What Are Taxable Benefits?
A taxable benefit is a payment from an employer to an employee that is considered a positive benefit and can be in the form of cash or another type of payment. A number of common benefits in Canada are actually taxable benefits and must be reported when an individual files his personal income taxes.
Employer Responsibilities
If an employer provides benefits or allowances to staff or individuals who hold an office in his company, he must take the following steps.
- First, he must determine if the benefit meets the definition of a taxable benefit and then calculate the value of the benefit and payroll deductions.
- If applicable, he must file an information return.
- The employee is considered to have received a benefit if the employer paid or provided something that is personal in nature to the employee or to a person who does not deal at arm’s length with the employee, such as the employee’s spouse, child or sibling.
- The benefit may be paid to the employee in cash, such as a meal allowance or reimbursement of personal cellphone charges, or provided in a manner other than cash — referred to as a non-cash benefit — such as a parking space or gift.
Once it is determined that a benefit is taxable, calculate the value of the specific benefit.
The value of a benefit is generally referred to as its fair market value. This FMV is the price obtained in an open market between two individuals dealing at arm’s length. The cost for the particular property, good or service may be used if it reflects the FMV of the item or service. Supporting documentation may be needed for the value of the benefit assigned.
The value of a benefit or allowance may have to be included in an employee’s income depending on the type of benefit or allowance and the reason it was given. Once the value of the benefit, including any taxes that may apply, is determined, add this amount to the employee’s income for each pay period or when the benefit is received. This gives the total amount of income subject to payroll deductions. The employer then withholds deductions from the employee’s total pay in the pay period in the normal manner. The deductions withheld, especially the employment insurance premiums, depend on whether the benefit provided is cash or non-cash.
Common Taxable Benefits
Some common benefits often considered taxable include:
- tips
- boarding, lodging, rent-free or low-rent housing
- travel expenses for personal travel
- personal use of an employer’s automobile
- gifts over $500 per year
- use of vacation property owned by the company
- holiday trips
- prizes and awards
- life insurance premiums
- costs of employer-paid courses for personal interest not related to work
Others include reimbursement for the cost of tools used in employment, loans to employees, tax equalization payments to relocate employees to offset higher taxes, income tax preparation fees and scholarships provided to children.
This is not an exhaustive list, but these benefits are considered common benefits in Canada.
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