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Taxable benefits and allowances

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Employment income is not only what appears on a pay cheque. An employer who provides a benefit, pays an allowance, or reimburses a personal expense has often provided employment income, and that income generally carries the same withholding, remitting and reporting obligations as salary. This is the area employers most reliably overlook, because the amounts do not feel like pay and no money moves through payroll when the benefit is given. It is also where the rules are most granular: whether something is taxable, whether it is subject to CPP, whether it is subject to EI, and how it is valued are four separate questions with four separate answers, and they vary by benefit type.

How to work through this tutorial

This works from the principle down to the four questions: 1. Understand why a benefit is employment income at all. 2. Learn the distinction between a benefit, an allowance and a reimbursement. 3. Learn the four questions each benefit raises, and why they have different answers. 4. Learn the ones employers most often miss. 5. Understand how a benefit is valued, and the GST/HST component. 6. Understand when the amount is reported and how it reaches the T4. 7. Work through an example of a benefit that was never put through payroll. 8. Check your work against the common errors. 9. Verify every specific against CRA's published guidance before relying on it.

Why a benefit is income

The principle is that an employee is taxed on what they receive by virtue of their employment, whether it arrives as cash or as something else of value. If that were not so, an employer could pay a smaller salary and provide the difference as goods, services or paid personal expenses, and the employee would receive the same economic benefit untaxed. The rule closes that gap, and understanding it as a gap-closing rule makes the specific cases much easier to reason about. The practical consequence for an employer is uncomfortable: providing a benefit creates a withholding obligation even though no cash passed through payroll. The employer has to gross the benefit into the employee's pay for deduction purposes and withhold on the total, which means the deductions come out of the employee's actual cash pay. An employee who receives a valuable benefit can find their take-home pay falls, and this needs explaining before it happens rather than afterwards.

Benefit, allowance, reimbursement

Three words that employers use interchangeably and that behave differently. A **benefit** is something of value the employer provides — the use of a vehicle, a subsidised item, an employer-paid premium. An **allowance** is a set amount paid to an employee, in advance or periodically, for an expense, without the employee accounting for what they actually spent. Allowances are generally taxable, with specific exceptions where CRA's conditions are met — a reasonable per-kilometre motor vehicle allowance being the best-known. A **reimbursement** repays an employee for an amount they actually spent and substantiated. Reimbursement of a genuine business expense is generally not income; reimbursement of a personal expense generally is. The test that separates the last two is accountability: did the employee have to show what they spent? An "allowance" that requires receipts and repays actual amounts is functionally a reimbursement, and an employer's label does not decide it — which will sound familiar from the first tutorial in this line.

Four questions, four answers

For any benefit, an employer needs four answers, and it is a mistake to assume the first one settles the rest: 1. **Is it taxable?** Some benefits are excluded or have conditions under which they are not taxable. 2. **Is it subject to CPP?** Taxable benefits are generally pensionable, but there are exceptions. 3. **Is it subject to EI?** This is where benefits most often diverge — **non-cash** benefits are generally not insurable, even when they are taxable and pensionable. 4. **How is it valued, and does it include GST/HST?** Some benefits are valued at fair market value, some by a prescribed formula, and the value may need to include a sales tax component. That third point is the one to hold on to: a taxable non-cash benefit typically attracts income tax and CPP but not EI. An employer who applies all three deductions to everything is over-deducting EI, and the year-end review at level 3 will find it. CRA publishes a benefits chart setting out these answers benefit by benefit. It is the right thing to point an employer at, and it is not something to reconstruct from principle on a call.

The ones employers miss

The pattern is that overlooked benefits are the ones that do not feel like compensation. **Personal use of an employer-provided vehicle** is the largest and most commonly mishandled, and it has its own prescribed calculation with more than one component. **Employer-paid parking**, where it is a benefit rather than a business necessity. **Gifts, awards and social events**, which have specific administrative rules with conditions and thresholds rather than a blanket exclusion. **Premiums paid by the employer** for certain kinds of insurance — the treatment differs sharply by type of plan, and getting it backwards is common. **Employee loans** at below-market rates, which give rise to an imputed interest benefit. **Cell phones, internet and home office equipment**, where the personal-use portion is the question. **Board, lodging and travel** provided to the employee, subject to specific exceptions for particular work locations. An employer who has never reviewed this list should be pointed at it before year end rather than after, because a benefit discovered in February is a T4 amendment and a benefit discovered in September is a correction that can still be made cleanly.

Valuation, GST/HST, and getting it onto the T4

The general rule is fair market value — what the employee would have paid for the thing — but a number of benefits have prescribed calculations instead, and where one exists it governs. Many taxable benefits must be valued including the GST/HST that would apply, and the employer has a corresponding remittance obligation in respect of that component. This is a genuine cross-over into the GST/HST regime and is frequently missed by employers who have handled the income tax side correctly. On timing: a benefit is generally included in income when it is provided or enjoyed, and the withholding follows in the pay period in which the employer accounts for it. A benefit accumulated all year and dealt with only at year end has been under-withheld all year. On reporting: taxable benefits are included in the employee's total employment income on the T4 and are also reported separately in the appropriate boxes, so CRA can see the composition. The specific box depends on the benefit, and the box numbers are exactly the kind of detail to take from the guide rather than from memory.

A worked example: the car nobody put through payroll

Teaching example. The figures below are invented to show the method. They are not CRA figures, and no amount here should be used for a real taxpayer.

The figures in this example are invented for teaching. They are not real prescribed rates or values, and nothing here should be used to check a real calculation. Suppose Marguerite's company provides her with a vehicle. She uses it for client visits and also drives it home, on weekends, and on holiday. The company pays for the vehicle, the insurance and the fuel. No money passes through payroll in respect of the car, so for two years nobody treats it as pay. It is a taxable benefit, and a substantial one. Suppose, on the prescribed calculation, it comes to $7,400 a year. That means each year Marguerite should have had an extra $7,400 of employment income for withholding purposes. Income tax should have been withheld on it. CPP should have been withheld on it, with the employer's matching share. EI generally should not, because the benefit is non-cash — which is exactly the divergence described above. Suppose the company discovers this in year three. It faces amended T4s for two closed years, under-remitted amounts with penalties and interest, and its own CPP share on income it did not know it was providing. Marguerite faces something worse in one respect: her T4s for two years were understated, so she has under-reported income and will owe tax on it, having never seen a dollar of cash she could have set aside. The lesson: benefits do not announce themselves through the bank account. When an employer describes what they provide their staff, listen for the things that never touch payroll.

Common errors

Assuming that because no cash moved, no payroll obligation arose. Assuming a taxable benefit is automatically subject to all three deductions. Non-cash benefits are generally not insurable. Treating "allowance" and "reimbursement" as labels rather than as descriptions of whether the employee accounted for actual spending. Assuming a per-kilometre allowance is automatically non-taxable. There are conditions. Reconstructing the treatment of a specific benefit from principle. CRA publishes a chart; use it. Overlooking the GST/HST component in the value of a benefit. Handling benefits once at year end, having under-withheld all year. Quoting T4 box numbers for benefits from memory. Quoting the gift and award administrative thresholds from memory. They have conditions and they change. Getting the insurance treatment backwards. It differs sharply by type of plan and is worth checking every time. Forgetting to warn an employee that a new benefit will reduce their cash take-home pay.

What to verify this tutorial against

This was drafted without a source document. Benefit treatment is granular, published benefit by benefit, and is the last thing to answer from memory. CRA's employers' guide to taxable benefits and allowances is the primary reference for everything in this tutorial. Confirm its current number and title. CRA's benefits and allowances chart sets out, for each benefit, whether it is taxable, whether it is pensionable, whether it is insurable, whether GST/HST applies, and which T4 box it goes in. This chart answers the four questions in this tutorial directly and should be the standing answer to a benefits enquiry. CRA's guidance on automobile and motor vehicle benefits carries the prescribed calculations, including the separate components and the per-kilometre rates, all of which are set annually. CRA's administrative policy on gifts, awards and long-service awards sets out the conditions and thresholds referred to here. CRA's guidance on employee loans and imputed interest covers the prescribed rate, which is set quarterly. CRA's guidance on the GST/HST implications of employee benefits covers the remittance obligation on the tax component. CRA's employers' guide to filing the T4 is the reference for which box each benefit is reported in.

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