The tax implications of employee benefits.
Business owners often offer various employee incentives to encourage workers to join them and, once there, boost team spirit and a sense of belonging. During a recent tax conference, Canada Revenue Agency was asked about a number of specific employee perks and what the tax consequences of offering such benefits to employees would be, both from the employer’ s point of view (i.e ., tax deductibility) and the employee’ s position(i.e ., whether it’ s a taxable benefit from employment .) Specifically, the CRA was asked about: after-work cocktails, team lunch es, a relaxation area for employees with pool tables and arcade games, free bicycle parking and personal athletic coaching for employees, such as long distance running training.
Occasionally, these types of corporate expenditures are denied by the CRA in the course of an audit on the basis that the expenses are not being incurred to earn income. In addition, a CRA auditor is sometimes temp ted to impose a taxable benefit to employees for the value of such perks. Under the tax rules, a corporation can deduct reasonable expenses for the purpose of earning income. The value of any “benefit” received by an employee by virtue of employment must also be included in the employee’ s income.
In each benefit example cited above, the corporation argued that the benefits to the company were significant since they boost employee morale and team spirit. This ultimately leads to less employee turnover and avoids the costs associated with training new staff. It also encourages employees to occasionally work long hours to meet various corporate deadlines.
The CR A listed four criteria it uses to determine whether a taxable benefit exists: Has the employee received an economic advantage? Is it measurable and quantifiable? Does the benefit primarily benefit the employee or the employer? And, was the benefit conferred in connection with employment?
Using these criteria, the CR A felt that if an employer paid for a coach to allow an employee to complete a marathon, it’ s primarily the employee who benefits and it should therefore be treated as a taxable employment benefit. On the other hand, if the value of a benefit, such as free bicycle parking, isn’ t easily quantifiable and measurable, the CR A’ s view is that it would not be a taxable benefit.
Finally, the CRA reiterated its longstanding position on employer- paid social events, such as an after-work cocktail hour or team lunch and internal recreational facilities, finding that both situations generally do not give rise to taxable employment benefits.
THE VALUE OF ANY “BENEFIT” RECEIVEDBY AN EMPLOYEE BY VIRTUE OF EMPLOYMENT MUST ALSO BE INCLUDED IN THE EMPLOYEE’S INCOME