Tax season: Universally regarded as the polar opposite of birthdays on the fun scale. While it’s not the most enjoyable process, it’s critical that small businesses dot their i’s and cross their t’s on payroll year-end tax documents to avoid getting on the Canada Revenue Agency's (CRA’s) naughty list (aka, a PIER review).
Our Community Manager, Bianca Mueller, CPB sat down with Xen Accounting’s Practice Lead, Hasan Shahariar, CPA and Payroll Associate, Heather Levcuk, PCP to discuss the ins and outs of taxable benefits and remote employees in business.
Bianca Muller, CPB, Community Manager, Wagepoint
Heather Levchuk, PCP, Payroll Associate, Xen Accounting
Hasan Shahariar, CPA, Practice Lead, Xen Accounting
You can watch the full recording of the webinar by clicking play above or read through the recap below. Sit back, relax and soak up some best practices to sail through tax season with ease.
Benefits and allowances.
The CRA’s benefits and allowances chart can be overwhelming outlining a detailed list of benefits and allowances. Let’s start simple and break down benefits and allowances by how the benefit is received by your employee:
1. In-cash taxable benefits
This is when the employee is paid a physical currency like a cheque or electronic payment.
Common examples of in-cash benefits include:
- Wellness reimbursements such as gym memberships or other wellness activities (golf, yoga, etc.)
- Cell phone and internet services. Note: Cellular data and personal usage rules apply.
- Parking that is provided for commuting to work.
- Car allowance and moving expenses.
Jump to timestamp 7:38 in the recording to hear more from Heather.
2. Non-cash (in-kind) taxable benefits
An in-kind or non-cash benefit is the actual good, service or property. These are typically held or provided to the employee where there is no immediate cash realization.
Common non-cash taxable benefits include:
- Taxable wellness spending accounts that are managed.
- Employer-paid group insurance benefit such as:
- Life insurance
- Dependent life insurance
- Critical illness
- Note: Long term disability (LTD) is not a taxable benefit.
- Any payment, gift or reward paid in virtual currency is a taxable benefit.
For those working for a Québec employer, there are additional non-cash taxable benefits you can’t forget about:
- Group insurance plan contributions (or premiums). Note: Contributions for coverage of total or partial loss of income are not a taxable benefit.
- Additional group insurance benefits like health and dental, and health care spending accounts.
Jump to timestamp 11:01 in the recording to hear more from Heather.
3. Near-cash taxable benefits
Near-cash benefits function as cash, such as gift certificates, gift cards or something else that can easily be converted to cash. Although they’re a fun way to thank your employees for a job well done or hitting that sales target, they aren’t freebies!
Common near-cash taxable benefits include:
- Gift cards (these do not follow the gifts and awards policy)
- Loyalty points — redeemed for travel or other rewards
- Recognition awards — performance and goal achievements
It’s important to note that CRA has a separate policy for gifts and awards. You may give up to $500 per year in non-cash gifts and awards to each employee or contractor. Anything above this amount is considered taxable. Examples of gifts and awards include:
- Gifts: Birthday, wedding, holiday (like Christmas), the birth of a child
- Award: Long service, Outstanding Accomplishment (criteria)
Lucky for you, items of a trivial matter like clothing, mugs, plaques or trophies are not considered taxable.
Why is recording the tax on taxable benefits so important?
To ensure tax calculations are accurate come year-end, taxable benefits must be included in the employee’s income. However, it's important to note that not all benefits are subject to Employment Insurance (EI) and Canada Pension Plan (CPP) premiums. As an employer, you’re required to remit CPP, EI and income tax on applicable remuneration regularly. This is when it’s important to understand how the employees received the benefits.
When a cash benefit is taxable:
- It’s also pensionable (CPP)
- It’s also insurable (EI)
When a non-cash or near-cash benefit is taxable:
- It’s also pensionable (CPP)
- Exceptions for security options.
- It is generally not insurable (EI)
- Exceptions include board and lodging, RRSP contributions, gifts, awards and social events.
For more information on whether the benefit received is pensionable or insurable, check out CRA's Guide T4001, Employers' Guide – Payroll Deductions and Remittances.
What are the impacts of not recording taxable benefits properly?
As an employer it’s important to be informed on how to properly record taxable benefits. It’s in the best interest of you and your team to review these regularly to ensure tax season is as straightforward as possible.
Here’s what can happen if you don’t properly record taxable benefits:
- You’ll receive a PIER review from the CRA.
- Could require a T4 adjustment affecting boxes 14, 26, 16, and “other” box 40.
- Could require additional CPP(QPP)/EI owing on the additional benefit income.
- Employers must pay both the employee and employer portion of the source deductions.
- Employees may owe additional tax due to increased salary related to the benefits.
Jump to timestamp 15:06 in the recording to hear more from Heather.
Remote employees: Province of employment vs. province of residence.
Now more than ever, employees are working remotely from all corners of the country. So what’s the difference between the province of employment versus province of residence?
- Province of employment — Where your physical office location is and where employees are paid from.
- Province of residence — Where the employee lives.
Why do you need to know the difference?
Employees are taxed based on the province of employment, not where the employee resides. However, the TD1 Provincial Personal Tax Credit form is based on where the employee lives. This means they can see unanticipated statutory deductions being taken off their pay cheque.
For instance, Québec has higher tax rates than other provinces and territories. If you’re located in Québec and your remote employee is located in a separate province from your small business, your employee will have to pay the higher Québec tax rates off each pay cheque. It's not all bad news though. They’ll get the difference back when they file their taxes (based on the province where they reside)!
Pro tips and resources for remote employees:
- If you don’t want to wait until tax time, it’s recommended that you fill out Form TP-1016-V, Application for a reduction in source deductions of income tax. This’ll help put money back in your pocket every pay day.
- If you’re looking to understand the tax calculations for your province of employment, here are some helpful online calculators: CRA Payroll Deductions Online Calculator | Revenu Québec (RQ) WebRAS
- Make sure that your income tax returns for the previous years are assessed and all amounts owing are paid in full before applying.
- Be mindful that reduction at source applications can sometimes take a few months to be reviewed.
- For employees outside of Québec who want to reduce income taxes at source, and have reasons that aren’t part of the Form TD1, Personal Tax Credits Return, please use Form T1213 to apply.
It’s important for employers to keep workers’ compensation top of mind in relation to the province of employment. All provinces and territories have workers’ compensation boards (WCBs) and most require you to apply once you have employees working in the province. Keep in mind:
- Employers may need to manage multiple provincial accounts and rates.
- Employers should register with the WCB board for each province of residence.
- In some cases, due to the nature of work, the employer might receive a compliance certificate and not be required to report.
Note: If your employee’s office is now their home, they can apply for a claim should they sustain an injury at home. Be sure to register and get coverage!
Payroll software makes tax season easier.
With a payroll BFF, like Wagepoint, in your corner, this time of year can be less taxing on you and your brain. Our payroll software helps automate the headache-y parts of tax season — like source deduction and workers’ compensation calculations and payments and taxable benefits deductions — to make your life easier. Sign up for Wagepoint today!
Learn about even more small business tax deductions.
About our fellow presenter:
Xen Accounting is your virtual, paperless, cloud-based Chartered Accountant practice. Their modern approach combines slick cloud-based systems, fully paperless processes and a knowledgeable, proactive team of professionals who help lift the burden of running a business. Welcome to the new way of doing accounting.
The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
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