Creating a work environment that will ensure both the retention of valued employees and the ability to attract new ones is a concern of every employer, and an attractive compensation package is a key to both. Furthermore, while an employee’s salary is the cornerstone of any compensation structure, it can sometimes be the benefits included in the position that tip the balance in favour of one employer over another. This is especially true if those benefits can be structured in a manner which minimizes the tax bite faced by the employee. This article reviews some of the more common employee benefits and the tax treatment of those benefits in the hands of the employee.
Public and private health care premiums
The availability of extended health care plans, to cover part or all of such costs as prescription eyeglasses, prescription drugs and dental and orthodontic costs, is a benefit highly valued by most employees. For that reason alone, they are provided by most employers. Fortunately, it is also a benefit which enjoys beneficial tax treatment. Specifically, contributions made to private health services plans by an employer for employees (such as medical or dental plans), does not result in a taxable benefit to those employees. However, premiums paid by an employer under provincial hospitalization or medical care insurance programs are treated as a taxable benefit, and the benefit is equal to the amount paid.
Overtime meals and travel allowances
The Canada Revenue Agency (CRA) is prepared to view such allowances as non-taxable, if they are in the Agency’s view, “reasonable”. Where an employee works three or more hours of overtime and that overtime occurs less than three times a week, a meal allowance provided to the employee will not be taxed. Similarly, where an employee works three or more hours of overtime and that overtime is occasional in nature, the CRA will not tax any travel allowance extended to the employee to cover his or her costs of getting home
Especially in industries with high transfer rates, an employer will often cover the considerable cost of moving an employee (his family and their household) to the new location. Since the move is almost always made at the behest and for the benefit of the employer, the employee is not assessed a taxable benefit for moving costs paid by the employer. The CRA provides a listing in its publications of the kinds of expenses which qualify for non-taxable benefit status. An employee who is not reimbursed for moving costs or receives only partial reimbursement can often deduct the non-reimbursed costs of moving.
In some cases where a workplace is located in an area which makes it impractical for employees to go out for lunch and return within the time limits imposed by the employer (e.g., an industrial park), an on-site dining room or cafeteria may be provided to supply meals to employees, with the cost of such meals subsidized by the employer. Once again, the CRA is prepared to treat the subsidy element of such meals as a non-taxable benefit to the employees, as long as the amount charged to the employees covers the employer’s cost of providing the meals – meaning the cost of the food, its preparation and service. Where the meals are provided at less than cost, there will be a taxable benefit to the employee equal to the difference between the employer’s cost and the amount paid by the employee.
Employers whose business involves the manufacture of consumer goods (e.g., clothing or electronics manufacturers); often make such goods available to employees of the business at a discount from the usual retail price. The CRA is prepared to view these kinds of discounts as a non-taxable employment benefit, as long as the goods are not provided at less than cost, and that the privilege of making such purchases is extended to all employees.
Employer-sponsored social events
The office Christmas party or summer picnic is an annual event in most workplaces. Where the employer pays the costs associated with the event, and all employees are included, there will be no taxable benefit if the per-employee cost (excluding any ancillary costs, such as taxi fare or overnight accommodation) is less than $100.
Gifts to employees
As a starting point, gifts or awards from an employer to an employee are a taxable benefit. However, the CRA is prepared to provide a limited exception to that rule under which the employer can provide an employee with up to two non-cash gifts each year, and up to two non-cash awards. The total value of non-cash gifts given in the course of a year must be less than $500, and the CRA applies the same valuation rule to employee awards.
If those counseling services relate to the employee’s wellness or physical or mental health, then the cost of counseling is not a taxable benefit to the employee. Examples of counseling that would qualify would include counseling for tobacco, drug or alcohol abuse, or stress management programs. In addition, where an employer provides counseling in respect of an employee’s retirement or re-employment, no taxable benefit will be assessed to the employee.
Recreational facilities and club dues
Recognizing that a healthier work force generally pays off in terms of fewer sick days and disability leaves, many employers now provide employees with either an on-site exercise facility or membership in a local fitness club. Once again, where the benefit is made available to all employees, either through the provision of in-house facility or the payment of fees at a commercial club, then there is no taxable benefit.
If an employer pays professional membership fees on behalf of employees, there will be no taxable benefit to the employee as long as the employer is the primary beneficiary of the membership.
Income maintenance/wage loss replacement plans
Where the premiums paid by an employer for such coverage for an employee are paid to a group plan, there is no taxable benefit to the employee. However, a taxable benefit will arise when the premiums are paid to a non-group or individual plan. Most often, this would be the case where coverage is sought for a senior, high-income employee whose needs cannot be met by the terms of any available group plan.
Employer-paid tuition fees
Where training or education is provided or paid for by the employer, is that no taxable benefit will arise if such training or education is related to the employee’s work and is therefore for the employer’s benefit.
Generally, employees who receive such employer paid parking are considered to have received a taxable benefit equal to the fair market value of the parking minus any portion of the cost paid by the employee. In some situations – such as employer-paid parking pass for a commercial parking facility beneath a large office tower – it is easy to determine the fair market value of the benefit. In other cases – for example, where the employer’s business operates in an industrial park where there is parking available to anyone – the determination of the value of the parking space is more problematic. Perhaps in recognition of the difficulty or impossibility of making that determination, the CRA concedes that no taxable benefit will arise in such circumstances. The CRA is also prepared to acknowledge that where there is first-come, first-served employer-provided parking, but there are fewer parking spaces than there are employees who need parking, no taxable benefit is to be assessed. Finally, employer-paid parking will not result in a taxable benefit where the employer provides parking to employees for business purposes and where employees regularly have to use their own automobiles, or automobiles supplied by the employer to perform their employment duties.
Low interest or interest-free loans
Where an employer loans funds to an employee at a favourable interest rate, the employee will have to include a taxable benefit in income, equal to the difference between interest calculated at the “prescribed rate” and the actual interest paid. The “prescribed rate” is the rate published by the CRA four times a year, which generally approximates commercial interest rates in effect at the time.
There is some leeway provided within these rules, where an employer loans money at below market rates so the employee can purchase a home. The prescribed rate used to calculate the taxable benefit to an employee who receives such a loan, is set at the time the loan is made, and is effective for the next five years.
The inclusion of benefits in an employee’s compensation package may provide the employee and his or her family with access to services that might not be obtainable individually on a cost-effective basis. As is often the case, when those benefits can be provided on a non-taxable basis, it’s a win-win situation for the employee. And, from the employer’s perspective, being able to offer an attractive compensation package which is also tax-effective can mean the retention of valued long-term employees and an edge over the competition in successfully recruiting new ones.
If you are looking to provide benefits to your employees, contact the professionals at White Kennedy LLP so that these benefits can be structured properly to ensure tax free status to your employees.