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Employment Benefits and Allowances
by Eeva Harrop, CPA, CA, MSc, TEP and Nizam Shajani, CPA, CA, MBA
A benefit is a good or service an employer gives to an employee such as the free use of a property it owns. A benefit 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.
As an employer, your payroll responsibility is:
- Determine if the benefit is taxable
- see the employer’s guide T4130 at: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4130/t4130-19e.pdf
- Specific benefits and allowances are here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/benefits-allowances-alphabetical-index.html
- 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
- See the Employer’s guide T4001 at: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4001/t4001-19e.pdf
- Use the CRA payroll deductions online calculator found here: https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/payroll-deductions-online-calculator.html
- File an information return
- 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
- Guide to completing a T4 slip is here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/completing-filing-information-returns/t4-information-employers/t4-slip/filling-t4-slip.html#bx_14
With most offices closed as a result of the COVID-19 outbreak, employees have been working from home. The question that has come up is can home office expenses be deductible to the employee?
Businesses can pay for expenses incurred by employees a few ways: pay an allowance, reimburse the expense amount and some may not pay for anything. The following highlights the tax treatment of these different options:
- An Allowance
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 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.
- No reimbursement
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
- Form T2200 is complete by the employer.
The Income Tax Act does allow an employee to deduct expenses related to a work space in a home where the taxpayer resides where the work space meets the following criteria:
- the work space is where the employee “principally” performs the office or employment duties; or
- the work space 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.
As always, the devil is in the details! The Income Tax Act provides the criteria noted above for expenses related to a work space at home to be deductible; however, there are terms that are not defined…. so this is a bit of a grey area and the CRA will likely provide further guidance before the end of the year. In the interim, let’s consider some of these terms:
Principally performs office or employment duties– The CRA interprets “principally” to mean more than 50%. During COVID-19, the question is 50% of what? The ITA does not provide additional guidance on whether this would be for example during the entire time an employee was employed by the employer in the year, or if a shorter period such as a temporary work-at-home order during COVID-19 would be considered. So could be difficult to meet the first criteria unless the office is indefinitely closed to all staff.
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. With COVID-19, work is being conducted through electronic and phone “meetings” which may force to the CRA to broaden their position. So this criteria could also be difficult to meet based on the current position.
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, this form is completed and the employer certifies that the employee meets the conditions of employment. 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.
Now the question is what is in the employment contract for this employee? The CRA considers the employment contract would note any requirement to pay for expenses. The CRA also acknowledges that an employee who works from home and does not have access to an employer’s office is required to work from home. The current situation with COVID-19 could include employees who are working from home but does still have access to the employer’s office; so does that count? The CRA is expecting more employers to complete Form T2200 for employers, and the CRA is reviewing the many issues with the Form T2200s. Given the criteria for being able to deduct employment expenses, the CRA may question the validity of the Form T2200 and employer’s may be at a higher risk of a payroll audit.
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 work space relative to size of the employee’s house/apartment.
Form T2200 Declaration of Conditions of Employment: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2200/t2200-fill-19e.pdf
Form 777 Statement of Employment Expenses: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t777/t777-19e.pdf
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. © 2020 Shajani LLP