It’s time to talk about the ever-changing rules around non-taxable and taxable benefits. As we’ve mentioned before, benefits are a fantastic and affordable way to attract, retain and reward the best talent. But we also know they’re not always straightforward – especially for small businesses.
Generally, if you offer employee benefits, you have a list of responsibilities: determine if the benefit is taxable or non-taxable, calculate the benefit’s value, implement payroll deductions and file an information return.
Let’s start with that first step: how do you know if a benefit is taxable or non-taxable? If you offer (or want to offer) employee benefits, this guide is for you.
Have more questions? You can also contact one of our benefits architects – our solutions fit your budget and business.
Table of Contents
- What are Non-Taxable Benefits?
- What are Taxable Benefits?
- How are Taxable Benefits Calculated?
- The Difference Between Cash and Non-Cash Benefits
- How are Benefits Reported?
- How to Handle Taxable Benefits on Your Tax Return
- Employer and Employee Responsibilities
What are Non-Taxable Benefits?
Non-taxable benefits are employee benefits exempt from income tax. So, you can provide these benefits to your employees tax-free, and they don’t have to report them as income on their tax returns.
Examples of Non-Taxable Benefits
Some common examples of non-taxable benefits include:
- Health and dental benefits
- Health spending accounts (HSAs)
- Group life insurance
- Disability insurance
- Pension plans
- Education assistance
- Parking passes
- Allowances for travel expenses
What are Taxable Benefits?
On the other hand, taxable benefits are benefits subject to income tax. As such, your employees must report these benefits on their tax returns.
Examples of Taxable Benefits
Examples of taxable benefits include:
- Company cars or other vehicles provided for personal use
- Gift cards or other non-cash rewards
- Club memberships
- Housing allowances or subsidies
- Low-interest loans
- Stock options
- Travel expenses paid by the employer
How are Taxable Benefits Calculated?
Calculating taxable benefits can be complicated – each benefit often has its own formulas and calculations. We’ve compiled a list of the most common methods used to calculate taxable benefits. Remember, this list isn’t exhaustive; if you have a specific question about benefits calculations, your best option is to contact a benefits architect or tax advisor.
The Standby Charge
If you provide an employee with a company car or vehicle for personal use, they may be subject to a standby charge. A standby charge estimates the cost of wear-and-tear on the car. You calculate it using the vehicle’s original price (purchase or lease) and the number of days it was available for personal use. Your employee must then report this amount as taxable income.
The Operating Cost Benefit
Like the standby charge, the operating cost payment may constitute a taxable benefit if you provide an employee with a vehicle for personal use and pay for everyday expenses (think fuel, oil changes, insurance or repair). The operating cost is typically calculated using the total operating expenses of the vehicle, such as gas, insurance and maintenance.
The Difference Between Cash and Non-Cash Benefits
Cash benefits, such as bonuses or salaries, are always taxable. However, depending on the circumstances, non-cash benefits may be taxable or non-taxable. For instance, health benefits are non-cash and non-taxable, whereas company vehicles are a taxable, non-cash benefit.
How are Benefits Reported?
You must report all taxable benefits on an employee’s T4 slip. Then, your employees use their T4s to complete their tax returns and report their income and benefits.
Non-taxable benefits are typically not reported on the T4 but may be reported on a T4A if they relate to pension or retirement income.
If you deduct taxable benefits from your employee’s pay slip (more on this next), your employees still need to include them in their tax returns.
Implementing Payroll Deductions
If you offer benefits, the easiest way to manage deductions, taxes and remittances is through a full-service payroll provider. With PayEvo, you can automate taxable benefit deductions and manage your employees’ CPP and EI contributions. Plus, taxable benefits may require GST or PST, depending on the value. We stay on top of the corresponding GST/ PST/ HST rates, so you don’t have to.
Employer and Employee Responsibilities
Remember, you’re responsible for calculating and reporting taxable benefits on your employees’ T4 slips. You must also withhold tax from your employees’ payslips based on their income and benefits.
On the other hand, your employees are responsible for reporting their income and benefits on their tax returns and paying any taxes owed. So encourage them to keep accurate records of all benefits received throughout the year (using something like PayChequer) to ensure they consistently report the same amount.
Wrapping up Non-Taxable and Taxable Benefits
We get it – understanding the difference between non-taxable and taxable benefits in Canada isn’t always easy. That said, it’s essential for both you and your team. You need to know which benefits are taxable so your payroll deductions are correct, and you’ll want to educate your team so they can make the most of their benefits.
We can help make benefits a breeze. We work with you to create an affordable benefits package that attracts, retains and rewards your best talent. So book a call with one of our benefits architects today.
Do I have to pay tax on my health benefits?
- No, most health benefits are non-taxable in Canada.
How do I know if a benefit is taxable or non-taxable?
- There are exceptions, but if a benefit is for health purposes, it’s typically non-taxable. Conversely, if you can measure the financial value of a benefit, it’s probably taxable.
Are group RRSPs non-taxable?
- If you offer a group RRSP to your team, your contributions (usually no more than three to five per cent of your employee’s salary) are taxable as income.
What should I do if I have questions about taxable benefits?
- Contact the CRA, your payroll provider or a benefits architect for assistance.
Disclaimer: Please note that the information provided here may not reflect all updates to tax rules. For guaranteed legality and accuracy, please get in touch with the CRA or a tax advisor.
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