Review of 3 types of allowances shows challenges of administering them
Making sure employers comply with pay-related rules is a critical part of a payroll professional’s job. Non-compliance may lead to fines, penalties, extra work for payroll and unhappy employees.
One area that can be particularly challenging is administering employment benefits and allowances. The Canadian Payroll Association recently published a list of the Canada Revenue Agency’s (CRA’s) most frequently requested adjustments to employers’ payroll for incorrect reporting.
Six of the top 10 related to taxable benefits and allowances.
Motor vehicle allowances
Employers that provide a motor vehicle allowance to employees who use their vehicle for work may have to include it in the employee’s income, depending on its structure. They can come in various forms, including a flat rate allowance, a per-kilometre rate or a combination of the two.
The type of allowance will determine whether it is taxable. A flat rate allowance, where employers pay employees a fixed amount for automobile use not related to actual expenses or the number of business kilometres driven, is always taxable.
A per-kilometre allowance, where employers pay employees a set amount for the number of business kilometres they drive, may or may not be taxable, depending on whether the CRA (and Revenu Québec, if applicable) considers it reasonable. The agency says it takes into account factors such as the type of vehicle and the driving conditions when assessing the amount.
Per-kilometre allowances have to meet the following criteria:
• only apply to business kilometres an employee drives in a year
• be “reasonable”
• employer must not reimburse expenses related to same use of the vehicle, except for toll or ferry charges or supplementary business insurance if these items are not already included.
The CRA advises employers to use as a guide rates prescribed under the federal Income Tax Regulations for maximum deductions for business expenses.
In late December, the federal Finance Department announces the maximums for the next year. For 2016, the maximum is 54 cents per kilometre for the first 5,000 driven and 48 cents on each additional kilometre.
In the Yukon, Northwest Territories and Nunavut, the maximum rates are higher. For 2016, a maximum rate of 58 cents applies for the first 5,000 kilometres and 52 cents for each additional.
Some employers pay employees both a flat-rate allowance and a per-kilometre allowance. If the two types of allowances apply to the same use of the vehicle, the CRA will consider them one allowance. Since it has a flat-rate component, the entire allowance will be taxable even if the per-kilometre part is reasonable.
If the two allowances cover different uses of a vehicle, the CRA allows employers to consider them separately. This could happen where an employer provides a flat-rate allowance for business driving within an employee’s work area and a per-kilometre rate for outside the work district.
If an employer has to include a motor vehicle allowance in an employee’s income as a taxable benefit, the employee may be able to claim expenses covered under the allowance on a personal income tax return. To do so, the employer must complete and sign a form T2200, Declaration of Conditions of Employment, and give it to the employee. (Revenu Québec provides a similar form, called TP-64.3-V, General Employment Conditions.)
If a motor vehicle allowance is taxable, payroll must include it in the employee’s income for calculating Canada/Quebec Pension Plan (C/QPP) contributions, employment insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums and income tax source deductions.
At year end, report taxable allowances on an employee’s T4, using box 14 and code 40 in the “Other Information” area. For Quebec, report them on an RL-1 in boxes A and L.
Moving allowances
Some employers provide allowances when employees move households because of a job transfer or a new job. Moving allowances are not taxable if an employee’s new residence is 40 kilometres closer to the new work location and the expenses are reasonable and qualify for exemption under the federal Income Tax Act.
The CRA allows employers to exempt a number of moving-related expenses from an employee’s income, as long as the employee provides receipts.
Eligible moving expenses include:
• travelling costs, including meals and lodging
• transportation and storage costs for household effects
• temporary living expenses while waiting to move in
• house-hunting trips• legal fees and land transfer tax
• costs to move items, change legal documents, cancel leases, disconnect utilities
• costs incurred to set up utilities, appliances and fixtures
• costs of selling old residence
• fees for automobile licenses, inspections and drivers’ permits, if employee had them before
• costs incurred to adjust and alter current furniture and fixtures for the new residence
• amounts paid for property taxes, utilities, insurance and grounds maintenance for the old residence if the employee has not been able to sell or rent it despite “reasonable efforts”.
Allowances to pay for moving expenses not listed above are taxable. Revenu Québec allows for similar exemptions.
The CRA and Revenu Québec will also exempt the expenses if an employer pays to move an employee from a remote area when the work duties are done.
The CRA also allows employers to provide a non-taxable, non-accountable allowance of up to $650 to pay for incidental moving costs. The employee must certify in writing he incurred the expenses.
Amounts exceeding $650 are taxable. Revenu Quebec exempts an amount equal to two weeks’ salary or wages.
Taxable moving allowances are subject to C/QPP contributions, EI and QPIP premiums (if cash-based) and income tax deductions. Employees may be able to claim some of the moving expenses the employer does not reimburse (or only partially reimburses) when filing a personal income tax return.
At year end, report taxable moving allowances on a T4 in box 14 and in the “Other Information”, using code 40. For Quebec, report them in boxes A and L of an RL-1.
Overtime meal allowances
Some employers provide meal allowances when employees work overtime.
The CRA does not require an employer to take source deductions if the employee works at least two hours of overtime either right before or right after scheduled work hours and it happens occasionally or infrequently. T
he CRA uses the benchmark of less than three times a week to define occasional or infrequent, although it may allow for more hours if circumstances require it.
The amount of the allowance paid must also be reasonable or it will be taxable.
The CRA considers amounts up to $17 to be reasonable, although higher amounts may not be taxable if the price of meals in the employee’s location is higher than elsewhere or there are “significant extenuating circumstances”.
Revenu Québec requires employers request the overtime and that employees provide receipts.Meal allowances that do not meet the criteria are subject to C/QPP contributions, EI and QPIP premiums (if cash-based) and income tax deductions.
At year end, report taxable meal allowances on an employee’s T4, using box 14 and code 40 in the “Other Information” area. For Revenu Québec, report taxable allowances in boxes A and V of an RL-1.
For more detailed information on employment allowances, refer to the CRA’s website or Revenu Québec’s website.
