Payroll terminology may seem similar, but differences are major
Pensionable. Insurable. Taxable. Source deductions. These are all terms that payroll professionals get to know very quickly when they begin working. After all, understanding key terms and phrases is essential for complying with federal payroll deductions rules.
Yet, there are other terms that may not come up as frequently, but that are just as important to understand.
Here is a brief refresher of some payroll terms and phrases that may seem similar, but have important differences:
Fair market value vs. cost: Knowing the difference between these two terms is important for properly calculating the value of taxable benefits provided to employees. The Canada Revenue Agency (CRA) requires employers to assess taxable benefits based on their fair market value (FMV) minus any amounts that employees paid for them.
The CRA defines FMV as “the price that can be obtained in an open market between two individuals dealing at arm’s length.” For some taxable benefits, the FMV may be the same as the amount it cost the employer to purchase the benefit. This could apply for benefits such as gift cards or subsidized meals.
For other benefits, the employer’s cost may have no relationship to the FMV. For example, for employer-provided parking, the FMV depends on a number of factors other than the employer’s cost, such as where the employer’s location, whether it offers scramble parking, and the price of parking in comparable commercial lots.
Wages in lieu of notice vs. severance pay: While these terms are sometimes used interchangeably, they have different meanings for source deductions and employment standards rules.
Wages in lieu of notice are payments required under an employment contract or employment standards law if there is a termination of employment and the employer is not having the employee work a required notice period. When paying wages in lieu of notice, employers must comply with minimum employment standards requirements.
Severance pay is an amount paid to employees when or after they retire in recognition of long service or for the loss of a job. Only two jurisdictions in Canada — Ontario and the Canada Labour Code — require employers to pay severance pay in certain situations, although employers in any jurisdiction may choose to pay it.
For federal payroll deductions, wages in lieu of notice are regular employment income, subject to Canada Pension Plan (CPP)
contributions, employment insurance (EI) premiums, and income tax deductions.
The CRA considers severance pay to be a retiring allowance, exempt from CPP and EI. Tax deductions are calculated using lump-sum tax rates. Staff who meet certain conditions may transfer some or all of the payment tax free to a registered pension plan (RPP) or a registered retirement savings plan (RRSP).
Different rules apply in Quebec. Revenu Québec considers wages in lieu of notice required under the Act respecting labour standards to be a retiring allowance. The payments are excluded for Quebec Pension Plan (QPP) contributions, but included for Quebec Parental Insurance Plan (QPIP) premiums (following EI rules) and income tax deductions.
Eligible vs. non-eligible amounts for retiring allowances: Employees with years of service with their employer before 1996 may directly transfer some or all of a retiring allowance to their RRSP or RPP without income tax deductions. The CRA calls this the “eligible” amount. The “non-eligible” amount is the remainder.
The eligible amount consists of a maximum of $2,000 for each year or partial year of service before 1996, as well as $1,500 for each year or part year before 1989 in which the employee did not belong to the employer’s pension plan or deferred profit-sharing plan or in which the employee belonged to the plan, but the employer’s portion was not vested in the employee when it paid the retiring allowance.
The CRA allows individuals to transfer all or part of the non-eligible amount to their or their spouse/common-law partner’s RRSP without tax deductions if the amount transferred does not exceed the employee’s annual RRSP deduction limit. The CRA advises employers to take steps to ensure that the employee has the deduction room prior to transfer.
At year end, the eligible amount is reported on a T4 in the “Other Information” area, using code 66 (code 68 if the individual is an Indian, as defined under the Indian Act, with tax-exempt income). Use code 67 (or 69 for Indians) for the non-eligible portion.
Employee as primary beneficiary vs. employer as primary beneficiary: This is an important concept when determining whether employer-provided benefits are taxable. In general, if an employee is the primary beneficiary of the benefit, it is taxable and has to be included in the employee’s income for payroll deductions. If the employer is the one who mainly benefits, there is no taxable benefit.
The CRA states that the person who is the primary beneficiary is a question of fact. To determine the primary beneficiary, it advises employers to examine why they are providing the benefit since this “often offers clues as to the identity of the primary beneficiary.”
For example, if an employer pays for an employee’s membership in a professional organization and belonging to the organization is a condition of employment, the employer could argue that it is the primary beneficiary. If membership benefits the employee, but is not a requirement for the job, the employee is likely the primary beneficiary.
The CRA advises employers to keep records to back up their position on who is the primary beneficiary in case it requests them during an audit or compliance check.
Cash vs. near-cash vs. non-cash benefits: Cash benefits are benefits provided in the form of money, cheques, direct deposit, allowances and
reimbursements.
Examples include a meal allowance or reimbursement of an employee’s personal cell phone charges.
Near-cash benefits are items that function as cash or that can be easily converted to cash, including gift cards or stocks and securities. Non-cash benefits are actual goods, services, or property, such as an employer-provided free parking space. Non-cash benefits are also called benefits in kind.
Determining which category a taxable benefit falls in is important when it comes to calculating EI and QPIP premiums. (In general, taxable benefits are always subject to C/QPP contributions and income tax deductions.)
Cash-based taxable benefits are always subject to EI and QPIP. Do not deduct EI or QPIP from near-cash or non-cash taxable benefits, with two exceptions: the value of board and lodging benefits provided to an employee during a period in which the employer pays the employee cash earnings, and the value of employer-paid contributions to an employee’s RRSP when the employee can withdraw the amounts.
Standby charge vs. operating cost benefit: These are both important, but separate, components for calculating automobile taxable benefits.
The standby charge is the benefit that applies simply by virtue of the employee having an employer-provided automobile available for personal use. The operating cost benefit is the benefit that arises with an employer-provided vehicle if the employer (or a person related to the employer) pays any of the vehicle’s operating expenses, including gas, insurance, and repairs and maintenance.
The value of an automobile taxable benefit is the total of these two components, minus any amount that the employee reimbursed the employer during the year. The formula used to calculate the standby charge varies, depending on whether the employer owns or leases the automobile.
Different calculation methods also apply in certain circumstances, including if the vehicle is not classified as an automobile or if the employee uses the vehicle mostly for business purposes.
Canada’s Finance Department sets a fixed-rate each year for calculating the operating expense benefit. For 2018, it is 26 cents per kilometre of personal use or 23 cents per kilometre if the employee’s principal source of employment is selling or leasing automobiles.
There is also an optional operating expense calculation that employers can use if employees request it and certain conditions apply (including that the employees use the automobile more than half of the time for business purposes).
For more information on these terms and other, refer to the CRA’s website at https://www.canada.ca/en/services/taxes.html.
