Taxable Benefits in Canada
Taxable benefits are benefits that are added to the total amount of an employee’s taxable income on their T4 slip by the employer. They are provided as perks to employees, like allowances or reimbursement on products, memberships, or services that they would likely have paid for themselves, like gym memberships or child care.
Even though the employee has to pay taxes on these services at the end of the year, they still save money overall, as the taxes are less than the market value of these services and perks.
This article will explore the difference between taxable vs. non-taxable benefits, as well as how to calculate their value.
- Taxable benefits are payments or allowances for services, memberships, or products employees can take advantage of that are added to their taxable income during tax time.
- Benefits that are not taxable are perks paid for by the company that does not get taxed at the end of the tax year.
- See the CRA taxable benefits chart for help determining what is and is not taxable.
- What Are Taxable Benefits?
- What Are Non-Taxable Benefits?
- How to Determine if a Benefit is Taxable
- Calculating the Value of a Taxable Benefit
- Payroll Deduction
- Should You Offer Taxable Benefits to Your Employees?
- Streamline Taxable Benefits with FreshBooks
- Frequently Asked Questions
What Are Taxable Benefits?
Taxable benefits are cash or non-cash allowances or reimbursements given by a company for services, membership fees, products, and items that an employee would normally pay for themselves.
The fair market value (FMV) of these perks is added to the employee’s taxable income amount at the end of the year on their T4, in Box 14 and under Code 40, and more taxes are taken out of the employee’s pay every pay period.
While an employee has to pay taxes on these perks, they are still considered valuable, as the amount of taxes paid will cost them less out-of-pocket than directly paying for the goods or services would.
One of the most common types of taxable benefits (Canada) is called an “allowance” or “advance.” This is what it is called when an employer provides funding periodically, or in a lump sum, for an employee to pay for specific upcoming expenses. This ensures that the employee does not need to cover the costs out of their own pocket.
Reimbursement is another common type of taxable benefit, meaning any qualifying items that are paid for by the employee and reimbursed by the corporation or employer at market value must be added to their taxable income at the end of the year.
The employee must provide receipts and keep proper records, giving them to the employer for reimbursement.
3. Examples of Taxable Benefits
The following are some of the taxable benefits examples that are commonly provided by employers in Canada:
- Transit passes (bus or train passes)
- Group insurance premiums that are paid by the employer
- Rent-free or low-rent housing, and subsidized lodging or boarding
- Reimbursement for the cost of an employee’s personal cell phone costs
- Child care, if provided at and managed by the place of business, is offered to all employees, and is not available to the general public
- The use of a company car for non-work purposes
- Medical expenses paid for by the company
- Gym memberships subsidized by the employer
- Employer-provided parking, unless the employee has a disability
- RRSP contributions and administration fees paid by the company
What are Non-Taxable Benefits?
These are part of a benefits package that an employer provides, for which the employee does not have to pay taxes at the end of the year. To qualify as non-taxable, these types of benefits need to have a tangible monetary value, and they must have some kind of advantage for the employer, or they must preserve the employee’s health in some way.
The more non-taxable benefits an employer can offer, the better it is in general for the employee, as these do not add money to their tax bill at the end of the year. Offering these types of perks may attract more experienced, higher-value workers to the company.
Examples of Non-Taxable Benefits
Some non-taxable benefits for employees may include:
- Disability-related employment benefits
- Meals provided for working overtime
- Counseling services, if related to an employee’s re-employment, retirement, or mental health or physical health
- Specific or general employment-related training, including first aid and language courses
- Health spending accounts (HSA), in all provinces except Quebec
- Cell phone costs when the phone is used for work purposes
- Moving expenses and relocation benefits
- Up to $500 in reimbursement for home-office set-up
- Scholarship or tuition coverage for the employee or their family members
- Reasonable educational allowances for the employee’s child
FreshBooks accounting software keeps expenses and deductions organized to ensure you have everything you need for tax preparation so you can file your taxes properly at tax time.
How to Determine If a Benefit is Taxable
Some of the most common internet searches regarding employee benefits are questions about taxes, like:
- Are employer-paid health benefits taxable in Canada?
- Are disability benefits taxable in Canada?
- Are disability benefits taxable?
- Are health benefits taxable in Canada?
- Are maternity benefits taxable?
- Are death benefits taxable in Canada?
You can tell if a benefit is taxable by determining whether it gives the employee an economic advantage and if so, are they the primary beneficiary of the benefit, or is the company?
For example, paying for a worker to learn a specific work-related computer program will benefit the company, making it a non-taxable benefit, but paying for the same worker to join a dance class in their spare time would benefit them, making it taxable.
For more help determining what are taxable benefits in Canada and what are non-taxable benefits, you can also speak to a tax professional or visit the CRA website, which is full of helpful tips and a taxable benefits chart you can refer to.
Calculating the Value of a Taxable Benefit
To calculate the value of the benefit, you must find out the fair market value (FMV) of the service, item, or membership, and then add GST/HST to the total value, for income tax purposes.
The fair market value would be the dollar amount that the employee would have to pay for the perk if they were to purchase it by themselves. The Canada Revenue Agency recommends calculating taxable benefits’ FMV by using the “highest dollar value…in an open and unrestricted market between a willing buyer and a willing seller who are knowledgeable, informed, and acting independently of each other.”
You can look at the published prices of items or services, look at similar items in an open market, or, if necessary, contact a professional for their opinion. In most cases, simply comparing prices with local shops and service providers will be enough due diligence.
Canada taxable benefits are paid or provided to the employee in:
- Cash (physical currency, direct deposit, or cheques)
- Non-Cash Benefits (stocks, securities, or gold)
- Near-Cash Benefits (the actual good or service, non-cash gifts, gift cards, awards, or a payment made directly to the provider)
The manner in which the employee is paid will determine how payroll deductions are withheld. Taxable benefits (CRA) are reported in Box 14 (Employment Income), as well as “other information,” using the code that matches the benefit received.
Should You Offer Taxable Benefits to Your Employees?
How do taxable benefits work for you, as an employer? Offering worker benefits can attract more candidates to a position, so you can bring better employees on board, while employers that offer less taxable benefits may not be able to attract employees with the same level of experience.
In some industries, employers can also offer additional benefits when they are paying below-market wages. Benefits are also a useful retention tool in many companies, keeping employees happy by offering perks like free lunches or gas for their vehicles to get them through their day a little bit happier.
Streamline Taxable Benefits with FreshBooks
Now that you have the answer to the question “how do taxable benefits work in Canada,” you can create your employee tax slips with confidence. Using accounting software like FreshBooks can make things simpler, helping you save time and keep track of receipts, employee reimbursements, and other important details.
FreshBooks simplifies tax reporting for businesses, allowing you to spend less time on tax management, and more time focusing on expanding your business. You can try FreshBooks free to see how helpful and user-friendly it can be.
Using FreshBooks accounting software will also help you make sure no tax write-offs for small businesses in Canada are missed.
FAQs About Taxable Benefits
It is the employer’s responsibility to understand the nuances of their employees’ benefits. The following are some frequently asked questions to help you learn more.
What are the common taxable benefits in Canada?
Some of the most common benefits that are taxable in Canada include personal use of a company vehicle, transit passes, gym memberships, employer-provided parking, and personal cell phone reimbursements. Employers can use FreshBooks expense tracker to track expenses and payouts, making tax calculations easier.
How do you record taxable benefits?
To record benefits that are taxable, enter the value of the taxable benefit (with GST/ HST) on the T4 in Box 14 (Employment Income), and in the “Other Information” area at the bottom of the form, using code 40, or another applicable code.
Is health and dental a taxable benefit?
No, health and dental benefits are exempt from taxation. If an employer makes contributions to a private health services plan for employees, there is no taxable benefit for the employees.
How does a taxable benefit affect net pay?
These benefits will decrease your net pay at each pay period because tax deductions on the regular pay cheque will increase as the value of the benefit is added to the total income, and payroll tax deductions will be based on this new, higher income amount. This means the employee pays higher taxes, but their salary will remain the same.
About the author
Kristen Slavin is a CPA specializing in accounting, bookkeeping, and tax services for small businesses. In addition to her 16 years experience in the accounting field, she also holds a Master’s Degree in Business Administration. In her spare time, Kristen enjoys camping, hiking, and road tripping with her husband and two children. In 2022 Kristen celebrated opening her own firm; K10 Accounting. Learn more about her services: www.k10accounting.com