What are taxable and non-taxable benefits?

Taxable benefits are specific employee benefits, health and dental care insurance, retirement plans, car allowance, and other taxable benefits that are generally offered to new hires when they join a company. These benefits are commonly presented in the form of a standard package available to all employees. However, in a market that is becoming more and more competitive, organizations may need to offer benefits and job perks that go beyond compensation. This is an important factor to consider when trying to attract and retain top talent.

In Canada, there are two main categories for benefits: taxable and non-taxable. Both can be beneficial to employees, but they are handled differently when it comes to running payroll and income tax obligations. As an employer or payroll administrator, the following you should know about taxable benefits and how they relate to payroll.

What is a taxable benefit?

Taxable benefits are measurable, monetary advantages or benefits employees receive in addition to their regular wage. It is a good or service an employee receives on top of everyday earnings. The benefit can include what the Canada Revenue Agency would deem to be the employee’s non-arm’s length parties. Benefits are often taxable and may be subject to statutory deductions including Canadian Income Tax (CIT), Canada Pension Plan, and Employment Insurance (EI).

Some examples of taxable benefits are: 

• Use of company vehicle for personal use 
• Parking spaces or public transit passes 
• Meals 
• Gift cards and monetary awards 
• Group life-term insurance
• Non-business-related complimentary or reduced-rate accommodation 
• Low-interest or interest-free loans 
• Event tickets 

What is non-taxable benefit?

In Canada, an employee’s earnings are taxed as income and included on their T4 slip. There are, however, many benefits and perks that an employer may provide that an employee may receive on a non-taxable basis.

According to the Canada Revenue Agency, a benefit is defined as goods or services that you provide your employees, or close relative of the employee, that is personal in nature. Some examples of non-taxable benefits are: 

• Cell phone and Internet services
• Education and professional development fees/tuition 
• Professional dues
• Recreational facility or club dues 
• Gifts and awards – generally under $500 
• Mileage for work travel as per a reasonable CRA prescribed mileage rate
• Counselling services for the purpose of re-employment, retirement, or physical/mental health 
• Short and long-term disability insurance

How to determine if a benefit is taxable

The most basic way to determine if a benefit is taxable is to examine how the benefit is being used. Chances are, the benefit may be taxable if it is being used for personal reasons outside of the workplace and on personal time. 

This can become somewhat murky in the case of claiming mileage on a personal vehicle, for example. A simple parameter may be the allowance is non-taxable if the mileage claimed is based on a reasonable, CRA prescribed mileage rate for work-related travel. However, the mileage is taxable if it is based on an unreasonable mileage rate or was for personal travel. 

Childcare is another example. Childcare expenses are only considered a non-taxable benefit if the service is provided on-site, at the workplace, is managed directly by the employer, is given to all employees at minimal, or is no-cost and is not available to the general public.

Since this can be a grey area, it is best for both the employee and employer to have a clear understanding of benefits provided and define what is considered to be taxable and non-taxable. This is something that can be outlined in a new employee welcome package prepared by a Human Resources administrator.

Calculating the value of a taxable benefit

 The value of a taxable benefit is usually based on the benefit’s “fair market value” (FMV) – which is the amount of money a product or service would be sold for on the open market. It is what an employee would have ordinarily paid for the benefit had the employer not provided it for them.

HST and GST might need to be included when calculating taxable benefits as well. This is something that can be found on the CRA benefits chart. It is also important to keep in mind that HST and/or GST is calculated on the gross amount of the benefit.

Is a taxable benefit a payroll deduction?

When calculating payroll deductions from an employee’s salary or wages, taxable benefits are included. Before you calculate, it is important to first verify if the benefit is taxable and if it requires deductions for CPP, EI, and income tax. After the value of the benefit is calculated, including the various taxes (HST/GST) that might be applied. This is added to the amount of the employee’s regular income for the applicable pay period. This gives the payroll administrator the total income required to make the proper payroll deductions.

Should you offer your employees taxable benefits?

Now more than ever, the job market is a competitive world. Considering technological advances that allow remote work to be more common, some previous location barriers have broken down which allow employees to work efficiently with fully remote or hybrid work locations.  Attractive benefits packages just might be the tipping point for your company to secure and retain the best possible talent, and it can demonstrate that your organization takes the health and well-being of its employees seriously. In other words, it demonstrates that your employees are valued. 

When it comes to benefits, it is possible that both candidates and current employees may find that non-taxable benefits are more attractive than taxable benefits. Employers often monitor feedback to ensure they are offering the right mix of each. Realistically, a benefits package will often include both taxable and non-taxable benefits. The key is to ensure your payroll administrator knows how to process them properly and your HR department is experienced in presenting them. As a result, your employees will have a full understanding of not only the benefits package, but also the taxes they may or may not be responsible for. 

With the right software and HR team, calculating taxable and non-taxable benefits can be quick, accurate, and efficient for the employer. This, especially in a highly competitive labour market, will allow employees, both remote and in-house to quickly comprehend and decipher their payroll statements – anytime, anywhere.

Frequently asked questions

Are CPP benefits taxable?

Yes, employees must pay Canada Pension Plan (CPP) contributions on taxable benefits. When CPP deductions are taken from an employee’s pay, they are based on the total earnings. This means, the CPP contribution will be higher when taxable benefits are added to the overall earnings. 

Is Employment Insurance (EI) taxable?

Yes, when an employee is collecting employment insurance during a period of unemployment, parental leave, or a personal or family matter requiring them to take a leave that qualifies for a benefit, it is considered taxable income. EI benefits are taxable income, so where applicable, federal and provincial taxes are deducted.

Are pension benefits taxable?

Yes, like employment income and employment insurance, a pension is taxable income and is subject to federal and provincial tax deductions which will appear on a monthly statement. This includes Canada Pension Plan (CPP), Old Age Security (OAS) and company pension payments. This does not, however, include withdrawals from a tax-free savings account (TFSA).

Is health insurance a taxable benefit?

Health insurance, such as medical or dental plans, are not a taxable benefit for employees if their employer makes contributions to a private health service. According to the CRA employee-paid premiums to a private health services plan are often considered to be qualifying medical expenses and can be claimed by the employee on their income tax and benefit return.

How are taxable benefits calculated by payroll administrators?

Whatever the value of the taxable benefit is, it will be added to the employee’s income. For example, if an employee’s annual salary is $75,000 and the value of the benefit at hand is $1,000, the taxable income – or income that must be reported – is now $76,000. This revised income amount is what will be used to make the regular, necessary payroll deductions.

Learn More

Are you looking to implement taxable and non-taxable benefits to retain top talent but aren’t sure where to start? ADP offers payroll software that’s easy, affordable, and available for all business sizes. Let us take care of your payroll, taxes, and benefits administration. Talk to our sales team today at 866-622-8153 or start a quote and find the right payroll solution for your business.

This guide is intended to be used as a starting point in analyzing taxable and non-taxable benefits and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.