Complete Guide to Taxable Benefits

Although many employers and employees may be unaware of the fact, taxable benefits are one of the cornerstones of income tax. Therefore, it is important to understand what taxable benefits are, how they are calculated, and what the associated tax responsibilities are.

Here, the business tax professionals at T2inc.ca offer a comprehensive guide to taxable benefits, explaining what they are, how they work, and why they're so important to Canadians.

What is a taxable benefit?

A taxable benefit is a payment or benefit in kind (BIK) received by an employee from their employer in addition to their salary. The employee must declare the value of this benefit on their annual tax return and pay any associated tax.

Benefits of this type can take many forms, including cash payments, cash equivalents, goods, services or other tangible benefits.

Difference between taxable and non-taxable benefits

The distinction between taxable and non-taxable benefits is generally based on how a given benefit is used and its connection with the employee's work. Taxable benefits are generally applicable to benefits that are intended for the employee's personal use outside the work context. Non-taxable benefits, on the other hand, are related to the employee's job responsibilities.

For example, if an employer provides a cell phone to an employee for business use, this is generally considered a non-taxable benefit, as it is related to the employee's work. On the other hand, if the employee uses the cell phone for personal use, and the company reimburses the cost, this portion could be considered a taxable benefit.

Employers' responsibilities

When it comes to taxable benefits, employers are responsible for complying with regulations and managing employee benefits accurately. Here's an overview of employer responsibilities concerning taxable benefits:

1. Identifying taxable benefits

Employers must first determine whether the benefits offered to their employees fall into the category of taxable benefits. This involves assessing each benefit and determining whether it meets the criteria of a taxable benefit under applicable tax laws.

2. Calculating the value of taxable benefits

Once a benefit has been identified as taxable, the employer must calculate its value. Usually, this is based on the benefit's "fair market value" (FMV), which is the price the employee would have paid for the benefit if it had been acquired on the open market. It is important that this number be accurate, as it will serve as the basis for subsequent tax calculations.

3. Adding taxable benefits to employee income

Once the value of the taxable benefit has been calculated, the employer must add it to the employee's income for each pay period during which the benefit is offered, in order to calculate appropriate tax deductions.

4. Payroll deductions

Taxable benefits are also relevant when calculating an employee's payroll deductions. An employer must deduct taxes and contributions from an employee's income, including those related to any taxable benefits. Deductions depend on whether the employee has received cash, cash equivalents or non-cash benefits.

5. Information returns

In addition to adding the value of taxable benefits to an employee's income, the employer must also file information returns. These declarations enable the tax authorities (Revenu Québec and the Canada Revenue Agency) to track the taxable benefits granted to each employee, and to verify that taxes are reimbursed correctly.

Employee responsibilities

Employees also have a role in declaring taxable benefits. Here's an overview of what employees need to do: 

1. Declare taxable benefits: Employees must declare both cash and non-cash taxable benefits on their income tax returns.
2. Taxable benefits documentation: Employer-provided statements, such as T4 slips in Canada, show the value of taxable benefits for accurate tax declaration.
3. Tax slips: Employees should keep their business records in a safe place and use them to make accurate calculations on their tax returns.
4. Payroll deductions: Employees must be aware that taxable benefits may result in additional tax deductions, which could affect their net pay.
5. Tax compliance: Failure to comply with tax obligations can result in penalties and interest.

List of common taxable benefits

In Canada, there are many taxable benefits that must be declared correctly by both employers and employees. The following is a list of common taxable benefits:

• Tips: Gratuities received by an employee, such waiters in restaurants, are taxable. This includes cash tips or tips included in credit card payments.
• Board, Lodging, Free or Low-Rent Housing: If an employer provides free or low-rent housing to an employee, the value of this benefit is taxable. This also applies to accommodation benefits, such as board and lodging provided by an employer.
• Travel expenses for personal travel: When an employer reimburses an employee's personal travel expenses, such as vacations, these reimbursements are considered taxable.
• Personal use of an employer's vehicle: If an employee uses a company vehicle for personal ends, the value of this use is taxable. This includes fuel and maintenance costs.
• Gifts valued at more than $500 per year: Employer-provided gifts and rewards valued at more than $500 per year are considered taxable. This may include gifts for job performance or other rewards.
• Use of company-owned property: If an employee uses a company-owned cottage or other property for personal ends, the value of this benefit is taxable.
• Vacation Travel: Vacation travel offered by an employer as a benefit is generally taxable. This applies to free or subsidized trips.
• Group Insurance Plan: Premiums paid by the employer on behalf of the employee are taxable. This also includes group insurance plans.
• Employer-paid course fees: If an employer pays course fees for an employee, but these courses are not directly related to the employee's employment, the value of this benefit is taxable.
• Other benefits: Other taxable benefits include reimbursement for the cost of tools used in employment, loans to employees, payments to offset higher taxes after an employee relocates, tax preparation fees and scholarships paid to children.

For a list of all taxable benefits in Quebec and Canada, contact a reputable tax accountant!

Need advice on taxable benefits?

 Managing taxable benefits is an essential aspect of corporate accounting and taxation. Understanding the differences between taxable and non-taxable benefits, and knowing their tax implications, can make all the difference to the way you compensate and motivate your employees.

At T2inc.ca, we're aware of the accounting and tax challenges facing Canadian businesses. Our team of professionals is here to help you navigate this complex field. We can provide sound advice on managing taxable benefits, tax compliance and many other essential aspects of your company's financial management.

Contact us today to find out how we can help you optimize your accounting and tax management.