Test yourself on taxable benefit rules

With numerous laws and regulations to follow, payroll administration can be a challenge, even for the most seasoned professionals. One area that can pose difficulties is taxable benefits.

There are a number of different types of benefits that employers may provide to employees, including automobiles, parking, gym memberships, cell phones, health and dental plans, stock options, Christmas parties, and awards.

Some of the benefits are subject to income tax deductions, as well as Canada/Quebec Pension Plan (C/QPP) contributions, employment insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums, and year-end reporting, while others are not.

It generally depends on the type of benefit and the reason the employer is providing it.

Knowing which benefits are taxable is important for complying with Canada Revenue Agency (CRA) (and Revenu Québec) requirements.

However, the rules are sometimes complicated and not easy to remember. In fact, the Canadian Payroll Association says improper assessment and reporting of taxable benefits and allowances are regularly among the top 10 payroll adjustments that the CRA identifies every year.

How well do you know taxable benefit rules? Try and test yourself with the following true or false statements.

Employers may give employees as many non-cash gifts and awards as they want during a year without a taxable benefit arising as long as the total value of the gifts and awards is not more than $500. True or False?

True, as long as the gift is for a special occasion (birthday, wedding, religious holiday or birth of a child) and the award is for an employee’s “overall contribution to the workplace,” not for their job performance. If the total fair market value is more than $500, the excess amount is a taxable benefit. If an employer gives gifts or awards for any other reason, a taxable benefit will arise.

To calculate the taxable benefit that results from an employee’s personal use of an employer-provided automobile, use the actual cost of the vehicle when the employer bought or leased it. True or False?

False. The value of the taxable benefit is made up of three components: a standby charge (the benefit that applies by allowing the employee to use the vehicle for personal reasons and not just for business), plus an operating cost benefit (which results from an employer paying for automobile operating expenses), minus any amounts the employee reimburses the employer for the standby charge or operating cost benefit in the year. The CRA provides rules and formulas that employers must use to calculate the standby charge and operating cost benefit.

The value of a taxable benefit must always be included in an employee’s income when calculating C/QPP contributions and EI and QPIP premiums. True or False?

False. All taxable benefits are subject to C/QPP contributions (if the type of employment is covered under C/QPP), as well as income tax deductions, but not necessarily EI and QPIP
premiums. Whether or not employers have to deduct EI and QPIP premiums depends on whether the employment is covered under EI/QPIP and whether the benefit is in the form of cash, near-cash or non-cash. If the employment is not insurable, do not deduct EI or QPIP from the benefit.

If the benefit is a cash benefit, it is subject to EI and QPIP deductions. The CRA says “cash” includes things such as money, cheques and direct deposit.

Near-cash and non-cash taxable benefits are generally not included when calculating EI and QPIP premiums. Near-cash refers to items that function as cash or that can be easily converted to cash, such as gift cards, stocks and securities.

Non-cash benefits are actual goods, services or property that an employer provides to an employee. Another term for non-cash benefits is benefits in kind.

There are two exceptions to the non-taxability of non-cash benefits: 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 RRSP when the employee can withdraw amounts from the plan.

When calculating the taxable benefit for employer-paid group term life insurance premiums, do not include the GST/HST/QST in the value of the benefit. True or False?

True. Insurance is an exempt supply under the GST/HST/QST.

Employers should always wait until they are preparing T4s at year-end before adding the value of taxable benefits to employees’ earnings. True or False?

False. The CRA requires employers to calculate and include the value of taxable benefits in employees’ income on a pay-period basis. Employers who wait until the end of the year to assess an entire year’s taxable benefit could be penalized for failing to withhold and remit the appropriate source deductions.

If the exact value of the benefit is unknown during the year, payroll may use a reasonable estimate. At year-end, the payroll department will have to make any necessary adjustments.

Employer-paid premiums for an employee’s coverage under a group sickness or accident insurance plan, such as accidental death and dismemberment or critical insurance, are a taxable benefit. True or False?

True, although an exception applies for employer premiums or contributions for a wage-loss replacement plan that pays benefits on a periodic basis rather than in a lump sum.

When calculating the value of taxable benefits to include in an employee’s income, always use the actual amount that it cost the employer to provide the benefit. True or False?

False. The value of the benefit is its fair market value, not what it cost the employer to provide it (unless it paid the fair market value). The CRA says the fair market value is the highest price obtainable for a good or a service in an open market between two parties who deal with each other at arm’s length. When determining the fair market value, include any applicable provincial retail sales tax and the GST/HST/QST.

If an employer provides free or subsidized parking for an employee, there is no taxable benefit if the employer owns the parking lot. True or False?

False. It does not matter if the employer owns the parking lot. Employer-provided free or subsidized parking is a taxable benefit unless the employee has a disability or the employer provides the parking for business purposes and the employees regularly use their automobile or an employer vehicle to carry out their work duties.

There is no taxable benefit if employers provide free meals or reimburse employees for their meal costs when employees work overtime. True or False?

True, if certain conditions apply. The CRA says the cost of the meal must be reasonable (generally up to $17), the employees must work at least two hours of overtime right before or right after their scheduled work hours, and the overtime must be infrequent or occasional (generally less than three times per week, with some exceptions).

Employees may use an employer’s gym or recreation facilities free of charge without incurring a taxable benefit. True or False?

True, as long as the employer allows all of its employees to use the facilities and not just a select group. This applies whether the facilities are in-house or the employer pays for the use of an outside facility. If using an outside facility, the membership must be with the employer and not the employees for there to be no taxable benefit.

All loyalty points that employees collect and redeem from using their credit card or a company credit card to pay for business expenses are a taxable benefit. True or False?

False. If employees use their personal credit card to pay for the cost of work-related travel or other business expenses (for which the employer reimburses them) and that generates loyalty points, there is no taxable benefit unless the employees convert the points to cash, or the CRA (or Revenu Québec) determines that the arrangement is a form of additional remuneration or a way to avoid paying tax.

If you got all or most of the questions correct, congratulations! You know your taxable benefit rules.