Introduction – What are Taxable Benefits
Under Paragraph 6(1)(a) of the Income Tax Act, a taxable benefit is any advantage or benefit given to an employee from an employer, as well as the employee's non-arm's length parties such as his or her children or spouse. A taxable benefit must be included in the employee's income for the applicable tax year.
The definition for taxable benefits given under Paragraph 6(1)(a) of the Income Tax Act is extremely broad. We have discussed some aspects of taxable benefits in our article here. In this article, we will discuss the issues of what constitute a taxable benefit under Paragraph 6(1)(a).
What Constitutes a Taxable Benefit?
The Income Tax Act defines taxable benefit as:
- the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm's length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer's office or employment, except any benefit ...
There are two questions that can be asked of this definition. The first question is a question of the connection between the benefit and employment. More specifically, whether a taxable benefit must be conferred to the employee as a part of the employee's compensations or simply conferred in the context of being employed by one's employer.
The second question is whether everything received from an employer must constitute a benefit to the taxpayer even if the taxpayer gained no economic advantage as a result of receiving it.
The Connection Between a Benefit and Employment – The Queen v Savage
The definition for taxable benefit can be narrowly construed to cover only material benefits that are a part of the compensation for services rendered by the employee. On the other hand, it can be construed broadly to cover virtually any benefits received by the employee by virtue of him or her being an employee rather than a member of the general public.
The Supreme Court of Canada's decision in The Queen v Savage tackles this issue. In Savage, Ms. Savage worked for a life insurance company, and she received a cash prize from her employer for voluntarily taking and passing three courses related to life insurance. Both Ms. Savage and her employer reported the income as a non-taxable gift, and CRA took the position this was taxable benefits under Paragraph 6(1)(a).
In deciding this issue, the Supreme Court of Canada took a broad approach in construing the meaning of Paragraph 6(1)(a). The Court cited the following passage from Ontario Court of Appeals decision in R v. Poynton:
I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all-embracing definition of s.3.
A taxable benefit does not have to be benefits that were given to the employee as a part of his or her compensation for his or her services. In this case, Ms. Savage clearly received the prize by virtue of her employment even if the prize was not given for her services to her employer. Therefore she received a taxable benefit.
What is a Benefit – Canada (Attorney General) v. Hoefele
In Canada (Attorney General) v. Hoefele, the Federal Court of Appeals addressed the question of the meaning of "benefit" under Paragraph 6(1)(a) of the Income Tax Act. In this case, the taxpayer received a mortgage interest subsidy from his employer to relocate from Calgary to Toronto.
The taxpayer in Hoefele argued he did not receive any economic advantage from the interest subsides as the he is in no better position in his standard of living than he was before he moved from Calgary to Toronto. The interest subsidy simply covered the higher real estate costs and cost of living in Toronto compared to Calgary.
The Federal Court of Appeal noted although "benefit" is not defined under the Income Tax Act, the courts have historically defined benefit as an economic benefit that increase the taxpayer's net worth, not standard of living.
In the case of Ransom, Cyril John v. Minister of National Revenue, the employee was transferred by his company to a different city and was reimbursed for the losses incurred on the sale of a house.
The Court in Ransom considered this payment not to be a taxable benefit under Paragraph 6(1)(b) of the Income Tax Act. The taxpayer in Ransom had his financial position adversely affected by his employment relationship. The reimbursement he received simply put him back into the position he would have been in if he did not have to move to another city to begin with.
However, the interest subsidy in the Hoefele case went towards shouldering the cost of a more valuable property. The Court in Hoefele noted that interest subsidy improved the taxpayer's financial position even if he is still enjoying a similar level of standard of living in Toronto compared to Calgary.
Pro Tax Tips – Assessment of Taxable Benefits
While it is usually the job of the employer to include any taxable benefits in the employee's discount, a failure to report taxable benefits can nevertheless results in a tax assessment from the CRA against the employee. The CRA may also assess the employee with interests and penalties on top of the unreported taxable benefit amount.
If you are assessed or reassessed for failure to report taxable benefits under Paragraph 6(1)(a) of the Income Tax Act, it is incredibly important to speak to an experienced Canadian tax lawyer who understands your rights under the Income Tax Act and work with you through the objection and appeal process.
Frequently Asked Questions
I was granted an Employee Stock Option as a part of my compensation package with my employer. Does this count as a Taxable Benefit under Paragraph 6(1)(a)?
The Income Tax Act has a specific section governing the taxation of Employee Stock Options upon exercise in Paragraph 110(1)(d) and Paragraph (1) (d.1). However, the granting of an option by itself would generally not be considered to be a Taxable Benefit as the employee cannot gain any economic advantage from the options until he or she choose to exercise the options.
Are parking passes I received from my employer as well as reserved parking spots considered Taxable Benefits under Paragraph 6(1)(a)?
There are several cases indicating parking passes and reserved parking spots will likely be considered taxable benefits equal to the fair market value of the parking pass or reserved parking spot. See Adler v. the Queen.