What is considered a taxable employee benefit?

Anything you give an employee in addition to their salary, intended for their personal use, is considered a taxable benefit. There are nuances to this, however, and not everything you give an employee that they end up using in their personal lives is explicitly considered a taxable benefit. Taxable benefits are paid for by the employer on the employee’s behalf, and given in the form of cash, near-cash (such as a gift card or prepaid credit card) or non-cash (goods and services such as a vehicle or lodging). Benefits are a vital part of attracting and retaining top talent, so aim to offer a diverse mix of these as part of an ongoing talent acquisition strategy.

Common examples of taxable benefits include:

• personal use of a company car by an employee
• employer-provided free lodging and meals
• employer-provided housing and utilities for an employee’s permanent residence
• non-taxable counselling services like financial, mental health or retirement planning
• health, accident or life insurance premiums
• gifts, awards and prizes exceeding $500 annually

These benefits are subject to income tax and must be reported on the employee’s T4 slip. To do this properly, first calculate the value of the taxable benefit. You can do this by determining the benefit’s Fair Market Value (FMV), which is the price the benefit would fetch on the open market in an informed and honest transaction.

Depending on the province in which you are based, you need to also consider sales taxes as part of Fair Market Value. In the territories and Alberta, you only need to factor in 5% GST, since there is no sales tax in these provinces. In every other province, you need to account for 5% GST as well as the respective province’s provincial sales tax: 6% in Saskatchewan, 7% in Manitoba and British Columbia, 8% in Ontario, 9.975% in Quebec and 10% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island.

Allowances and reimbursements

As an employer, you have two options when it comes to giving your employees taxable benefits: through allowances and reimbursements. The method you choose will depend on the nature of the benefit being offered as well as your business circumstances.

You give an employee an allowance when you give them a lump sum of money with a pre-determined use in mind and forbid the employee from spending the money on anything else. Once you determine and codify a lump sum of money in an employee’s contract, it becomes a taxable benefit, and you can either disburse it all at once or over a period of time (such as bi-weekly or monthly). Allowances are determined in advance and agreed on by the employee.

For example, an employer might provide a car allowance to cover the costs associated with using a personal vehicle for business purposes. This allowance could be allocated monthly to offset fuel, maintenance and insurance expenses incurred by the employee while performing their job duties. Anything above and beyond work-related duties the employee chooses to use the vehicle for would not be covered by the allowance.

Reimbursements are simply when an employer reimburses an employee for incurring expenses. Unlike allowances, reimbursements require employees to first pay for the expense out of pocket and then submit valid proof of payment to their employer. Once verified, the employer reimburses the employee for the amount spent, which ensures that the reimbursement is not taxed as income.

An example of a reimbursement would be if an employee travels for business and pays for accommodation and meals. They would submit receipts to you for reimbursement of these expenses. You would then reimburse the employee based on the documented costs, maintaining a clear record of the expenditure.

Managing allowances and reimbursements requires clear policies and documentation. It is a good idea to establish guidelines for how allowances are calculated and distributed, as well as procedures for employees to submit reimbursement claims with supporting documentation. Many payroll and accounting software systems offer these services. It isn’t possible to give a general answer on which approach is better, since it depends largely on how you operate your business. Factors such as budgeting preferences, control over expenses and the nature of the benefit being provided will determine whether you offer your employees allowances or reimbursements. Allowances provide predictability in budgeting, while reimbursements offer precise reimbursement of actual expenses incurred.

How to start offering taxable employee benefits

To begin offering taxable benefits to your employees, start by developing comprehensive policies and guidelines. Start by defining eligibility criteria for each benefit, such as job roles and seniority levels. In many cases, not everyone will qualify for all benefits you offer. You should try to establish methods for calculating the taxable value of benefits, including considerations like the Fair Market Value of each benefit. Next, you’ll need to determine how often you’ll disburse the benefits in question, whether it’s through reimbursements or an allowance given all at once as a lump sum, monthly, annually or otherwise. If you choose to go the reimbursement route, you should outline documentation requirements, such as receipts and usage logs, far in advance and get your employees to sign an agreement.

After establishing these policies, communicate openly with your employees about the available benefits. Clearly explain any conditions or limitations of each benefit, such as how they are calculated and their tax implications. Having effective communication with your employees in general is a good policy, but it is especially helpful when dealing with complicated matters such as benefits and taxes. Finally, you should figure out how to actually administer the benefits. You will need to integrate benefit calculations into your payroll system and maintain precise records to comply with reporting requirements, like including taxable benefits on T4 slips.

Once your benefit administration system is in place, and benefits have been distributed, it’s crucial to monitor and review the programs regularly. This ongoing evaluation ensures compliance with tax laws and allows for adjustments as needed to maintain fairness and effectiveness. If your benefits administration team lacks experience in managing taxable benefits, provide them with adequate training and support. Educate relevant staff members responsible for administering benefits so they understand their roles and responsibilities in managing benefits accurately and ethically.

If you lack an internal team or feel uncertain about managing benefit programs independently, consider consulting with tax advisors. These professionals can offer guidance on current tax laws and regulations affecting taxable benefits. They can also assist in optimizing benefit structures to minimize tax liabilities for both your company and employees.

As you can see, there are numerous variables you need to account for when administering taxable benefits to employees. If at any point, you are unsure about your duties in this process, reach out to a tax professional.