one-third of the regular workweek of the organization and whose positions are ongoing. All non-full time employees whose jobs do not fit this description are not covered by the Act.
• Job rates: The term job rate needs clarification, especially where remuneration includes bonuses and salary grants. The job rate is defined in the Act as the highest rate of compensation for a particular job class. Compensation includes:
  • regular salary
  • bonuses that are a regular part of a remuneration package
  • salary grants paid to staff (e.g. DOG and WEG)
  • benefits where only some job classes and not others receive them.
• Calculation of job rates: For ease of pay equity calculations, all job rates should be expressed as a dollar per hour amount (e.g. $10.25/hour). To calculate the job rate for staff paid an annual salary, divide annual salaries, including salary grants, by the number of hours in your organization’s standard work year [e.g. $32,000/(261 days worked x 8 hours per day) = $15.33/hour].
• Correctly distributing pay equity: The lowest paid female job class must receive the largest dollar value adjustment. All other job classes can receive the same or different adjustments providing they are less than that received by the lowest paid female job class. As an example, assume the cook, earning $8.50/hour, is in the lowest paid female job class. If this class receives a 124 /hour adjustment then all other job classes must receive an adjustment of 114 /hour or less.
• Annual adjustment deadline: Pay equity adjustments must start January 1 of any given year. The September 30 deadline ceased to exist once Schedule J amending the Act was repealed in September 1997. Staff employed in the year who have left the organization before the pay equity adjustments have been made are still entitled to receive their adjustment for the period they worked.
• Informing staff of annual adjustments: Staff must be specifically informed that a raise is intended to be the annual pay equity adjustment. In some instances organizations gave staff raises in 1997 without realizing that a 1% pay equity increase was also required. Retroactive characterization of the raise as the annual pay equity adjustment is not technically permitted. The organization is supposed to make the pay equity adjustment in addition to the regular raise unless an agreement can be reached with the staff. Staff may agree to the reclassification if management can demonstrate that the organization has insufficient funds to give a raise over and above that already given. See the section on Review and Compliance Process below.

Pay Equity Funding
Many not-for-profit organizations currently receive pay equity funding from one of several branches of the Ontairo or municipal governments. There is often confusion in Boards as to whether the funding received completely offsets the recipient organization’s funding obligations.

The position of the Pay Equity Commission is that, regardless of funding arrangements made by various Ministries, organizations must always base distributions on 1% of the actual preceding year’s payroll. This calculation must be done each year.

The Ministry of Community and Social Services (“MCSS”) started funding pay equity in 1994. The amount received annually by many organizations from MCSS equals 3% of 1993 base salaries. We understand from discussion with MCSS that this funding is to cover pay equity adjustments for 1994, 1995, and 1996. This pay equity funding will only be sufficient to cover an organization’s funding obligations where payroll costs in 1994 and 1995 did not increase over those in 1993. In situations where payroll costs have increased from 1993 amounts and the pay equity funding (based on the 1993 amounts) has not been supplemented then the full amount of required pay equity adjustments may not have been made.

Where funding is received from the Ministry of Health, the 1994 pay equity adjustment of 3% is considered to be a 1% 1994 adjustment and a 2% “bonus” to help speed up the equalization process. Organizations receiving this type of pay equity funding are still required to make 1995 and 1996 pay equity adjustments. Given that funding is so scarce these days, most organizations in this position are treating the 3% 1994 adjustment as coverage for the 1994, 1995 and 1996 obligations.

The relationship between compliance and funding is made more complicated by the fact that the Pay Equity Commission has no responsibility for funding of the payments and the funding ministries have no responsibility for compliance. Staff on the Pay Equity Hotline does not provide information on Ministries’ funding plans. Therefore they are not in a position to determine whether an organization is in compliance with the Act without a full review. In our experience, staff at the various funding Ministries have limited knowledge of pay equity requirements. When trying to resolve issues with the “authorities” be very careful that all parties involved are dealing with the same set of facts and assumptions.

Review and Compliance Process
Compliance with pay equity requirements is based on self-assessment. Organizations are required to comply with pay equity legislation regardless of their financial circumstances. There are currently no annual filing requirements with the Pay Equity Commission. Consequently, a review of your pay equity practices for failure to comply with the regulations will not be initiated unless there is a formal complaint filed with the Commission.

If your organization cannot afford to make its annual pay equity adjustment in any given year then we recommend you discuss this with the employees. You may be able to negotiate a plan for pay equity increases in the event that funds become available.

In the event you cannot reach agreement with employees, a complaint may be lodged with the Pay Equity Commission. A pay equity review officer will contact your organization. The Act sets out processes for resolving disputes that may arise in establishing, implementing and maintaining pay equity. Review officers will often mediate pay equity adjustment claims between organizations and employees in an attempt to reach a compromise position that the organization, the employees and the Commission can live with.

Directors’ personal liability
Note that Directors of not-for-profit organizations are personally liable for unpaid wages and salaries of an organization under their incorporating legislation and/or the Employment Standards Act. We understand that unpaid pay equity adjustments may fall under the definition of wages and salaries in the relevant Acts. If that is the case then the directors could have personal liability for unpaid amounts. If your organization is unable to fully comply with its pay equity obligations then we recommend that you obtain legal advice.

What To Do If You Have Lost Your Pay Equity Plan
You will need your original posted pay equity plan to make the 1997 pay equity adjustment. Original plans were never filed with the Pay Equity Commission. From our talks with the Ministry of Community and Social Services we understand that that they did not retain a copy of the plans originally filed with them. Toronto area childcare centres may be able to obtain a copy their plan from Metro Children’s Services. If you can no longer locate a copy of your organization’s original pay equity plan then you unfortunately may have to re-do it and re-post it.

How to Get Help
If you have questions or require detailed assistance regarding the legislation you should contact the Pay Equity Commission in Toronto. The staff are extremely helpful and a pleasure to deal with. For questions about funding of your pay equity obligations you should contact your funding Ministry directly.
We can also be of assistance. If you would like your pay equity implementation plan reviewed please contact either Barb Scott or Phil Cowperthwaite at 416/323-3200. We will review your current pay equity implementation policies and procedures, ensure you are in compliance with the Act, help ensure your system is administered as efficiently as possible and prepare a brief report of our recommendations for your Board of Directors.

Background
Coverage under the Workplace Safety & Insurance Act (WSIA) is compulsory for many industries in Ontario. It is not, however, compulsory for childcare centres and most not-for-profit organizations. Still, many organizations have chosen to opt for voluntary coverage under Schedule 1 of the WSIA. In December, 1997 the WSIB adopted the following policy with little publicity:

“Effective immediately all eligible employers who cancel their application coverage under Schedule 1 of the Act [ed. note: voluntary coverage] will be charged a supplementary premium for the final year of coverage.

The supplementary premium will be calculated to ensure the amount realized is sufficient to meet all remaining financial obligations, including the employer’s share of the unfunded liability for the class or classes of which it is a part.”

Impact
An organization canceling voluntary coverage will have to pay out its pro-rata share of the unfunded obligations of all organizations in its class covered under the WSIB policy at the date of cancellation. Childcare centres wanting to opt out are being assessed eparture fees of in the order of $100 to $200 per child.

We suggest that all not-for-profit organizations with voluntary WSIB coverage call their WSIB representative to determine if the departure fee applies to them and, if so, how much it would be at the end of a particular year. Based on our discussions with affected organizations and the WSIB we understand that there is no process to plea for a waiver of this uncontracted-for departure fee. If you are thinking of obtaining disability coverage for your employees you should carefully consider all your options, including private and WSIB coverage. Costs to be weighed against benefits should include the future departure fee.

Employee versus independent contractor
There are two main types of relationship between not-for-profit organizations and the individuals performing work for them:

• an employer/employee relationship
• an organization/independent contractor relationship.

As an example of the difference consider a not-for-profit organization hiring two people. One person is hired to provide counseling to a group of clients specified by the organization for five days a week, eight hours a day. The person is given an office onsite and is expected to work in accordance with organization policies. This person has all of the attributes of an employee. The same organization engages a computer consultant to keep the organization’s computer network up and running. If the individual, or another person designated by that individual, is expected to perform work only on a sporadic basis as and when problems arise then this person may be considered an independent contractor. Needless to say, there are many instances where the defining criteria are not nearly so clear cut.

The determination of whether a not-for-profit organization has an employer/employee relationship with an individual or has hired them as an independent contractor is a question of law. Whenever you are unsure you should consult a labour lawyer. Some of the principal criteria used by the courts in making the determination follow.

Traits of an employer/employee relationship

• the individual is effectively precluded from working for other organizations while employed
• hours of work are regulated by the organization
• the individual must perform the services (i.e. they cannot delegate the work to another individual).
• the individual is entitled to benefits by virtue of working for the organization (Canada Pension Plan, Employment Insurance, vacation and sick pay, other non-statutory benefits)
• the individual has work space and equipment provided for them (e.g. computers)
• the individual is guaranteed a fixed amount of revenue (e.g. a fixed sum paid every two weeks)
• the individual does not retain ownership of client engagements on which he/she works.

Traits of an organization/contractor relationship

• acceptance of the contract does not preclude the individual from simultaneously working for other organizations
• hours of work are not specified by the organization
• the individual may delegate tasks to other individuals (e.g. employees of the contracted individual)
• the individual receives no benefits from the not-for-profit organization in addition to contracted payments
• the individual must provide his/her own workspace and/or equipment
• the contracted individual is not guaranteed payment in the event that services are not provided and/or performance is not achieved
• the individual retains ownership of client engagements.

Correctly determining whether an individual is an employee or an independent contractor is important as the organization’s obligations vary significantly depending on the classification. Specifically, if an organization is an employer then it must comply with statutory regulations including the requirement to deduct from remuneration and remit to Revenue Canada Employment Insurance and Canada Pension Plan premiums and income tax. In addition, the organization must meet the statutory requirements for vacation and sick pay and may incur additional liabilities if the employment contract is terminated.

The costs associated with employment can amount to 20% of gross employment income. If an individual is hired for $20,000/year then the additional costs of employment to the employer could amount to $4,000/year. It is often an advantage to an individual to be classified as an employee as opposed to an independent contractor as the organization pays the cost of benefits.

There can be costs associated with having work performed by independent contractors. Typically, the organization contracting the work has less say in and control over the way services are performed. In addition, the independent contractor will often have to charge the organization GST of 7% in addition to the contracted price. The not-for-profit organization may or may not be eligible for a refund of up to half of GST charged [Volume II, Issue 4, p.19]. Note that in the Maritimes contractors may have to bill the not-for-profit organization Harmonized Sales Tax (HST) of 15%.

Determining whether an individual is an employee or a contractor is often more difficult where the individual performs services for an organization on a sporadic basis. Sporadic work should not be confused with a part-time position where an individual works less than a full week but works on a regular basis. If you have questions as to whether you should be treating an individual as an employee or a contractor we urge you to seek legal advice. A labour lawyer will be able to help you reach the best possible arrangement for both the organization and the person to be hired.

Following is an overview of the principal statutory obligations that follow from a not-for-profit organization entering into an employment contract with an individual.

Canada Pension Plan (“CPP”)
Who must contribute
Both the employer and the employee must contribute to the CPP provided the employee:

• is older than 18 and younger than 70
• has collected pensionable earnings during the year
• does not receive a CPP or QPP retirement or disability pension during the year

What CPP premiums are based on
Premiums must be paid on all pensionable earnings. In general terms, pensionable earnings includes all salaries, wages and taxable benefits earned in the year by an employee. This would include lump-sum bonus payments, pay equity adjustments and wage and salary grant payments received.

Certain types of employment and payments are not subject to CPP contributions. A detailed list of these is contained in the Employer’s Guide to Payroll Deductions published by Revenue Canada. A significant exemption from pensionable earnings is any lump-sum payment made by an organization to an employee as a retiring allowance or severance payment. CPP should not be deducted on these amounts.

How much must be deducted
The maximum amount of CPP deductions can be obtained from the Ontario Payroll Deduction Tables published by Revenue Canada Taxation. The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must match employee contributions (i.e. for every dollar of employee deduction employers must also pay a dollar).

Benefits of the plan to employees
Employees are eligible for CPP benefits once they reach the age of 65. Benefit recipients may continue to be employed. In addition, employees may continue to work and elect to contribute to the CPP until they reach age 70. They will increase their CPP credits by deferring receipt of benefits up to the age of 70.

Finally, employees may apply for reduced CPP benefits once they reach 60 provided they can verify that they have substantially ceased to be engaged in paid employment prior to the pension commencing.

Employees who have contributed to the CPP are eligible for disability benefits “only if they are determined in a prescribed manner to have a severe and prolonged mental or physical disability”. In addition, the employees must meet specified criteria defined by the CPP legislation. Employees must apply in writing to the Client Service Centre – Health and Welfare Canada – to qualify for disability payments.

Finally, separated or divorced individuals may qualify to share their former spouse’s pension earnings. Individuals who believe they might be eligible for pension sharing should contact the Client Service Centre – Health and Welfare Canada, nearest them.

Employment Insurance (“EI”)
Who must contribute
Employers must deduct EI from all individuals classified as employees. There is no upper or lower age limit for deducting EI premiums. Employment outside Canada can also, under certain circumstances, be insurable (see Employer’s Guide to Payroll Deductions).

What EI premiums are based on
EI premiums must be deducted on every dollar of “insurable earnings”. Insurable earnings include basic salaries and wages, taxable benefits and other bonus payments received. In almost all cases insurable earnings received will equal total taxable earnings of the employee up to the maximum limits.

Note that, as is the case for CPP premiums, no EI should be deducted from lump-sum payments made to employees for retiring allowances or severance payments.

How much must be deducted
The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must more than match employee contributions (i.e. for every dollar of employee deduction employers must pay $1.40).

There is no minimum insurable earnings level. As a result, the employment of many part-time and casual/temporary employees is now covered by the EI system. Employers are responsible for deducting EI premiums from the salaries/wages of these employees. This situation makes the determination of whether casual staff are employees or contractors especially important. If a not-for-profit organization’s decision not to withhold EI on even small amounts of income is questioned by Revenue Canada then the organization could end up paying significant penalties and interest.
Benefits of the plan to employees
The new rules and regulations surrounding eligibility for EI are complex. Employees with questions should be referred to their local Employment Insurance Centre.

Individuals are eligible for Regular EI benefits if they have become unemployed and are seeking but cannot find work. To be eligible an individual must have:

• paid EI premiums, typically through payroll deductions
• had an interruption of earnings from employment for at least seven consecutive days
• collected insurable earnings for a specified number of hours during the qualifying period.

It gets more complicated. New entrants to the labour force must have a minimum of 910 hours (essentially half of a full-time work year) in order to qualify for EI benefits. In addition, no regular benefits are paid to those who quit a job without just cause or are fired for misconduct. Just cause for quitting a job for EI purposes includes a variety or situations including:

• sexual or other harassment
• discrimination as defined in the Canadian Human Rights Act working conditions that constitute a danger to health or safety
• obligation to care for a dependent child or other immediate family member
• significant modification of terms and conditions respecting wages or salary
• significant changes in work duties
• excessive overtime work or refusal of an employer to pay for significant overtime
• antagonistic relations between an employee and a superior where it can be demonstrated that the employee is not primarily responsible
• reasonable assurance of other employment in the immediate future.

There are three types of Special EI benefits:

• maternity benefits which are available to the natural mother of a child for up to 15 weeks (note that the 17 week period usually claimed includes 2 weeks of unpaid absence);
• parental benefits which are available to both natural and adoptive parents caring for a new-born or newly adopted child up to a maximum of ten weeks. These can be received by one parent or split between two and are payable for absences from work at any time during the twelve month period after the child arrives home;
• sickness benefits which are available for up to fifteen weeks of sickness on providing a medical certificate from a doctor.

Employer Health Tax (“EHT”)
All employers with an annual gross Ontario payroll in excess of $400,000 and with permanent establishments in Ontario must pay EHT. Certain agencies “relatd” to the government of Ontario are not eligible for the exemption.

What EHT premiums are based on
EHT premiums are calculated by multiplying total Ontario gross calendar year payroll (box 14 on the T4 Summary) by the tax rate applicable to that amount. For gross employment over $400,000/year the EHT tax rate is 1.95%. As with CPP and EI, gross annual payroll does not include lump-sum payments made by an employer to an employee as retiring allowances or as severance or termination payments.

Note that related organizations are required to pool employment earnings for EHT purposes. As an example, an organization running a children’s mental health centre under one employer number and a childcare centre under a separate employer number must combine the two gross payrolls for purposes of calculating the EHT premium.

An annual EHT return must be filed by March 15th of each year pertaining to the previous year’s payroll.

Benefits to the employee
The eligibility of Ontario residents for coverage under the Ontario Hospital Insurance Plan (“OHIP”) is independent of the requirement of employers to make EHT payments. Employees with OHIP questions should be directed to their local OHIP office.

Income Tax
All employers are responsible for deducting income tax from remuneration paid to employees. All organizations should request that employees complete a form TD1, Personal Tax Credits Return, to determine the amount of tax to be withheld at the source. Employees can request for more than the minimum legally required tax to be deducted by specifying this on the TD1 form.

What taxes must be deducted from
Incomes tax must be withheld on salary, wages and other taxable remuneration including bonuses and vacation pay. Unlike CPP and EI premiums, income tax must be deducted on severance payments and retiring allowances. The minimum amount to be deducted on lump-sum severance and retiring payments is:

Vacation Pay
Who earns it
All employees in Ontario earn a minimum of two weeks of vacation with pay after each twelve months of employment. This works out to 4% of salary (2/52 weeks). Entitlement to vacation time and vacation pay benefits applies to all full-time, part-time and temporary employees. Employees who have worked less than one year are not entitled to vacation time. They are, however, entitled to vacation pay of 4% of remuneration earned in their first year.

The Ontario Employment Standards Act requires that an employee must be provided with two weeks of vacation time upon completion of twelve months of employment. Any agreement to provide pay in lieu of this minimum vacation time entitlement requires the approval of the Director, Employment Standards of the Ontario Ministry of Labour. If an employee is entitled to receive more than two weeks vacation a year, the employee may accept pay in lieu of vacation for that portion of the vacation entitlement in excess of the basic two week minimum. This policy of insisting on at least two weeks of time off emphasizes the basic principle of providing employees with an opportunity to rest, relax and rejuvenate.

Employers typically state vacation entitlement in terms of number of weeks permitted per year. Where significant unpaid absences from work are anticipated, employers should quote the vacation entitlement as a percentage of salary earned. For example, if an employee would normally have entitlement to three weeks of vacation, the employer should consider quoting the vacation entitlement in the employment contract as 6% of remuneration earned. Using this method an unpaid leave of absence would accrue no paid vacation time.

How much vacation time is required
Typical paid vacation allowances are:

Note that an employer can stipulate when employees may take vacations. Weeks given need not be consecutive. Note, however, that two weeks of vacation must be given within ten months after the end of the twelve month period for which the vacation was earned. Terminated employees are entitled to receive vacation pay earned but not taken. An employee entitled to three weeks vacation pay a year is entitled to one-and-a-half weeks’ pay in lieu of vacation if they are terminated in the middle of the year.

Legislated public holidays
The rules for employee entitlement to legislated holidays in Ontario are surprisingly complex. Currently there are nine legislated paid holidays in Ontario. They are:

• New Year’s Day
• Family day
• Labour Day
• Good Friday
• Thanksgiving Day
• Victoria Day
• Christmas Day
• Canada Day
• Boxing Day

Customarily Ontario employers provide at least ten paid holidays each year. The two additional days are often Simcoe Day in Ontario (the first Monday in August) and a floater holiday (e.g. Easter Monday). Employees may request a holiday to observe religious holidays that are not recognized by legislation. To support such a request organizations should consider:

• granting an unpaid leave of absence for the employee for the day
• allowing the employee to observe the holiday as a day of vacation
• allowing the employee to take a paid floating holiday for the day requested.

Loss of holiday pay entitlement
Under certain circumstances an employee may lose their entitlement to receive holiday pay. In these situations legislated public holidays taken need not be paid for by the employer. These situations are where the employee:

• has been employed for less than three months
• fails to report for work on a scheduled work day either before or after a holiday without giving notice
• has agreed to work on a public holiday and fails to report for work
• has not earned wages on at least twelve days during the four weeks immediately preceding a holiday.

This last point is important in situations where employers hire staff on an irregular basis. Full or part-time staff who earn wages on at least twelve days during the four weeks immediately preceding the holiday are entitled to pay for the relevant legislated public holiday. If you have significant part-time staff that are not receiving pay for legislated holidays you should check the regulations under the Employment Standards Act.

Statutory leaves of absence
Statutory provisions for pregnancy and parental leaves of absence are detailed in the Employment Standards Act. In summary, an employee is entitled to 17 weeks of unpaid leave of absence for pregnancy only if they have been employed for at least thirteen weeks preceding the estimated date of delivery. During the leave of absence the employer must continue to provide and make contributions to non-statutory benefits such as pension plans, health and dental plans unless the employee declines coverage in writing.

It is critical to note that on returning to work the employee must be reinstated to the same position he/she left and at the same rate of pay. The Ontario courts have been extremely unforgiving in cases where employers have terminated employees while they were on maternity or paternity leave. If you are considering such a course of action it is imperative that you consult a labour lawyer first.

Note also that vacation continues to accrue during pregnancy leave. If, as was suggested before, you quote vacation pay entitlement in terms of a percentage of salaries earned then, while the employee may earn an extra week or two of vacation time during the pregnancy leave, the employer need not pay the employee for the time away. If, on the other hand, employees are guaranteed a specified number of paid weeks per year then the employer may not only be required to give the employee vacation time earned during the unpaid maternity leave but they may also be required to pay the employee for the time off.

Enter 1997. The proxy method was reinstated and organizations in the broader public sector were informed they must act as though it had never been repealed. These organizations were required to make retroactive pay equity adjustments for 1995, 1996, 1997 and the current adjustment for 1998. Each adjustment was equal to 1% of the prior years’ payroll and should have been distributed according to the rules outlined in our pay equity legislation. If your payroll is approximately $500,000 and pay equity has not yet been achieved for all female job classes then your organization could have to come up with in excess of $30,000 in total to meet its retroactive pay equity obligations up to and including 1997.

In late 1997 the Minister of Finance for Ontario announced that $140 million will be available for pay equity funding for organizations in the broader public sector. The Minister apparently arrived at this amount by estimating the salaries of broader public sector organizations and the resultant pay equity funding deficiency from 1995 to 1997. The announced funding was supposed to be sufficient to cover the shortfall to date.

MCSS informs us that correspondence will be sent out shortly to all organizations in the broader public sector to advise them of the situation. A survey will be sent to these organizations sometime in 1998 to determine existing unfunded pay equity requirements. Funding was forthcoming for the period 1995 through 1998 in 2000 and continues today.

Changes to the WCB
On January 1, 1998 the Workplace Safety and Insurance Board (“WSIB”) replaced Ontario’s 83 year old Workers’ Compensation Board. Bill 99 made the following adjustments:

• Benefit levels for injured workers were reduced to 85% of net salaries.
• Inflation protection was be reduced for permanently disabled benefit recipients.
• There is no longer compensation for chronic stress.
• Chronic pain benefits are limited.
• New rules were introduced to accelerate the return to work of injured employees. In addition, injured workers are required to consent to the release of medical information by their doctors to employers and/or the WSIB.

As participation in the WSIB plan is optional for childcare centres and the majority of other not-for-profit organizations you should review participation by your organization.

Ask your private benefit plan consultant to prepare for your Board of Directors a comparison of your existing short and long-term benefits with those to be provided by the WSIB. In many cases there is already significant overlap of private plan and WCB coverage. Employees, however, are generally not permitted to claim double benefits even though premiums may have been paid for both plans.

Some private plans are more comprehensive than current WSIB coverage. For example, employees are only covered by WSIB for injuries sustained while on the job during working hours. Typically most private plans cover employees for injuries sustained twenty-four hours a day. On the other hand, some private benefit plans have a limited payment period for long-term disability claims. The WSIB will typically pay claims for the duration of the injury to age 65. In addition, WSIB participation provides some coverage for Directors of Boards as employees claiming coverage must waive rights to claim damages from their employers as a condition of applying for WSIB coverage.

Cancellation of participation in the WSIB plan is often difficult and the exit fee is often significant. Cancellation normally must be done before January 1 of a year. It is next to impossible to terminate coverage in mid-year. Now, therefore, is the time to review your long-term insurance plans.

Taxation of disability benefits
The rules for taxation of disability benefits are as follows:

• If an employer pays any part of the disability insurance premiums on behalf of an employee then disability payments will be taxable to that employee in the year received. The insurance company typically issues a T4(A) each year to employees receiving benefits where employers have paid the premiums.
• If an employee pays his/her own disability insurance benefit premiums then disability benefits received under the plan will not be taxable to the employee.

From the employer’s perspective it is less expensive to have the employees pay for their own long-term disability premiums. This approach can often be sold to employees on the grounds that their disability benefits will be tax-free in the event that they are disabled and unable to work. On the other hand, employees often prefer the short-term benefit of having their employer pay the monthly disability premiums. The personnel committee of your organization should consider the advantages and disadvantages of premium payment options when reviewing disability coverage.

Employer Provided Childcare
Interestingly enough, there is no taxable benefit in the hands of the employee in cases where:

• the employer establishes an in-house childcare facility or leases space to provide a childcare facility off premises,
• the employer pays for all operating expenses of that facility and
• the facility is available to all employees either free of charge or for a minimal fee.

The childcare facility must be available to all employees and not just to a group such as management and, furthermore, all parents using the centre must be charged the same discounted fees.

Workplace childcare centres often result in significant costs to employers. Even though these costs are deductible from business income the employer costs are often perceived to exceed the benefits of providing subsidized workplace childcare. Consequently, employer subsidized workplace childcare centres tend to be few and far between and the generous tax provisions available to employees are consequently rarely available.

Employer Subsidized Childcare
Amounts paid by employers directly to an employee to defray childcare costs incurred by the employee will result in a taxable benefit to him or her. For example, if an employee receives $10/day from an employer to help defray the $30/day cost of toddler care then the $10/day will be taxed in the hands of the employee. The full cost of care paid for by the employee of $30/day is, however, eligible for the childcare expense deduction noted in the article “Deducting Childcare Expenses”.

It is important to note that from a cash standpoint employees are always better off having employers defray childcare expenses to whatever extent possible. For example, an employee receiving a $10/day taxable benefit could have their childcare cash outlay reduced by $6/day ($10 received from the employer less additional tax payable of $4). This assumes the allowance does not result in a reduction in their base pay. Employees not receiving the taxable allowance will have to come up with an additional $6/day out of their own pocket.

From the employer’s standpoint the full amount of any childcare allowance should be deductible as an employment expense against business income for tax purposes.

Childcare provided to centre staff
Some centres provide either free or discounted childcare to centre staff who have children. There are a number of compelling psychological advantages to staff for having their children looked after at their place of work.

However, the childcare centre must factor a staff discount policy into its fee assumptions when preparing its monthly cash flow forecast. Several staff might take advantage of this policy at once thereby significantly reducing fee revenue.

Discounts and/or free childcare will result in a taxable benefit to the employee equal to the difference between normal fees charged by the centre and amounts actually paid by the staff. Cash flow advantages are similar to those noted above.

Deductibility of employer subsidized fees
Please note that childcare expenses are only eligible for the childcare expense deduction to the extent that they have been paid by the taxpayer. If an employer pays a subsidy directly to a centre then the employee may only deduct the amount of the fees they actually pay to the centre. For example, if stated pre-schooler fees are $25/day and because of an employer subsidy an employee only has to pay $15/day then only the $15/day is eligible to be deducted as a childcare expense by the employee. On the other hand, if an employee were to pay the full $25/day to the childcare centre and then be reimbursed $10/day by the employer then the employee would be able to deduct the full $25/day as a childcare expense up to the maximum allowed. Note that in both cases the employee will have to include the $10/day subsidy in taxable income.

Summary
In summary, employees are almost always better off having their employer either fully pay or partly defray the costs of their childcare. A tax deduction to the employee is only available for amounts paid in the year to the childcare provider. Consequently, employees should arrange to be reimbursed personally by the employer for any cost defrayment.