when are employee benefits taxable?

Generally, one of the largest line items on a company’s income statement is Salaries and Benefits. It’s also one of the most important.

Ideally, a company’s human resources will work effectively to improve cash flow. In reality, quite often a startup’s human resources exist as a heavy overhead line item with no process to measure efficiency, performance or improvement. In a competitive environment, it’s not surprising that small companies are scrambling for creative ways to bonus their top human resources.

Finding non-cash ways to compensate employees has become increasingly challenging in Canada as the Canada Revenue Agency (CRA) holds a very narrow view of employee compensation and taxable benefits. When an employee is provided with a taxable benefit or allowance the value of that benefit needs to be reported as employee income. This can also include non-cash benefits, something that is often overlooked by start-ups. Many employers and employees are surprised to discover that a well-meaning bonus or Christmas party may trigger a tax liability and the intent of the reward can quickly turn sour.

According to the CRA performance related awards are simply considered to be additional remuneration for the job an employee was hired for. So these rewards are basically treated as bonus income. Examples of cash and non-cash benefits and allowances include the use of company vehicles and cellular phones, gifts and awards, interest-free (or low-interest) loans, point rewards (e.g. airmiles), or tuition fees. CRA is also careful to include near-cash items as taxable. Near-cash items are easily converted to cash (e.g. gift certificates, gift cards, gold nuggets, securities or stocks). A complete benefits chart is available from CRA but here are a few more examples to consider:

• Child care expenses
• Counselling services
• Educational allowances for children
• Internet service at home
• Overtime meal allowances
• Recreational membership dues
• Tool allowance
• Transit passes

Thankfully, there is some tax relief for employee non-cash gifts or awards. CRA limits the cost of non-cash gifts to C$500, including taxes.

If you give more than one non-cash gift or award per year and the total cost is more than $500, we allow you to exclude the cost of up to two non-cash gifts or awards from the employee’s income, as long as the total cost of the excluded gift(s) or award(s) is not more than $500. You have to include the fair market value of the remaining gift(s) or award(s) in the employee’s income.

For detailed information about CRA payroll rules with respect to employee gifts, awards and social events click here.

Diane Cadrain has a few interesting suggestions for motivational rewards in her article Cash vs. non-cash rewards: in the land of employee rewards, cash isn’t necessarily king. Although the article was written in 2003 many of Cadrain’s ideas are still relevant. Also worth checking out are these books dedicated to finding creative ways of motivating and compensating employees:

Arguably, one of the most popular rewards for an employee is still additional time off. Above all, people tend to value their time.

For details about the tax treatment of employee benefits be sure to read the CRA’s Employer Guide to Taxable Benefits, available here. As an employer, it is your responsibility to deduct and remit the CPP contributions, EI premiums and income tax where applicable on all employee taxable benefits. The cost of employee gifts and awards are deductible to the employer.

People are expensive. Good people are even more expensive. But good, motivated people are priceless. To avoid unpleasant tax surprises, make sure you understand the tax implications of a bonus before you reward your people.