Tax Articles
Employee and Shareholder Benefits: What’s Taxable, What’s Not
Mississauga Business Times
Colin Wong
The rules, they are a changin’.
When you are a business owner who is an employee and/or a shareholder of your own corporation, you have to keep up-to-date with the rules for employment benefits. Benefits are becoming increasingly diversified while the government increasingly adjusts their tax treatment.
Since you don’t want to be penalized for incorrect claims on your income tax, the following summary of the current status of some typical employment benefits may be helpful.
Shareholder Benefits
If you are a shareholder as well as an employee, not all of the following rules may apply to your situation; benefits provided to employees and benefits provided to shareholders are often taxed differently.
The rules related to shareholder benefits simply look at the value of a benefit provided to an individual as a shareholder -- special rules don't apply. To be treated as an employee, you need to demonstrate that you received the benefit by virtue of your employment and not by virtue of your shareholdings. You would do this by showing that non-shareholders in your organization receive the same benefit, or that it is common for employers to provide similar benefits to non-shareholder employees who have the same job function.
Employee Benefits
An employer can give employees, on a tax-free basis, up to two non-cash awards annually for employment achievements, as well as two non-cash gifts per year for special occasions such as holidays, birthdays or marriage. The total value of these awards can't exceed $500 per year, per employee, per category. This policy does not apply to the following gifts/awards, which are taxable benefits:
- cash or near-cash gifts/awards such as holiday bonuses, gift certificates, gift cards, travel points or similar rewards;
- reimbursement to an employee for a gift/award selected by that employee;
- certain hospitality awards such as employer-provided team building lunches and rewards in the nature of a thank you for doing a good job;
- remuneration given as a bonus that is disguised as a gift or award; and
- gifts/awards produced by a manufacturer and given by that manufacturer to the employee of a dealer.
Providing an employee with a cellphone or similar handheld device will not result in a taxable benefit as long as it is provided primarily for business purposes.
The provision of childcare services is not a taxable benefit, provided that the services are:
- supplied at the employer's place of business;
- managed directly by the employer;
- provided to all employees at minimal or no cost; and
- not available to the general public.
Employer-paid critical illness insurance is generally considered to be a sickness plan, and consequently, will not result in a taxable benefit.
Reimbursement for an Internet connection at home is not taxable, provided that the connection is needed primarily for business purposes.
If the employer provides overtime meals, or a reasonable allowance for overtime meals, there is no taxable benefit as long as the employee works three or more hours of overtime immediately after his or her scheduled hours of work and the overtime is infrequent and occasional (less than three times a week).
The value of parking provided is a taxable benefit -- unless the employer provides parking for business purposes and the employee is required to regularly use his or her vehicle during business hours as part of employment duties. Taxpayers have, however, been successful in challenging this benefit inclusion by showing that the employer benefited by providing parking. There is no taxable benefit where employees park in areas where no charges apply for parking or for “scramble” parking (employer-paid, first-come, first-served parking).
Professional membership fees are not a taxable benefit where the employer is the primary beneficiary of the payment -- which is presumed in most situations. This policy, however, does not apply to admission or initiation fees, since the employee is presumed to be the primary beneficiary of these fees.
Amounts paid by an employer for recreational facilities result in a taxable benefit, unless:
- the use of recreational facilities is available to all employees;
- the employer makes an arrangement with a facility to pay a fee for the use of the facility, and the membership is with the employer and not the employee; or
- it can be clearly shown that membership is principally for the employer's, rather than the employee’s, advantage.
Where an employer arranges for a group discount or fee waiver at a club, provided the employer doesn't pay some of the fees, there is no taxable benefit associated with the savings negotiated.
Amounts paid for employment-related skills or knowledge and general business training are not a taxable benefit. Employer-provided courses on personal interest topics or unrelated technical skills are, however, taxable.
The subsidization of a weight loss program for employees is a taxable benefit, however, employer-provided counselling related to wellness does not represent a taxable benefit. This means the type of program is important in determining taxability.
The rules regarding taxability of employer-provided automobiles are complex and require a separate discussion.
These benefits – and the rules regarding their taxability -- continue to evolve, so be sure to stay current regarding how you can derive the most benefit from your employment benefits.
Colin Wong is a Tax Partner of BDO Dunwoody LLP (www.bdo.ca). BDO, one of Canada’s leading accounting and advisory firms, helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Colin Wong in the Mississauga office at (905)270-7700 or cwong@bdo.ca.
