Do you give your employee a benefit, an allowance, or an expense reimbursement?
Your employee has received a benefit if you pay for or give something that is personal in nature:
- directly to your employee
- to a person who does not deal at arm’s length with the employee (such as the employee’s spouse, child, or sibling)
A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employee’s personal expense.
An allowance or an advance is any periodic or lump-sum amount that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having them support the expenses. An allowance or advance is:
- usually an arbitrary amount that is predetermined without using the actual cost
- usually for a specific purpose
- used as the employee chooses, since the employee does not provide receipts
An allowance can be calculated based on distance, time or something else, such as a motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.
A reimbursement is an amount you pay to your employee to repay expenses he or she had while carrying out the duties of employment. The employee has to keep proper records (detailed receipts) to support the expenses and give them to you.
What are your responsibilities?
If you provide benefits to your employees, you always have to go through the same steps. If a step does not apply to you, skip it and go on to the next step:
- determine if the benefit is taxable
- calculate the value of the benefit
- calculate payroll deductions
- file an information return
In this guide, “employee” includes an “individual who holds an office,” unless otherwise noted.
Determine if the benefit is taxable
Your first step is to determine whether the benefit you provide to your employee is taxable and has to be included in their employment income when the benefit is received or enjoyed.
Whether or not a benefit is taxable depends on whether an employee or officer receives an economic advantage that can be measured in money, and whether that individual is the primary beneficiary of the benefit.
For more information on the term primary beneficiary, see paragraphs 2.14 and 2.23 to 2.25 of Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment. For some common examples of taxable benefits, see Chapters 2 to 4 of Guide T4130, Employers’ Guide Taxable Benefits and Allowances.
The benefit may be paid in cash (such as a meal allowance or reimbursement of personal cellular phone charges), or provided in a manner other than cash, such as a parking space or a gift certificate. For more information and examples, go to CPP/EI Explained and choose “Pensionable and Insurable Earnings”.
The manner in which you pay or provide the benefit to your employee will affect the payroll deductions you have to withhold.
Types of benefits and allowances
To find out if benefits and allowances are taxable and how they are declared on T4 or T4A slips, see the Benefits and allowances alphabetical index.
Calculate the value of the benefit
Once you determine that the benefit is taxable, you need to calculate the value of the specific benefit.
The value of a benefit is generally its fair market value (FMV). This is the price that can be obtained in an open market between two individuals dealing at arm's length.
The cost to you for the particular property, good, or service may be used if it reflects the FMV of the item or service.
You must be able to support the value if you are asked.
Goods and services tax/harmonized sales tax (GST/HST) and provincial sales tax (PST)
When you calculate the value of the taxable benefit you provide to an employee, you may have to include:
the GST/HST payable by you
the PST that would have been payable if you were not exempt from paying the tax because of the type of employer you are or the nature of the use of the property or service
Use the Benefits chart, to find out if you should include GST/HST in the value of the benefit. Some benefits have further information about GST/HST in the topic specific section.
The amount of the GST/HST you include in the value of the taxable benefits is calculated on the gross amount of the benefits, before any other taxes and before you subtract any amounts the employee reimbursed you for those benefits.
You do not have to include the GST/HST for:
cash remuneration (such as salary, wages, and allowances)
a taxable benefit that is an exempt supply or a zero‑rated supply as defined in the Excise Tax Act
For more information on exempt or zero‑rated supplies, go to GST/HST for business or see Guide RC4022, General Information for GST/HST Registrants.
If you are a GST/HST registrant, you may have to remit the GST/HST for the taxable benefits you provide to your employees. For more information, go to Remitting GST/HST on employee benefits or see Chapter 5 of Guide T4130, Employers’ Guide Taxable Benefits and Allowances.
The GST/HST rates used in this guide are based on the current rates set under the Excise Tax Act and its regulations for taxable benefits provided in the 2019 tax year.
Forms and publications
- Guide T4130, Employers' Guide – Taxable Benefits and Allowances
- Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment
- Guide T4001, Employers' Guide – Payroll Deductions and Remittances
- Guide RC4120, Employers' Guide – Filing the T4 Slip and Summary
- Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary
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