Canada: Tax-Free Job Perks? Only If The CRA Says So

Last Updated: December 5 2017
Article by Darian Khan

It's no secret that non-monetary benefits help attract and retain top employees. But who controls whether these benefits are taxed? And how should employers review the rules to ensure the employer is on-side?

A recent announcement by Canada Revenue Agency (the CRA) serves as a valuable reminder that the CRA often decides which employee benefits to tax, and that it can change its mind on a whim. Earlier this month, the CRA announced that it would be revising its policy on employee discounts. These discounts were previously not taxed, for the most part. Critics were concerned that the CRA was going after low wage-earners, primarily in the retail sector, who disproportionately benefit from the discounts they receive on merchandise at work. In a plot twist, major backlash in the media prompted Parliament to clarify that the CRA's policy change was not sanctioned and inconsistent with the government's intentions. This sent the CRA back to the drawing board to re-revise its policy.

Law versus CRA Policy

It is important to keep in mind the distinction between the law, on one hand, and the CRA's administrative policies, on the other. The Income Tax Act [Tax Act], as interpreted by the courts, is law in Canada. The Tax Act has been passed by an elected Parliament and revisions to it go through a lengthy legislative process.

The CRA administers the law and develops non-binding administrative policies in carrying out this role. Sometimes the CRA's policies simply recite the law and offer an explanation of how the law works. At other times, the CRA's policies are markedly different from the law, perhaps for administrative efficiency, or due to the CRA's disagreement with a court's interpretation of the Tax Act. On rare occasions where the CRA's own policies are more favourable to taxpayers than the law, its policies can effectively replace the law—i.e., the CRA and taxpayers apply the more lenient policies instead of the strict legal rules. This is generally the situation for employee benefits.

The Law: Every Material Employee Benefit Is Taxable

Unfortunately, the Tax Act is not very lenient when it comes to defining taxable employee benefits. The general rule under the Tax Act is that the value of any benefit that a person receives "in respect of, in the course of, or by virtue of" his/her employment must be reported as taxable income. On its face, this means that an employer cannot give its employees anything of value without the employees being liable for additional tax. The purpose of this rule is to promote equality and fairness among employees who earn the same amount but are paid differently. For example, an employee earning $50,000 per year in wages should pay the same tax as someone whose employer compensates the employee with $50,000 worth of housing, food, transportation and entertainment, etc. f

The courts have interpreted the Tax Act in a way that gives employers slightly more leeway and eases the administrative burden of reporting every single benefit. According to the courts, an employee benefit must also be "material"—e.g., more than a cup of coffee—in order to be taxable.

CRA Policy: Some Employee Benefits, in Some Circumstances, Are Non-Taxable

Given the array of possible benefits employers may provide to employees and their families, the CRA has published numerous, detailed policies on the issue of what constitutes a taxable employee benefit., Many of these policies offer some relief from the harsh, default position of the Tax Act, which makes every material benefit taxable. The following are examples of the CRA's published policies on employee benefits that provide relief from taxation:

  • Childcare: a free childcare service that an employer manages directly and provides only to its employees and at its place of business is not a taxable benefit to the employees who make use of that service.
  • Education: scholarships, bursaries, and free tuition provided to an employee's family members will generally not be a taxable benefit to the employee (but may be a taxable benefit to the recipient family member).
  • Discounts on Merchandise: merchandise discounts are generally only taxable if the employee receives the merchandise at less than the employer's cost. The taxable benefit in that case is the difference between what the employee pays and the fair market value of the merchandise.
  • Gifts: an employee may receive unlimited gifts, other than cash or things easily convertible to cash (e.g., gift cards), up to a cumulative value of $500 per year, tax-free.
  • Cell Phone Plans: if an employee's cell phone plan is reasonable, and the employee's personal use does not exceed the base cost of the plan, the employee does not receive a taxable benefit for the employer-paid plan.
  • Social Events: an employer can pay for employee parties, and the employees will not receive a taxable benefit, where the cost per attendee is $100 or less, excluding ancillary items (e.g., transportation, hotel rooms for overnight stays, etc.). However, if the $100 limit is exceeded, the whole amount, not just the excess, is a taxable benefit to the employees.

While some of these policies may appear generous at first, they are usually constrained by rigid criteria, or contain exceptions that can easily render them inapplicable in a given scenario. Furthermore, unlike laws that must be amended or repealed by Parliament, the CRA can alter or revoke these policies at any time, and the courts are obliged to uphold the law, not these policies, if a dispute arises.

Take Home for Employers

Employee cell phone plans or discounted clothing purchases are not going to significantly affect the federal budget, but benefits like free child care and post-secondary tuition could be potential targets for greater revenue generation in the future. The CRA's willingness to scrap its own administrative policy on employee discounts suggests that the trend towards taxing more employee benefits may continue.

It would not be surprising to see the government codify more detailed rules for employee benefits in the Tax Act and remove some of the CRA's policy-making power. For example, there are already specific rules in the Tax Act for employer-provided vehicles, lodging and meals, which the CRA is intended to follow.

In the meantime, employers should consider:

  • developing internal policies on employee benefits and, where appropriate, track the value of taxable discounts, gifts and other benefits they provide to their employees throughout the year; and
  • reviewing existing internal policies regularly to ensure compliance with any changes in the law or CRA policy on taxable employee benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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