Are you up to date on taxable benefits?

Recently, a company that provided free meals to employees for a long period of time, as an inducement for them to come back to the office, wasn’t sure if these were was a taxable benefit.

It’s a good question, given that the Canada Revenue Agency made some important changes in the fall of 2022, retroactive for all of last year.

“While there are some exceptions, none of those exceptions seem to apply in this case,” says Lawrence Levin, senior associate in tax law services at EY in Toronto, referring to the company offering meals. “Where it gets difficult is where there's a lack of tracking and you don't know who's gotten what.

With employers rolling out employee T4s in February, they will want to make sure they’re compliant with the newer rules when it comes to meetings or events, related meals and entertainment, along with employee parking. If an employee benefit is non-taxable, it’s not subject to payroll deductions such as CPP and EI.

With employers rolling out employees T4s in February, they will want to make sure they’re compliant with the newer rules when it comes to meetings or events, related meals and entertainment, along with employee parking. If an employee benefit is non-taxable, it’s not subject to payroll deductions such as CPP and EI.

“The rules didn't come in until the fall. But if [I’m an employer] giving out gift cards in January [2022], when Omicron was on, or February, March, now all the sudden we're sitting here and we have to do our T4s, and we're like, ‘Those aren't taxable,’ you wouldn't have kept a log, conceptually, because you wouldn't think it would matter,” says Greg London, domestic tax consulting leader at BDO Canada in St. John’s.

‘Disruptive from HR perspective’

Even before the changes, the area of taxable benefits had a lot of non-compliance, says Levin.

It’s also an area where there's a lot of audit activity, from both the CRA and provincial revenue authorities, so “there's a very high likelihood that these matters will be uncovered in the course of a payroll audit because of the questions that are asked.”

Often companies don’t turn their minds to there being an issue, he says, “but, unfortunately, it's the employees who often bear the brunt.”

For example, if a gift card was given out worth $500 and it’s now taxable, the CRA would prepare an amended T4, and then reassess that employee for the $500 plus interest, says Levin.

“When these types of things are applied to a lot of employees, even though the dollars may not be huge… this can be very disruptive from an HR perspective,” he says. “For that reason, it’s important for companies to understand that what they're offering — and even what the tax consequences are — to avoid any unwelcome surprises down the line.”

While the rules around taxable benefits can be confusing, employers should understand that, essentially, they’re an exemption to the Income Tax Act, says London.

“If you just read the act, it's pretty easy: If you get anything because you work somewhere, you pay the tax on it. But with this policy, they're essentially saying, ‘We realize there are situations where you want to give, say, gifts or rewards to employees.’”

And while employers may think a gift is a small stipend, the CRA may think otherwise. Encouragingly, the government agency has done a good job laying out the new rules online, he says, “so if I'm an employer who doesn't have a tax person, either on staff or on standby, I think you could get through that page and understand exactly what you have to do, which is impressive.”

Gift card changes

Previously, the CRA’s policy was to consider gift cards as “near-cash” and, therefore, taxable; now, these cards are considered “non-cash” if:

• they come with money already on them and can only be used to purchase goods or services from a single retailer or a group of retailers and
• the terms and conditions of the gift cards clearly state that amounts loaded to the card cannot be converted into cash and
• a log is kept to record gift card information.

However, the CRA’s change in policy regarding gift cards does not apply to those given as a long-service award.

In addition, if an employee is given a non-cash gift (including gift cards) or an award, the benefit is not taxable if:

• it amounts to an unlimited number of non-cash gifts or awards with a combined value of $500 or less (including taxes) in the year (not including small items or trivial items or long-service awards) and
• it is a gift for a special occasion (such as a birthday or wedding) or a recognition award for an employee's overall contributions to the workplace and
• it is not provided as a reward related to job performance.

If the total of non-cash gifts and awards are more than $500, the amount over $500 is taxable. Long-service awards have their own $500 limit.

CRA has this construct “which it's easy for them to say, difficult to apply,” says Levin.

Essentially, there are three categories: gifts (for a birthday, for example); rewards (for job performance-related reasons); and awards (for an employee’s overall contribution to the workplace). But rewards are always a taxable benefit, he says.

And now, with the 2022 changes, employers may be wondering if it still makes sense to provide gift cards to employees, says London.

“One thing to keep in mind, actually, with all this is that if something is not a taxable benefit to the employee, it doesn't mean that the company can't deduct the expense. For example, if you're providing employees awards in the form of a gift card to Canadian Tire for $500, the company, all things being equal, should get a corporate deduction for that. So, these could be quite tax-effective — not taxable to the employee, deductible to the company. It works out well.”

Back in 2020, the CRA clarified how taxable benefits should be handled for people working from home amid the pandemic.

Virtual and in-person events

Under the CRA's administrative policy, if an employer provides an in-person social event, the benefit is not taxable if:

• it is available to all employees and
• the cost is $150 or less (including taxes) per person (including spouses or common-law partners, not including ancillary costs such as transportation home and overnight accommodation and
• the event is within the maximum annual limit for social events (total of six employer-paid combined in-person and virtual social events)

Also, if an employer provides or reimburses for a virtual social event, the benefit is not taxable if:

• it is available to all employees and
• the cost is $50 or less per person when it only includes meals, beverages and delivery services or the cost is $100 or less per person when includes meals, beverages, delivery services and entertainment and
• the event is within the maximum annual limit for social events (total of six employer-paid combined in-person and virtual social events)

It’s a reflection of the workplace changes during the pandemic, with people celebrating much more virtually, according to London.

“The CRA said, ‘OK, wait a minute, we need to adapt and make sure that companies can still do this, and give their employees events.’ So they took the existing policy, and they fit in both virtual and hybrid events there.”

But it’s important to note that if an event involves $55 per person — so it’s $5 over the $50 limit — it's the whole $55 that ends up being a taxable, he says. And the limit to six events is the total number of events, whether virtual or in-person.

In addition, the events have to be open to all employees, says London.

“Say, for example, you're going to entice back 13 per cent [of staff], you’ve got to be a bit careful not to make it exclusionary because then you're actually out of the policy.”

In the spring of 2022, BDO decided that one way to encourage staff to return to the office — for at least a few days a week — was to offer free meals.

Parking alterations

One other significant change from the CRA involves parking, and the update is “a bit confusing,” says London.

If an employer provides parking with a limited number of spaces, the benefit is not taxable — as long as: not more than two parking spaces are available for every three employees who want parking (“scramble parking”); parking spaces are not assigned; and parking spaces are offered to all employees who want parking.

“Since the employee's access to parking is random and uncertain, it may be difficult and excessively burdensome for the employer to determine the benefit enjoyed by any particular employee,” says the CRA. “In this situation, no taxable benefit will be required to be included in income.”

As a general proposition, if an employer pays for employee parking or provides free parking, it's a benefit — but the exception here is for scrambled parking, says Levin.

“The key thing here is there's not enough parking for everyone who wants it. So the issue with that is it's difficult to value because, unlike the parking lot where you could park for $20, there's no guarantee that you'll get parking if you show up,” he says. “What the CRA did here is define what is the criteria for parking to be considered to be scramble parking? Because I think, in the past, it wasn't so clear.”