Transcript - Episode 1: Introduction to taxable benefits

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Host: Hello and welcome to the inaugural episode of the Canada Revenue Agency’s payroll podcast. On the podcast, we’ll be discussing important topics related to deducting, remitting, and reporting payroll deductions. We’ll look at some of the key concepts you need to understand to ensure you’re fulfilling your responsibilities as an employer or payer. We’ll be speaking with subject matter experts from the CRA to delve into more detailed aspects of payroll and answer some of the most common questions we receive from the payroll community. At the CRA, we know that most employers want to be compliant, and our goal is to make being compliant as easy as possible by ensuring employers have the information they need. The Payroll Podcast is available on iTunes and on our website at cra.gc.ca/payroll. On today’s show, I talk to Kira Turner, a Senior Programs Officer with the CRA, to take an introductory look at taxable benefits. We’ll be discussing the key concepts you need to understand when determining whether or not a benefit is taxable. But first, what exactly is a taxable benefit?

Kira: A taxable benefit is part of an employee’s overall pay package. We’re all familiar with the fact that we go to work and we receive a paycheque, whether it’s directly deposited, or we receive a physical cheque or we’re paid in cash. Everybody knows that’s your pay, but your pay comprises of more than just that cash that you receive. Often employers will provide various benefits. These are items other than cash usually, things like your parking spot, or your employer, depending on the sort of job you do, may provide you with a car, or if your employer gives you a Christmas gift, that could in certain circumstances be a taxable benefit. Certain types of your insurance your employer provides could also be taxable benefits to you. A taxable benefit is an economic advantage. It’s something that usually, if you wanted it, you would have to pay for yourself, but because your employer provides it for you, you do not have to pay for it yourself out of pocket and therefore you have an economic advantage over employees who don’t receive the same benefit, whether they’re employees within your organization or just employees generally in the world.

Host: Is there a specific piece of legislation that says these things become taxable?

Kira: Yes there is, it’s called the Income Tax Act, and the taxation of employment income flows from two particular sections. Section 5, which includes “in an individual’s income for the year, salary wages and other remuneration.” Other remuneration is the key for taxable benefits. Salary and wages are those cash earnings, your paycheque, but other remuneration then flows through to Section 6. Section 6 says, roughly, I’m not going to say this is an exact quote, but it basically says “there shall be included is computing an individual’s income from office or employment, the value of all benefits received by virtue of office or employment.

Host: Obviously this is a very important concept for employers to understand. Are all benefits taxable? How can an employer know whether a certain benefit they provide should be taxed?

Kira: The starting point is that all benefits are taxable. The wording of the legislation is incredibly broad: “the value of all benefits of any kind whatever received by virtue of office or employment.” So if you’re wondering if a benefit is taxable, your starting point is yes, and then look for something that would make it not taxable. Section 6 starts with the general taxability of benefits but then it moves on to exclude certain benefits legislatively. For example, if your employer provides a private health services plan, that would be your extended medical and your dental, things of that nature, your drug plan. That is legislatively carved out as not taxable. Another example is disability related employment benefits. If you provide a benefit specifically related to helping an employee who has a significant disability access the workplace, that would be excluded from taxability. For example, a parking spot for somebody who has a severe mobility impairment.

Host: I’ve looked a little bit at the Income Tax Act, I have very limited experience with it. It can be very complex, very difficult to understand for someone who isn’t a legal expert. Do we have a resource that an employer can use? Let’s say they’re providing a specific benefit and they don’t know if there’s something that would exclude that from being taxable, what can they do? Is there a Guide or something that we provide for that?

Kira: There is. The CRA publishes annually the T4130 - Employers Guide - Taxable Benefits and Allowances. This guide addresses mostly CRA’s administrative policies. There is detailed description of automobile and motor vehicle benefits which are very prescribed in the legislation, but in addition to the legislated exclusions, the CRA has over time, through consideration and court precedent, established a number of administrative positions that allows certain benefits to be considered tax-free in certain circumstances.

Host: Ok, so the T4130 would go into detail about some of these benefits and break it down in a way that’s easier to understand, rather than reading the Income Tax Act.

Kira: The T4130 - Employers Guide - Taxable Benefits and Allowances, explains our taxable benefit policies. It is mostly focused on policies that are not enshrined in the legislation, that soften the legislation, although there are some discussions, such as automobiles or stock options or security options that are more an explanation of very complicated concepts from the legislation itself.

Host: Does the guide cover every benefit that can be provided?

Kira: No, because any personal item, sky’s the limit, can be a taxable benefit so it’s not possible to cover every possible thing an employer may decide to provide to an employee. We could try but the guide would be longer than the Income Tax Act and I don’t think that’s what anyone wants. What we do try to do in this guide is talk about the most commonly provided benefits, the things that you’re more likely to encounter. The way I like to put it is that we have to write the guide for the horses not the zebras.

Host: What would you do from an employer perspective if you look in the guide and the benefit you’re providing is not covered there? What can you do if you need more information?

Kira: If you need more information, you can always call the CRA’s Business Enquiries line, they’re an excellent resource for providing clarification. If you learn about the underlying concepts that govern why benefits are taxable and how we decide if they’re taxable, it could be something that you’re able to figure out yourself.

Host: After the break, we’ll take a closer look at the underlying concepts Kira mentioned, stay with us.

Cut-away #1 - Mailing Lists: The Canada Revenue Agency provides a free electronic service that notifies you of new information related to payroll. If you subscribe, you will be notified of any webinars, podcasts, or other payroll related information. To subscribe, visit us at cra.gc.ca/lists.

Cut-away #2 - T4127: Are you a payroll software provider or a company that develops its own in‑house payroll solution? Guide T4127, Payroll Deductions Formulas for Computer Programs, has the formulas you need to determine federal, provincial, and territorial income taxes, Canada Pension Plan contributions, and employment insurance premium deductions. The formulas also let you calculate payroll deductions for special cases, such as commission, pension income, bonuses, and retroactive pay increases. Download our easy-to-use guide from our webpage at cra.gc.ca/payroll.

Host: When determining if a benefit is taxable, there are three questions an employer needs to ask themselves: Is the employee receiving an economic advantage? Is that economic advantage measurable in monetary terms? And who is the primary beneficiary, or in other words, who benefits more, the employer or the employee? I asked Kira to break down each of these concepts for us.

Kira: It comes down to, is the employee further ahead at the end of the day than when they started the day. If you provide a benefit to an employee throughout that day, are they further ahead at the end? Generally speaking, a taxable benefit is a personal item or a personal service that is provided to the employee by the employer, something that if the employer didn’t provide it and the employee wanted it, the employee would have to pay for it out of pocket, and therefore when the employer provides it, the employee receives an economic advantage over other employees who do not receive that same benefit. One example I like to use to really illustrate this point is parking. You’ll find that it’s a benefit I talk a lot about because it generates a lot of questions and it’s very interesting to Canadians as a whole because we’re such a large country and so many of us drive. It’s well established that costs associated with commuting to and from work are personal in nature. Your employer doesn’t buy your car for you, usually, your employer usually doesn’t provide you with gas, usually doesn’t pay for the maintenance on your car. All those things, most people do understand that’s personal in nature. But where you park your car, that’s also part of the cost of getting to or from work and if you work in an area, very often these areas are downtown cores, where parking is at a premium, there are commercial parking lots. Some employers have the ability to provide their employees parking, some do not. An employee who chooses to drive in that situation either has to have an employer who pays for their parking, or provides them with parking, or has to pay for parking out of pocket. In that situation, an employee who has to pay for parking out of pocket in some large cities in Canada could end up paying, $3000, $4000, $5000 a year to park their car at or near work, whereas an employee who has free parking provided to them pays zero.

Host: So the employees that are getting that free parking have an advantage over the ones that aren’t.

Kira: Yes they have an economic advantage. They’ve been placed further ahead rather than restored to their previous state. There’s a difference between a benefit and a reimbursement. Sometimes in the course of performing your duties, you may actually pay out of pocket for certain expenses. For example, if you are on a business trip, travelling, you have to eat and you may pay out of pocket for your meals and submit a receipt to your employer and receive a reimbursement. In that case, the only reason you were eating out is because you were out of town performing your employer’s business. You would not have incurred those expenses but for the fact you were carrying out your employer’s business. In reimbursing you, your employer is merely returning you to your previous state as opposed to advantaging you, putting you ahead of where you were before.

Host: One thing you mentioned as well, in terms of an economic advantage, it does need to be measurable in monetary terms. Could you expand and talk a little bit about that?

Kira: Tax ultimately comes down to a numbers game. How much was the income, and the tax is generally speaking a percentage of that. Deductions are based on formulas but it all comes down to numbers. If the value of the benefit can’t be measured or quantified, you don’t know what number to put as income and what number to deduct as tax. There has to be a way to measure the value of that benefit. In general, the preferred method and this is also well-established via court precedent, CRA’s preferred method for determining the value of a taxable benefit is to consider the fair market value. The fair market value is defined as the highest price that can be obtained in an open market between two parties dealing at arm’s length. We prefer fair market value because it’s an objective measure. Some people will try to argue that as an employer, it doesn’t me anything to provide that benefit or the cost is minimal, therefore it has no value. It’s not the cost to the employer or the effort the employer goes to, it’s the value to the employee. The value to the employee is what that employee would have to pay for that same item or service or good if the employer didn’t provide it.

Host: You mentioned that fair market value is the price that can be obtained in an open market. What can an employer do if they’re having trouble finding out what that value should be? What advice can we give them as far as determining that?

Kira: It depends based on the benefit. For something like parking that we’ve already mentioned, look at the cost of commercial parking in the area. If it’s a good or a service, doing some quick internet research, you’ll get webpages that will say I’ll sell it to you for this and this and this and that provides a picture of what, in an open market, items of that nature, goods of that nature are going for.

Host: It’s up to the employer then, to do that research, find out what the value should be.

Kira: It is the employer’s responsibility to accurately reflect the employee’s income and this does include determining the fair market value of benefits that are given. In some cases, the cost to the employer could actually be representative of fair market value, but you can’t assume that it is representative of fair market value.

Host: Should employers be keeping records to justify the value they’ve come up with?

Kira: Absolutely. Records as a whole, throughout all of payroll, not just taxable benefits, are key. As an employer, should you ever come up for a compliance review, having complete and detailed records will make the process much easier for you. Employers and taxpayers in general are actually legislatively required to maintain books and records. CRA doesn’t necessarily dictate the exact form that they take, the employer can make those decisions. Where taxable benefits are concerned, employers should detail their thought process, what they considered, why they made the decision something was taxable or why they made the decision something was not taxable.

Host: We’ve talked about the value to an employee, and an employee being further ahead, and that being an important factor in whether or not a benefit is taxable. How does the benefit to the employer come into that, how is that a factor in all of this?

Kira: Anytime an employer provides a benefit they do so because it suits them to do so, because they see an advantage to them in doing it. They don’t do it out of kindness or altruism, they do it because they see an advantage to them. Those advantages can be things like attracting and retaining employees, increasing morale. For certain health-related benefits such as insurance or dental plans, that kind of thing, it’s to the employer’s benefit to have a healthier workforce. Regular dental care and healthcare is helpful to having a healthier workforce so there’s always a benefit to the employer and the question comes down to who benefits more. A good way to consider this is, we tend to consider that the employer is the primary beneficiary when the item provided to the employee is required for the employee to do their duties of employment. Returning to my favourite benefit example, parking. For parking, in general, costs associated with commuting to and from work, including parking, are personal in nature. But what if the nature of jour job means you actually need to have access to a car throughout the day? Perhaps you’re a Regional Manager for a group of stores in a city and you have to travel throughout the day from store to store to store. In that case, you need to have a vehicle to do your duties. Travelling between home and work is still personal in nature, but we would allow that if you regularly require a vehicle to do your duties, that the parking is not because if you need that car you also need somewhere to park it. Where the employee needs the good or service in order to perform their duties of employment we tend to consider the employer to be the primary beneficiary. Where the item is purely personal in nature, the employee does not need it to do their duties, then we would consider the employee to be the primary beneficiary. We don’t require or allow any percentages. We don’t say it’s 55% employer benefit and 45% employee benefit, it’s just once you reach past 50% for one or the other, all of the benefit accrues to that person and any ancillary benefit is ignored.

Host: Thank you for listening to the CRA’s payroll podcast. Today’s episode was the first installment in a series on taxable benefits. Later episodes in the series will focus on some of the more complex taxable benefits employees receive. If you have any questions about the show, if you’d like to give feedback, or if you’d like to request a topic for a future episode, you can email us at podcast@cra-arc.gc.ca. We’d love to hear from you.