A great employee benefits package is an essential part of every job negotiation and one of the things employees consider when accepting job offers. But there could be taxes on these benefits. As an employer, you might be wondering whether you have to deduct taxes on all employee benefits and, if not all, which ones?
Employee benefits are taxable. But taxes do not apply to all benefits. Generally, all benefits that an employee receives as primary beneficiary and measurable in money will be taxable. This includes all group and non-group insurance. But it’s not all benefits measurable in cash that will be taxed. For example, gifts and awards below a certain amount will not be taxable.
Thus, it’s essential to know which benefits are taxable as an employer so you can structure your employees’ benefits. This article highlights instances where benefits are tax-free and instances where they’re not.
What are Taxable Employees Benefits?
Employee benefits are free or subsidized access to services, reimbursements, and allowances that an employer provides for employees apart from their standard wages. These benefits can be for employees and their immediate relatives or next of kin.
The taxable benefits are included when calculating the employee’s total income to be taxed. According to the Canada Revenue Agency, an employee benefit is taxable when the worker receives a benefit measurable in money, and they are the primary beneficiary of that benefit.
Instances where Employee Benefits are Taxable
Here are situations where employees’ benefits will attract tax:
When the employer pays the premium on group insurance that your employees are beneficiaries of, such premiums are taxable benefits. This includes group life insurance, accident insurance, critical illness insurance, and dependent life insurance. In Quebec, taxes apply to premiums on health insurance benefits for dental and eye care, prescription drugs, etc. But in other provinces, taxes won’t apply.
The employer’s contributions to a personal insurance plan of an employee are also taxable even if the insurance policy is for accident, health, or disability insurance. For example, where a director or key employer of the company negotiates an individual and comprehensive health insurance policy as part of their compensation plan, the premium paid by the employer for that insurance will be taxable.
If the employee pays all the premium on disability insurance, any payout received from the insurance will be considered non-taxable income. But where the employer pays part of the premiums for a group disability insurance, those premiums will count as taxable income. Any benefits received from the policy will also be taxable.
Instances Where Non-Taxable Benefits
There are no taxes imposed on the following benefits received by employees:
If an employer pays the tuition fee for employees, such fee wouldn’t be taxable as long as the training is relevant to the job. For example, if you operate a Financial Planning firm and pay an employee’s tuition to train and become a chartered accountant, the fees won’t be taxable. However, in a situation where the employer gives the employee’s child a scholarship or bursary, Canada Revenue Agency will decide whether the benefit is taxable. The employer will have to report the amount and send a Form T4A to the beneficiary.
Gifts and Awards
As parts of efforts to boost workplace morale, employers usually give awards and gifts to employees. This could be in recognition of excellent service or commemorating a momentous occasion. If such gifts are non-cash and the combined value isn’t above $500 annually, they’ll not be taxable. Such gifts must be for a special occasion such as a wedding, birthday, etc. In the case of non-cash awards that are not above $500, it must be an award for overall contribution to the workplace.
You can also give employees a non-cash anniversary or long-service award, which will be tax-free as long as the employee has worked in the company for a minimum of five years. The employee is only eligible for that award or gift once every five years. However, any performance-related bonuses and incentive awards are taxable income. In addition, the surplus over $500 of the combined value of any non-cash award or gifts in a year will also be taxable.
Some companies procure phones for their employees and provide data and voice plans. This won’t amount to a taxable benefit if the cost of the phone plan is reasonable and the employee doesn’t incur additional costs for personal use.
Pension Plans and Group Registered Retirement Savings Plan
The employer’s contributions to a registered pension plan on behalf of the employee are taxable. But there’s an exception when the contribution comes from the employee’s income. Also, where the employers contribute to a group RRSP that employees can’t withdraw until after retirement, such contributions will not be taxable.
Where the employer matches or contributes to workers’ group RRSP contributions, it’ll become a taxable benefit since it increases the employee’s income. However, if there’s a contribution room, an employee can offset the income inclusion by using the employer’s contribution. Note that employer contributions to the RRSPs or pension plan reduce the contribution room for the subsequent year.
Private Health Service Plans
This is the most notable non-taxable benefit that an employee can get. It’s usually in the form of a dental and health benefit plan that’s not covered by the government’s universal healthcare plan. However, it’ll be non-taxable if an insurance plan backs it, and 90% and above of the premiums paid are eligible for Medical Expenses Tax Credit.
Home Office Equipment
Generally, any reimbursement for home office expenses is taxable benefits. But with the COVID-19 pandemic, the CRA made some exceptions for 2020. First, it allowed a tax-free reimbursement at $2 per day for each day that an employee works from home. The maximum deduction is $400, and this amount could go towards buying home office equipment.
Knowing which benefit is taxable and which one isn’t can be tricky due to the complex tax rules. But it’s crucial that you know the basics that will answer most of your questions about taxable benefits. In addition, you can get more information from a registered and licensed brokerage. If you have more questions or want to get insurance advice or quotes, speak to the consultants at Insurance Direct Canada – one of the most trusted insurance brokers in Canada.