Employee purchases through payroll deductions; Taxable benefit if no receipt?; Taxable benefit for car with company logo?
Employee purchases, taxable benefits
Question: We offer a program that allows employees to buy electronic products, such as televisions and laptops, from the company and pay for them over an extended period through payroll deductions. Employees pay the full cost for the items they buy, but they pay for them over a number of months (e.g., up to a year or more). If an employee buys an item through the program, does the employee have a taxable benefit?
Answer: The employee may have a taxable benefit. It depends on whether the employee has to pay interest on the outstanding amount owing for the item purchased. If the employee has to pay interest and the rate of interest is higher than the rate that would apply on a commercial loan (i.e., a loan not related to the employee’s employment), there would be no taxable benefit.
There is also no taxable benefit if the employer includes all or part of the outstanding amount in the employee’s income. If the interest rate charged to the employee is lower than the commercial rate or no interest is charged, there is a taxable benefit to the employee. The taxable benefit would be for an interest-free or low-interest loan. The Canada Revenue Agency (CRA) includes in loan taxable benefits any type of indebtedness, including the unpaid purchase of goods and services.
The taxable benefit consists of: the interest on each loan/debt calculated at a prescribed* rate of interest for the period in the year in which the loan was outstanding, plus the interest on the loan/debt that the employer paid or that was due during the year, minus the total of the interest for the year that any person or partnership paid on each loan or debt within 30 days after the end of the year and any part of the interest the employer paid that the employee paid back within 30 days after the end of the year.
The taxable benefit is subject to C/QPP contributions and income tax deductions, but not EI or QPIP premiums. For year-end reporting, report the taxable benefit on a T4 in box 14 and in the "Other Information" area, using code 36. For Quebec, report the taxable benefit on an RL-1 in boxes A and L.
*Note: The prescribed rate of interest is set every quarter. It is based on the rate of interest on 90-day Government of Canada Treasury Bills.
Example: An employee buys three laptops for $1,100 each and a $1,500 TV through his employer, for a total of $4,800 in purchases. The employer allows the employee to pay for the items over a 12-month period, with monthly payroll deductions of $400.
The employer does not charge the employee any interest on the outstanding amount owing. The prescribed rates of interest that apply over the 12-month period in which the employee is paying for the items are: two per cent for the first quarter, one per cent for the second and third quarters and two per cent for the fourth quarter of the year.
The taxable benefit is calculated as:
Prescribed rate of interest x loan amount for the period in the year in which the amount was outstanding:
2 per cent x $4,800 x ¼ = $24.00
1 per cent x $4,800 x ¼ = $12.00
1 per cent x $4,800 x ¼ = $12.00
2 per cent x $4,800 x ¼ = $24.00
For a total of $72.00
In this case, the employer did not pay any interest on the amount outstanding for the purchases, so the employee did not repay any interest amounts. Therefore, the taxable benefit for the year is $72.
Clothing reimbursements, taxable benefits
Question: We reimburse employees for purchasing and maintaining protective clothing since the clothing is a job requirement. Is the reimbursement a taxable benefit if we do not require receipts for the purchases?
ANSWER: If an employer requires employees to wear distinctive clothing, uniforms or items of clothing to protect them from job hazards and reimburses them for buying and maintaining the clothing without requiring receipts, the reimbursement is not a taxable benefit if all the following conditions apply:
The employees are required by law to wear the protective clothing, the employees purchased the clothing, and the amount the employer reimburses is reasonable (the CRA doesn’t define "reasonable").
If all the conditions do not apply, there is a taxable benefit. Include any GST/HST that applies to the value of the benefit. If the reimbursement is paid in cash, the taxable benefit is subject to C/QPP contributions, EI and QPIP premiums and income tax deductions. If it is non-cash, do not deduct EI or QPIP premiums.
For year-end reporting, report the taxable benefit on a T4 in box 14 and in the "Other Information" area, using code 40. For Revenu Québec, report the taxable benefit on an RL-1 in boxes A and L.
Note: If an employer reimburses an employee for required uniforms or protective clothing and requires receipts, the reimbursements are not taxable benefits.
Taxable benefit for company car with logo
Question: We provide our sales reps with company cars for work. The cars have our company name and logo painted on the sides in large lettering. The employees are allowed to use them for personal driving. Whenever they drive them, they are essentially advertising our company. As a result, do we need to assess the employees a taxable benefit for their personal use of the cars?
ANSWER: Yes. If an employer makes a car available to an employee for personal use, the employee has a taxable benefit, regardless of whether the car provides advertising.
The only exceptions the CRA allows for are: Situations where an employer requires employees to drive directly from home to a point of call other than the workplace where the employee regularly reports for work or to return home from the trip, and situations where privately owned cars are prohibited from entering a restricted area where an employee works and the distances within the area are far enough apart that employees need a car to travel within the area.
In all other cases, the employer must assess a taxable benefit and include it in the employee’s income.
