4.4 What is an employee benefit and what are the tax implications of the most common employee benefits?

What is an employee benefit?

An employee may receive additional benefits, by virtue of their employment, over and above their gross salary. All these perks and benefits are presented by the employer to make the job offer more lucrative and to keep up the motivation levels of the employees. ITA 6(1)(a) states that any benefit received by virtue of one’s employment is taxable (assuming the primary beneficiary is the employee), however there are a number of exceptions to this rule.

Tax treatment of the most common taxable benefits 

Some of the most common taxable benefits are described below with links to CRA’s Publication T-4130 “Employers’ Guide – Taxable Benefits and Allowances”

1. Health and Dental Insurance– If an employer pays the premiums for an employees health and dental insurance there is no taxable benefit to the employees. i.e. the employee would not need to include the value of the benefit in their income.  See “Private Health Services Plan Premiums”.
2. Group Life Insurance – A group life insurance is a type of life insurance in which a single contract covers an entire group of people.  If an employer is paying the premiums for the employees group life insurance, it creates a taxable benefit for the employee and will be included in the employees income.  Note that while ITA 6(1)(a)(i) states that Group Term Life Insurance benefits paid are not taxable however ITA 6(4) supersedes this and states that Group Term Life Insurance benefits ARE taxable (based on prescribed amounts).   See “Group Term Life Insurance Policies”
3. Training Expenses – An employer generally pays for the training expenses on the behalf of the employees. If the training is related to the employment and upgradation of work-related skills, it is not a taxable benefit. If the training expense is primarily for the benefit of the employee (rather than the employer)  it would typically be considered a taxable benefit.  See “Scholarships, Bursaries, Tuition and Training”  
4. Vehicle Allowances – An allowance is an amount received by an employee from an employer for using their own/personal vehicle for work-related purposes. This payment is on top of the existing salary and is a taxable benefit unless it is considered ‘reasonable’. Reasonable automobile allowances must be based on kilometres and the payment per kilometre should be within the CRA prescribed rate for the province.  The rationale behind this is that a reasonable per-kilometre allowance is not meant to create any additional economic benefit for the employee and hence, is not taxed.  See “Reasonable per kilometre allowance”
5. Gifts and Awards – The tax treatment for gifts and awards depends on the specific circumstances.  Cash or near-cash awards (gift cards, securities, stocks) are always classified as a taxable benefit.  A non-cash award up to a monetary value of $500 is not considered a taxable benefit. For example, a sporting event ticket or a voucher to buy a Christmas tree from a particular store are examples of non-cash gifts.  As long as the non-cash gifts remain under the worth of $500, these are non-taxable.  The specific details are fairly complex, see “Gifts, Awards and Long-Service Awards”  for more details.
6. Cellular Phone Service – If an employee uses a cellular phone which is owned by the employer, there exists no taxable benefit. On the other hand, if an employee uses his own cell phone and is reimbursed for it, the fair market value of the phone is a taxable benefit.  If an employer reimburses an employee for their cell phone plan, the portion attributable to personal use would be considered a taxable benefit. See “Cellular Phone and Internet Services”
7. Counselling Service – An amount paid by the employer to provide financial and legal counselling to an employee creates a taxable benefit. For example, employer provided income tax preparation and legal sessions create an economic benefit and are taxed. Services like re-employment, retirement, mental or physical health counselling for the employees do not create a taxable benefit.  See “Counselling Services”

Editor’s note:  I have not included the tax implications of employer provided automobiles (operating cost benefit and standby-charge) or stock option benefits.  Although these are included in the CPA competency map I don’t believe they are “common benefits”, in fact they didn’t even make it into the top 10 most common employee benefits in a 2016 survey by the Canadian Payroll Association (see link at bottom of page). Instead we have focused on the more common benefits identified in that survey.

References and Resources

• Article – “T4130 – Employers’ Guide – Taxable Benefits and Allowances” (Author: Government of Canada)
• Article – “Top 10 Employee Benefits in Canada” (Author: Daryl Smith)

“What is an employee benefit and what are the tax implications of the most common employee benefits?” from Introductory Canadian Tax Copyright © 2021 by Sam Newton and Wahaj Awan is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.