CRA list highlights tricky benefits, payments
Payroll professionals are rule followers. At least, they should be.
A critical element of payroll’s job is to comply with legislation and regulations governing employee pay and deductions, remittances, as well as reporting income and deductions.
Sometimes employee income is not taxed or reported as taxable income. This can lead to Canada Revenue Agency (CRA) penalties.
While errors and omissions can happen with any type of payment, there are certain situations that seem more likely to cause problems, according to the CRA.
Each year, it provides the Canadian Payroll Association (CPA) with a list of 10 commonly reported audit adjustments to employers’ payroll for not reporting wages and benefits properly.
Here is a look at five of the trouble spots from the 2017 list.
Unreported payments to independent contractors: Employers who hire independent contractors must report the fees they pay to them on a T4A, even though there are no source deductions taken from the fees.
To determine if a worker is an independent contractor, employers can refer to the CRA’s guide Employee or Self-employed? (RC4110).
Security/stock options: Employers must report a taxable benefit for employees who acquire security/stock option shares from their employer. The taxable benefit usually arises in the same year that the employee acquires shares, although there are exceptions.
The amount of the taxable benefit is based on the fair market value (FMV) of the shares when the employee acquired them minus the amount the employee paid for them.
Employees may claim an income tax deduction equal to one-half of the taxable benefit if they meet specified conditions under the federal Income Tax Act.
Report the benefit in box 14 on the T4, as well as in the Other Information area, using code 38. If the employee is entitled to a deduction, report it using code 39 or 41, as applicable.
The CRA provides more information on stock options in its Taxable Benefits and Allowances guide (T4130). To delve more deeply into the topic, refer to the CRA’s Interpretation Bulletin IT113R4, Benefits to Employees — Stock Options.
Automobile standby charge and operating expense benefit: The CRA’s list said employers are not calculating the benefit correctly because employees are not keeping proper logbooks that distinguish between business and personal driving.
The CRA advises that the logbooks contain details on the date, name, and address of clients visited for work, as well as the distance employees travel between their home and their clients’ places of business.
The logbook should also include the total number of business and personal kilometres the employee drives in the year, and any amounts the employee reimbursed the employer.
The CRA recommends that employers check employee logbooks periodically throughout the year.
Another issue the CRA raised was that there is a perception that if a vehicle is not an automobile, employers do not have to report a taxable benefit for employee personal use. This is incorrect.
Even if the employer-provided vehicle is not an automobile under the CRA’s definition, there is still a taxable benefit for personal driving. It is equal to the FMV of the employee’s personal use. This would be the amount that employees would have to pay to obtain comparable transportation on their own in an arm’s length relationship.
Report taxable automobile and motor vehicle benefits in box 14 on the T4 and in the Other Information area, using code 34.
The CRA’s taxable benefits guide provides information on how to calculate automobile standby charge and operating expense benefits, as well as benefits for vehicles that are not automobiles. It also defines the term “automobile” and lists types of vehicles that the CRA excludes from the definition.
Housing, low/free rent, board and lodging: If employers provide employees with accommodation (housing, board, lodging) for free or at a price that is less than the FMV, a taxable benefit arises, although there are exceptions for special and remote work sites.
The value of the benefit is usually its FMV less any rent the employee paid. When calculating the taxable benefit, also include the amount the employer paid or reimbursed for utilities.
The CRA allows employers to reduce the amount of the benefit if the accommodation is larger than the employee needs or if the employee does not have full privacy because of the nature of the accommodation (for example, it contains equipment or storage facilities, or the public has access to it).
Report the taxable benefit in box 14 on the T4 and in the Other Information area, using code 30.
Free or subsidized board and lodging for employees who work at special or remote worksites will not be a taxable benefit if the special worksite or remote work location meets all of the CRA’s eligibility criteria.
The agency provides a list of qualifying requirements for both special worksites and remote work locations in its taxable benefits guide and on its website.
If all of the conditions for a special work site apply, the employer and the employee must complete form TD4, Declaration of Exemption — Employment at a Special Work Site, certifying that the employee meets all of the eligibility criteria. The employer must keep the completed TD4 on file.
If an employee qualifies for a remote work location, the employer and the employee do not need to complete the TD4 form for the housing or board and lodging benefits to be tax exempt.
A remote work location is generally one that is at least 80 kilometres from the closest established community that has a population of 1,000 or more inhabitants.
To determine if a community is “established,” the CRA looks at whether it has certain essential services (for example, groceries, basic clothing store, accommodation, medical services, schools) within it or within a reasonable commuting distance.
The CRA also exempts up to $366 per month in 2019 for board and lodging provided to players on sports teams or members of recreational programs who meet specified eligibility criteria.
Unreported payments: The CRA audit adjustment list indicates that some employers fail to report commissions, bonuses and cash payments made to employees as taxable income.
A cash payment, even if given as a gift or an award, is always taxable. This also includes near-cash gifts, such as gift cards and gift certificates.
Employers must report taxable income in box 14 on the T4. Cash-based gifts are also reported in the Other Information area, using code 40.
Besides reporting taxable wages and benefits, payroll professionals must ensure that they calculate and deduct amounts for Canada Pension Plan contributions, employment insurance premiums, and income tax deductions from employees and pay the correct amount in employer contributions and premiums.
The CRA’s payroll website provides information on calculating, remitting, and reporting payments such as bonuses, commissions, cash payments, and taxable benefits.
In addition, its business video gallery on its website has webinars on tax deductions for bonuses and for gifts and awards to employees.
Payroll professionals who administer payroll in Quebec must also make sure that they comply with Revenu Québec’s rules for these payments and benefits.
Revenu Québec’s website provides access to its taxable benefits guide (IN-253-V) and to a general guide on source deductions and contributions for employers (TP-1015.G-V).
The CPA regularly runs seminars on taxable benefits for payroll professionals.