How Taxing Non-Cash Benefits for Employees Works
Occasionally staff members will receive compensation for their efforts outside of their regular pay cheque. Here’s a quick overview of taxing non-cash benefits to your employees.
According to the Canada Revenue Agency (CRA), a benefit is when you pay or provide your employee with anything personal like an allowance, free use of property, reimbursement, and services or goods that you own.
An allowance is a lumpsum or periodic amount that you pay an employee above wages to cover anticipated expenses. For example, meal allowance covers food expenses when on a business trip.
Reimbursement is the amount you pay to an employee to settle expenses incurred while on their daily duties. For example, if the employee takes a client for lunch, they provide receipts to receive reimbursement.
A non-cash benefit is a service, good or property that you give your employee. It includes payment that you make to third parties for the expenses (goods or services) you are responsible for. Since occasionally your staff members will receive compensation outside their regular pay, below is an overview of taxing non-cash benefits to help you with the process.
Determining whether a benefit is taxable
You need to determine whether a non-cash benefit is taxable or not and if you can add it to the employment income. A benefit is taxable when the employee receives an economic advantage measurable in monetary terms in a manner that they gain.
Canada Pension Plan (CPP)
When you establish that such payments are taxable to your employees, the Canada Pension Plan (CPP) is applied and appropriate deductions are made from your employees’ compensation. Under the CPP, you’re also responsible for the employer’s portion. If a non-cash benefit is the only compensation for your employees, there will be no remuneration to withhold deductions. Therefore, you don’t withhold income tax on the user even when taxable.
Near cash or non-cash compensations are not insurable, and you should not deduct Employment Insurance (EI). An exception to this is when you pay an employee contribution to a Registered Savings Plan that is accessible to them.
Determining payroll deductions
After calculating the value of the benefit, add the amount to the employees’ income for the period. It gives you the total payment to base the payroll deductions on. Then, withhold deductions for the overall pay in the usual way. The tax deductions depend on whether the benefits are cash or non-cash.
Taxing non-cash benefits
When non-cash benefits are taxable, you deduct income tax from the employee’s total pay for that period. Apart from security options, when the non-cash benefit is of a significant value and withholding tax can lead to undue hardship, you spread the amount over the financial year. Undue hardship occurs when withholding results in your employee being unable to pay expenses related to the basic needs such as clothing, food, shelter, childcare and transportation.
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