Understanding the Tax Implications of Employee Benefits and Perks

The employment laws of Canada's provinces and territories vary widely. Still, the statutory benefits that an employee is entitled to are, for the most part, the same everywhere in the country except for Quebec.

This guide will assist you in gaining an understanding of the mandatory and supplemental employee benefits available in Canada, as well as what you should provide to maintain compliance and guarantee that your employees are satisfied.

Employee Benefits and Perks

Employment may provide perks beyond gross compensation. The business offers these perks and advantages to make the job more attractive and motivate employees.

Employee benefits are further divided into two factors

· Mandatory Benefit (One required by Canadian Law)

· Supplemental Benefit (Not necessary by the law, but it assists in recruiting and retaining quality employees) (Global, 2022).

Mandatory Benefit:

  • Canada Pension Plan (CPP)

To help retirees maintain their standard of living, the Canadian government offers the Canada Pension Plan (CPP), a tax-free retirement income supplement. The 2023 contribution rate of CPP is 5.95%, with a $3,754 yearly cap. Employees' retirement pensions depend on their average wages, CPP contributions, and retirement age.

A contributor must be at least 60 years old and have made sufficient contributions to the CPP in order to receive a retirement pension. 

(Global, 2022).

  • Provincial Healthcare Coverage and HCSAs

The Canadian healthcare system provides many benefits, but the specific protections you and your loved ones enjoy vary from province to province. Provincial and territorial governments manage and deliver health care (Beatty, 2023).

Healthcare spending accounts (HCSAs) in Canada provide a tax-free way for workers to pay for healthcare costs. HCSAs are an optional benefit that companies can provide for their workers.

  • Workers' compensation insurance

Workers' compensation is the name given to the body of law that was formed to offer benefits, medical treatment, and rehabilitation services to workers injured on the job or who suffer from an occupational disease (Global, 2023).

  • Survivor Insurance

Like life insurance, the Canadian concept of survivor insurance provides financial support to a deceased worker's spouse or common-law partner. Any worker who has worked for their company between the ages of 18 and 70 is qualified to receive survivor insurance benefits through either the Canadian Pension Plan or the Quebec Pension Plan. The survivor's pension payment is based on their retirement savings and age when the pensioner died (Global, 2022).

  • Employment Insurance Contribution

The Employment Insurance (EI) program offers temporary financial assistance to unemployed individuals, aiding them in their search for employment or in their efforts to enhance their skill set. Workers who need to take time off work due to medical issues or childbirth are also eligible for payments through the EI program.

Supplemental/Common Benefit

  • Supplemental Healthcare Insurance

The Canadian Medicare scheme only covers a worker's primary medical and hospital treatment. Thus, many employers offer additional health insurance plans. Private health insurance policies facilitate access to primary care physicians and specialists. Dental, optical, pharmaceutical and other medical treatments are all covered by private insurance plans (Global, 2022)

  • Group Registered Retirement Savings

Group Registered Retirement Savings Plans (RRSPs) allow businesses to contribute to their workers' retirement accounts by matching a portion of their employee's contributions. If your GRRSP deduction maximum for the year is more than $2,000, you will be subject to a 1% tax on the excess of the contributions (Global, 2022).

  • Life Insurance and Long-Term Disability Benefits

Life insurance helps ease the financial burden of a worker's death on their loved ones. The payout might be used to compensate for missed wages, care for dependents, pay for funeral expenses, reduce debt, or give to charity.

Long-term disability insurance is a private form of insurance that employers can offer to protect workers from financial ruin in the event of a long-term illness or injury. These options are offered independently of existing health coverage and statutory guarantees (Wickersham, 2023).

Taxable vs Non-taxable Benefits

Income taxes must be paid on taxable benefits. Therefore, your staff must describe these perks in their tax filings. In contrast, Non-taxable benefits are those provided to employees not subject to federal income tax (Evolution, 2023).

Taxable Benefits:

  1. The vehicle provided by the company
  2. Lifestyle Spending Account (LSA)
  3. Gifts over $500
  4. Insurance
  5. Accommodation
  6. Child care expense

Non-taxable benefits:

  1. Medical and dental coverage
  2. Insurance for the disabled
  3. Health Spending Account (HAS)
  4. Meals
  5. Traveling expense allowance
  6. Gifts under $500

Equity Compensation and Stock Option

Equity Compensation:

Employees are sometimes awarded equity compensation in addition to their regular salary. Stock options, restricted stock, and performance shares are all examples of equity compensation that provide employees with ownership in the company. (Kenton, 2022).

Stock Option:

The right to buy stock at a set price. The contracts for options can cover either stock in a corporation or units in a mutual fund trust. 

If you decide to buy the shares at a price lower than their FMV after exercising your option, the difference is considered a taxable employment benefit (Agency, 2023).

Non-Monetary Perks

Rewards that do not involve monetary exchange are called non-monetary rewards.

Such as:

  • Opportunities for career advancement
  • Employee recognition and appreciation
  • Work-life balance
  • Praise
  • Team building activities
  • Memberships
  • Personal Vehicle
  • Leadership opportunities
  • Free or discounted food
  • Job security

Non-monetary rewards are equally important to motivate employees to enhance their performance.

Taxable Benefits Reporting and Compliance

If you are an employer, you must include the amount of the taxable benefit or allowance in box 14 of your employee's T4 slip, which is labelled "Employment income." If the employee received a taxable benefit or allowance, write the amount down in the "Other information" section of the slip.

 You should use the "Other information" section at the T4A's bottom if you are a third-party payer who has provided taxable perks or allowances to employees of another employer (Agency, 2022).

Key Takeaways

- Employee benefits are divided into mandatory and supplemental benefits

- Mandatory benefits include Canada Pension Plan, provincial healthcare coverage, workers' compensation insurance, survivor insurance, and employment insurance contribution

- Supplemental benefits include supplemental healthcare insurance, group registered retirement savings plans, life insurance, and long-term disability benefits

- Taxable benefits include company-provided vehicles, lifestyle spending accounts, gifts over $500, insurance, accommodation, and child care expenses

- Non-taxable benefits include medical and dental coverage, insurance for the disabled, health spending accounts, meals, traveling expense allowance, and gifts under $500

- Equity compensation includes stock options, restricted stock, and performance shares

- Non-monetary perks include opportunities for career advancement, employee recognition, work-life balance, team building activities, memberships, personal vehicle, leadership opportunities, free or discounted food, and job security.

References:

Global, V. (2022, November 23). Employee benefits in Canada: A guide to mandatory and common benefits. https://velocityglobal.com/resources/blog/employee-benefits-in-canada/

Evolution, P. (2023, July 4). How to navigate non-taxable and taxable benefits in Canada: The cheat sheet - payment evolution blog. https://blog.paymentevolution.com/2023/03/13/how-to-navigate-non-taxable-and-taxable-benefits-in-canada/#:~:text=Cash%20benefits%2C%20such%20as%20bonuses,taxable%2C%20non%2Dcash%20benefit.

Kenton, W. (2022, May 3). Equity compensation: Definition, how it works, types of equity. https://www.investopedia.com/terms/e/equity-compensation.asp#:~:text=Key%20Takeaways-,Equity%20compensation%20is%20non%2Dcash%20pay%20that%20is%20offered%20to,firm%20for%20a%20company's%20employees.

Agency, C. R. (2023b, January 24). Employee security options. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/publicly-traded-shares-mutual-fund-units-deferral-eligible-small-business-shares-other-shares/employee-security-options.html

Global, S. (2023, April 26). Navigating workers' compensation in Canada to get started. https://www.safeguardglobal.com/resources/blog/workers-compensation-canada#:~:text=Workers'%20compensation%20is%20the%20name,work%2Drelated%20injury%20or%20illness.

Beatty, M. (2023, April 14). Provincial health plans - What does Canadian health care cover? https://www.gms.ca/living-well/provincial-health-plans-what-does-canadian-health-care-cover#:~:text=Overall%2C%20provincial%20health%20plans%20will,and%20dental%20visits%20for%20kids.

Wickersham, P. (2023). Employee benefits in Canada: All you need to know. https://remote.com/blog/canada-employee-benefits

Agency, C. R. (2022, November 24). Employers’ Guide – Taxable Benefits and Allowances. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130/employers-guide-taxable-benefits-allowances.html

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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