Your employee is considered to receive a benefit if you pay for or give something that is personal in nature:
- directly to your employee; or
- to a person who does not deal at arm’s length with the employee (such as the employee’s spouse, child, or sibling).
A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own.
An allowance is a limited amount decided in advance that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having him or her support the expenses. An allowance can be calculated based on distance or time or on some other basis such as motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.
A reimbursement is an amount you pay to your employee to repay actual expenses he or she incurred while carrying out the duties of employment. The employee has to keep proper records to support the expenses and give them to the employer. These are not taxable.
There are many types of benefits and allowances that you may have to include in an employee’s income. Whether or not they are taxable depends on the type of benefit or allowance and the reason an employee receives it. To determine if the benefit is taxable, the tax department has a useful guide. Please see Chapters 2 to 4 of the Guide T4130, Employers’ Guide – Taxable Benefits and Allowances (follow the link).
Once you determine that the benefit is taxable, you need to calculate the value of the specific benefit. The value of a benefit is generally its fair market value (FMV). This is the price that can be obtained in an open market between two individuals dealing at arm’s length. The cost to you for the particular property, good, or service may be used if it reflects the FMV of the item or service. You must be able to support the value if you are asked by the tax department.
Add the taxable benefits and allowances to the employee’s income each pay period to determine the total amount that is subject to source deductions. The benefits and allowances may be subject to CPP contributions, EI premiums, and income tax deductions.