Providing employee benefits can be effective in retention tool, however the impact of tax on these benefits should be considered for both the deductibility to the corporation and the taxability and requirement to withhold for the employee.
A benefit is a good or service an employer gives to an employee such as the free use of a property, the use of vehicles, health care plans and paying for courses. A benefit also includes an allowance or a reimbursement of an employee’s personal expenses. Whether or not a benefit is taxable depends on if there is an economic advantage and who the primary beneficiary of the benefit is.
An allowance or an advance is any periodic or lump-sum amount paid to an employee on top of their salary to help the employee pay for anticipated expenses without having to support the expense. An allowance is generally a taxable benefit. This may be deductible to the employer, however the employee will need this reflected on the T4 issued by their employer and will have to pay tax on this benefit.
As an employer, you have the following payroll responsibilities:
- Determine if the benefit is taxable
- The CRA provides an Employer’s Guide – Taxable Benefits and Allowances to assist in this determination.
- The CRA also provides a list of Specific Benefits and Allowances with the related tax attributes.
- Determine the value of the benefits – this is generally the fair market value that would be obtained in an open market between two individual’s dealing at arm’s length.
- Calculate any payroll deductions and remit to CRA
- The CRA provides an Employers Guide to Payroll Deductions and Remittances to assist with this.
- The CRA also provides a Payroll Calculator to assist with the calculations.
- File an information return
- An employer is required to file an information return with the CRA each year detailing all remuneration paid to their employees. Benefits are reported in Box 40 on the T4. T4 must be filed by the last days of February following the end of the calendar year
- The CRA provides a Guide to completing a T4.
An allowance is generally provided to an employee without the need for the employer to provide receipts. For example, an employer pays their employees $100 per month to cover incidental expenses. The employee may or may not incur $100 of expenses however, they do not have to account for how the $100 is spent. As receipts are not required to support actual expenses, an allowance is considered taxable employment income so total amount of allowances paid in the year will be included in box 40 as a taxable benefit amount; as well, when the allowance is paid, the amount is subject to the normal payroll withholdings.
A reimbursement is when the employee provides a receipt for a business-related expense, and the employer reimburses the employee for that expense. For example, the employee purchases paper for their home printer and purchases a head set to use for business phone calls that total $100 in the month. The receipts are given to the employer, and the employee reimburses the employee for these purchases. A reimbursement of business-related expenses is not a taxable benefit to the employee. Consequently, reimbursements are not recorded on the T4 and they are not subject to payroll withholdings.
What happens when the employee incurs office expenses while working at home that are not reimbursed by the employer?
The Income Tax Act does provide limited rules that allow employees to deduct expenses. The rules are very narrow and the CRA is currently considering this question. For now, employees may want to track their expenses and keep their receipts should the CRA allow expenses incurred during this time to be deductible.
Employment Expenses – current rules
Expenses paid to earn employment income are deductible when:
- Employer requires you to pay for the expense,
- You did not receive reimbursement for the expense/or the amount is included in your income, and
- Form T2200 is complete by the employer.
The Income Tax Act does allow an employee to deduct expenses related to a workspace in a home where the taxpayer resides where the work space meets the following criteria:
- the workspace is where the employee “principally” performs the office or employment duties; or
- the workspace is used exclusively during the relevant period to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.
Principally performs office or employment duties– The CRA interprets “principally” to mean more than 50%.
Meeting Customers – are face-to-face meetings required?
The CRA’s longstanding position has been that meetings include only face-to-face encounters, and not emails, telephone class, skype, zoom, etc.
For an employee’s home office expenses to be deductible, the employer must certify that the employee met the conditions of employment (discussed above) and was required to pay for the expenses under their employment contract. Although Form T2200 does not need to be submitted to the CRA unless they ask for it, the form should be obtained before filing your return. Part B of the T2200 Form specifically asks: Did this employee’s contract require them to pay their own expenses while carrying out the duties of employment? If not, the employee is not entitled to claim employment expenses.
Deductible Employment Expenses
A signed Form T2200 does not necessarily mean that an employee can deduct home office expenses, the employee must be able to demonstrate that the requirements have been met. With the signed Form T2200, there are limited home office expenses that can be deducted which are: rent, fuel, electricity, light bulbs, cleaning materials, minor repairs and other expenses paid by the employee for the maintenance of their home. There are certain expenses that cannot be deducted (unless the employee is a commissioned sales employee) which are: mortgage interest, capital cost allowance, property taxes or insurance costs (unless the employee is some commissioned sales employee).
If an employee can claim home office expenses, the expenses are reporting on form T777 Statement of Employment Expenses of their personal income tax return for the year. Although some expenses will be fully deductible, some expenses must be apportioned based on factors such as the size of the workspace relative to size of the employee’s house/apartment.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2022 Shajani LLP.
Shajani LLP is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.