Fringe Benefit Tax Rules For Canadian Employers

The sheer complexity of Canadian tax laws can make compliance a challenge. Canadian employers, therefore, must carefully navigate fringe benefit tax rules to ensure full compliance with those tax laws. With help, you can chart a course through even the most complex tax issues and diligently leverage tax laws to your advantage while improving your company’s employee retention rate using fringe benefits. To learn more, consider contacting an experienced tax lawyer at Jeremy Scott Law by calling (902) 403-7201 to schedule a consultation.  

What Is a Taxable Benefit?

In Canada, taxable benefits refer to the benefits a business provides to its employees. These benefits are provided in addition to the employee’s regular wages and can be given in the following forms:

• Cash—physical currency or cheques
• Near-cash—assets that can be converted into cash, such as a securities, stocks, gold nuggets, or gift certificates
• Non-cash—any type of in-kind benefit that is not direct money, such as a company vehicle, gym membership, childcare, or medical insurance plan

For many Canadian workers, the offer of employment benefits can be a critical deciding factor for selecting, or leaving, a job. Offering some form of employee perks on top of base salary can help companies to remain competitive in today’s job market, giving them an edge in attracting and retaining top talent. However, employers who offer these additional benefits are then required to exercise due diligence concerning the applicable legal obligations, including fringe benefit tax and payroll deductions.

What Is the Difference Between Mandatory Benefits and Fringe Benefits?

The benefits that employers offer to their workers can be divided into two major categories: mandatory benefits and fringe (supplementary) benefits. Mandatory benefits are those required by federal labour standards, according to the Government of Canada, such as the Canada Pension Plan, sick time and paid time off, and employment insurance.

Alternatively, fringe benefits are additional perks that an employer can choose to offer. Benefits in this category are not legally required and commonly include supplementary medical insurance, retirement plans, tuition assistance, and profit-sharing plans. Employers are increasingly using fringe benefits to entice new talent to join their teams, minimize turnover, and encourage employees to create a healthy work-life balance.

Are Fringe Benefits Taxable in Canada?

Navigating employment law and corresponding benefits packages can be complicated and, if handled poorly, can result in legal issues and avoidable expenses. According to the Canadian Revenue Agency, if an employee gains an “economic advantage that can be measured in money,” and is the primary beneficiary of the advantage, then the benefit is considered taxable. Some of the most common examples of taxable fringe benefits include:

• Public transportation passes
• Housing or utilities
• Use of a company vehicle
• Premium payments for some types of insurance
• Gym memberships
• Securities options
• Tool reimbursement
• Educational assistance

The primary distinguishing factor of taxable benefits is that they are designated for personal use. In other words, the benefit received is generally unrelated to the employee’s job. Taxable fringe benefits may be granted to the employee exclusively or extended to the employee’s family members; in either case the benefits will be subject to the worker’s income tax.

What Are Some Common Non-Taxable Fringe Benefits?

Non-taxable benefits are not subject to the employee’s income tax, meaning that the employee will not need to pay fringe benefit tax. Some of the most common non-taxable fringe benefits offered to employees include:

• Company cell phones and computers
• Education related to the employee’s current role and professional development
• Reimbursements for gas money
• Premium payments for certain private insurance plans

Do Employers Have To Pay Taxes on Fringe Benefits?

Based on Section 6 of the Income Tax Act, the benefits an employer provides to employees are taxable unless otherwise excluded in the Act. If you provide taxable fringe benefits to employees, the following four steps can help you to understand your tax obligations:

1. Identify whether the benefit is taxable or non-taxable
2. Calculate the value of the taxable benefit
3. Determine the required payroll deductions
4. File an information return

Fair Market Value and Taxes Due

After identifying whether a benefit is taxable, employers will need to calculate the fair market value of the benefit. Generally, this is considered either the amount that the product or service is worth on the open market or the amount that the employee would have paid for the benefit if it had not been provided. When calculating the value of the benefit, according to the Canada Revenue Agency (CRA), employers may need to account for the Goods and Services Tax and Harmonized Sales Tax (GST/HST) and the Provincial Sales Tax (PST) that may be payable if the company is not exempt. The CRA provides a helpful benefits chart for assessing deductions.

Payroll Deductions and Reporting

After calculating the value of any taxable fringe benefits, the employer must determine payroll deductions by adding the amount to the employee’s income for a specific pay period, or when the benefit is received/used. This will provide the total amount of income for determining payroll deductions. Finally, employers must report the value of the taxable benefit on the T4 slip for the employee at the end of the calendar year. A knowledgeable tax lawyer from Jeremy Scott Law may be available to help ensure compliance with these requirements.

What Taxes Do Employers Pay for Employees in Canada?

In Canada, employers are responsible for paying mandatory taxes and contributions, including the pension fund and employment insurance. Employers may also be required to pay into provincial and territorial initiatives, such as healthcare and workers’ compensation. Moreover, employers in Canada are obligated to withhold and remit income taxes on workers’ gross earnings.

Are Employer-Paid Health Benefits Taxable in Canada?

If an employer pays the premium for certain types of private health services plans, such as medical or dental plans, on employees’ behalf, there is no taxable benefit for the workers. This non-taxable categorization applies to all private health services plans for which the employee could count premiums as a deduction on their individual income taxes if paying themselves.

Contact a Tax Lawyer for Help Navigating Fringe Benefit Tax Rules

Canadian employers need to meet their legal responsibilities and tax obligations, though they can be difficult to fully understand. Even the most minor missteps in navigating Canadian tax law can have a substantial impact on a company’s bottom line and on its right to continue to do business in Canada. Canadian employers, if you are ready to navigate fringe benefit tax rules and regulations and leverage strategies to maximize tax benefits and bolster your company’s fringe benefits package, consider contacting an experienced tax lawyer at Jeremy Scott Law by calling (902) 403-7201 today.