Withholding on cash and non-cash benefits

Calculate payroll deductions

After you calculate the value of the benefit, including any taxes that may apply, add this amount to the employee's income for each pay period or when the benefit is received or enjoyed. This gives you the total amount of income from which you have to make payroll deductions. You then withhold deductions from the employee's total pay in the pay period in the normal manner. The deductions you withhold, especially the employment insurance (EI) premiums, will depend on whether the benefit you provide is cash, non-cash, or near-cash.

Note

If you provide your employee with a monthly taxable benefit, you may include a prorated value in your employee’s income in each pay period in the month.

Cash benefits

Cash benefits include such things as:

  • physical currency
  • cheques
  • direct deposit

CPP contributions

When a cash benefit is taxable, it is also pensionable. This means you have to deduct Canada Pension Plan (CPP) contributions from the employee's pay. It also means that you have to pay your employer's share of CPP to the Canada Revenue Agency (CRA).

If the employment is not pensionable under the CPP, then any taxable benefits paid in cash are not pensionable and CPP contributions should not be withheld. For more information, see "Employment, benefits, and payments from which you do not deduct CPP contributions" in Chapter 2 of Guide T4001, Employers' Guide – Payroll Deductions and Remittances.

EI premiums

When a cash benefit is taxable, it is also insurable. This means you have to deduct EI premiums from your employee's pay. It also means that you have to pay the employer's share of EI to the CRA.

If the employment is not insurable under the Employment Insurance Act, then any taxable benefits paid in cash are not insurable and EI premiums should not be withheld. For more information see "Employment, benefits, and payments from which you do not deduct EI premiums" in Chapter 3 of Guide T4001, Employers' Guide – Payroll Deductions and Remittances.

Income tax

When a cash benefit is taxable, you have to deduct income tax from the employee's total pay in the pay period.

Non-cash or near-cash benefits

A non-cash (or “in kind”) benefit is the actual good, service, or property that you give to your employee. This includes a payment you make to a third party for the particular good or service if you are responsible for the expense.

A near-cash benefit is one that functions as cash, such as a gift certificate or gift card, or something that can easily be converted to cash, such as a security, stock, or gold nugget.

For more information on near-cash benefits, go to Gifts, awards, and social events.

CPP contributions

When a non-cash or near-cash benefit is taxable, it is also pensionable. This means you have to deduct CPP contributions from the employee's pay. It also means that you have to pay the employer's share of CPP to the CRA.

Notes

Except for security options, if a non-cash taxable benefit is the only form of remuneration you provide to your employee in the year, there is no remuneration from which to withhold deductions. You do not have to withhold CPP contributions on the amount of the benefit, even if the value of the benefit is pensionable. Also, you do not have to remit your share of the CPP amounts.

Always report the value of the non-cash benefit in box 14 – Employment income and box 26 – CPP/QPP pensionable earnings of the T4 slip, even if you did not have to deduct CPP/QPP contributions.

EI premiums

A taxable non-cash or near-cash benefit is generally not insurable. Do not deduct EI premiums.

Exceptions to this rule are:

  • The value of board and lodging an employee receives during a period in which you pay the employee a salary in cash. For more information, see Board and lodging.
  • Employer-paid RRSP contributions when the employee can withdraw the amounts. For more information, see Registered retirement savings plans (RRSPs).

Income tax

When a non-cash or near-cash benefit is taxable, you have to deduct income tax from the employee's total pay in the pay period. Except for security options, if a non-cash or near-cash benefit is of such a large value that withholding the income tax will cause undue hardship, you can spread the tax you withhold over the balance of the year. We consider undue hardship to occur if the required withholding results in your employee being unable to pay reasonable expenses related to basic family needs. Basic family needs are those related to food, clothing, shelter, health, transportation, and childcare.

Note

Except for security options, if a non-cash or near-cash taxable benefit is the only form of remuneration you provide to your employee, there is no remuneration from which to withhold deductions. You do not have to withhold income tax on the amount of the benefit, even if the value of the benefit is taxable.

For more information on calculating payroll deductions, go to Payroll or see Guide T4001, Employers' Guide – Payroll Deductions and Remittances.

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