Who pays the tax on fringe benefits?

HR need to be aware of the tax implications of unique perks
By Christopher Newton
|Canadian HR Reporter|Last Updated: 05/05/2003

F

ringe benefits, or perquisites, sound attractive, but are not entirely “free” if they attract tax. HR professionals have to be aware of when a “perk” is a taxable benefit in order to ensure employee communications convey this information effectively, payroll deductions are made properly and benefit plans are designed appropriately.

A taxable fringe benefit may not meet the desired goal of attracting and retaining employees if it comes with too big a price tag.

Generally speaking, all employee benefits are taxable unless they come under one of the exceptions noted in the Income Tax Act. However, there are plenty of exceptions — and exceptions to those exceptions.

Automobile

Automobile allowance:

any payment employees receive from their employer for using their own motor vehicles in connection with or in the course of their office or employment. There is no need to account for how the allowance was used. If a per-kilometre allowance is considered reasonable it is not taxable. If it is deemed too high or low it’s taxable.

Automobile stand-by charge:

a benefit employees enjoy when an employer’s automobile is available for personal use. It’s taxable.

Automobile operating cost:

operating expenses relating to personal use of an employer’s automobile. Taxable.

Parking:

taxable, regardless of whether or not the employer owns the lot. The benefit is equal to the fair market value of the parking minus any amount paid by the employee.

Housing

Board and lodging:

if an employer provides free or subsidized board and lodging, an employee receives a taxable benefit. An exception may arise where the employee works at a remote location or a special work site.

Rent-free or low-rent housing:

taxable.

Moving expenses and relocation benefits:

not taxable, subject to some exceptions.

Financial

Counselling services:

fees paid to provide financial counselling or income tax preparation are generally a taxable benefit, subject to certain exceptions.

Interest-free and low-interest loans:

generally taxable. The benefit is the amount of interest the individual would have paid on the loan for one year at the prescribed rate minus the amount of interest actually paid. Special rules apply to home-relocation and certain other loans.

Wage-loss replacement or income maintenance non-group plan premiums:

if the employer pays the premium to a non-group plan, it’s taxable. If the premium is paid to a group plan, it’s non-taxable.

RRSP premiums/administration fees:

taxable unless the amount is withheld from the employee’s remuneration and contributed for the employee.

Stock options:

taxable, though the taxable benefit can be deferred until the earliest year in which the employee disposes of the shares, dies or becomes a non-resident.

Education

Tuition fees, scholarships and bursaries:

not taxable if the training is mainly for the employer’s benefit, even it doesn’t result in a degree, diploma or certificate for the employee.

Educational allowances for children:

they are generally a taxable benefit unless employees have to live in a specific location because of their employment and education is unavailable in the employees’ official language.

Recreation

Facilities:

if the employer supplies recreational facilities to all employees, it’s not a taxable benefit. If the recreational facilities are only supplied to select groups for free or for a minimal fee while others have to pay the full fee, the members of the select groups each receive a taxable benefit.

Club membership dues:

if the employer pays a fee for an employee to be a member of a social or athletic club, and membership is mainly for the employer’s advantage, the fee is not a taxable benefit.

Health

Counselling services:

employee counselling services are not taxable if they relate to the employee’s or a related person’s mental or physical health, the employee’s re-employment or the employee’s retirement.

Premiums under provincial hospitalization, medical care insurance and certain federal government plans:

taxable.

Clothing

Uniforms and special clothing (non-cash):

no taxable benefit if the employer supplies employees with a distinctive uniform or safety clothing that must be worn while on duty.

Uniforms and special clothing (cash, i.e., the employer reimburses employees):

no taxable benefit if the law requires employees to wear protective clothing while on the work site, the employees buy the clothing and the amount of the reimbursement is reasonable.

Miscellaneous

Gifts, awards and social events:

taxable, if received as cash. However, an employer may give an employee, tax free, up to two non-cash gifts per year for special occasions (birthday, wedding), and two non-cash awards per year for employment-related accomplishments. Gifts and awards cannot cost more than $500 apiece or they will be taxable. A free party or other social event is not taxable if it doesn’t cost more than $100 per person.

Discounts on merchandise:

if the employer sells merchandise to employees at a discount, it’s not usually a taxable benefit.

Professional fees:

if the employee is the primary beneficiary, the fees paid are a taxable benefit. An employee is the primary beneficiary when membership is not a condition of employment.

Travelling expenses for spouse or common-law partner:

these payments are usually a taxable benefit. However, an exception arises if the spouse or partner went on a trip at the employer’s request and was mostly engaged in business activities. In this case, the expense is not a taxable benefit.

Subsidized meals:

not a taxable benefit provided the employee pays a reasonable charge.

Christopher Newton is a lawyer and the head of Hewitt Canada’s legal consulting group. He may be contacted at (416) 225-5001, or Christopher.newton@hewitt.com.

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