Have you received your T4 slip for the previous tax year? You may be wondering why the employment income reported in Box 14 is higher than the salary or wages you earned for the year. That's because your employer must report premiums* it pays for certain group benefits and the value of some perks as a taxable benefit, and you must pay taxes on those amounts. (*Premiums refer to monthly or annual fees.)
Tax benefits give you the opportunity to reduce your tax bill. They often come in the form of deductions and credits.
- A tax deduction lowers your taxable income. This, in turn, lowers your tax liability.
- A tax credit directly reduces the amount of taxes you owe.
You and your employer also have to make Canada or Quebec Pension Plan contributions (CPP or QPP). You both contribute to CPP and QPP on:
- the value of all taxable benefits and
- Employment Insurance contributions on taxable benefits you receive in cash.
You may have valuable company perks, such as a cell phone, tuition reimbursement and service awards. But these may not have any tax benefits in certain situations.
Here's how the Canada Revenue Agency (CRA) treats eight common employee benefits for tax purposes:
1. Group life and health insurance premiums
Employer-paid premiums for group life insurance, dependant life insurance, accident insurance and critical illness insurance are taxable benefits. What's more, your taxable income includes the amounts paid on your behalf.
In Quebec, premiums for health and dental insurance are also considered a taxable benefit. You may also be able to claim health insurance premiums you paid as a tax credit.
2. Group short- or long-term disability
Employer-paid short-term disability (STD) or long-term disability (LTD) premiums are not taxable benefits. But any short- or long-term disability benefits you receive in the future from your employer will be taxable.
3. Non-group insurance plans
A non-group insurance plan is a plan for an individual employee. Employer contributions to a non-group insurance plan are a taxable benefit even if the plan is a:
- accident insurance or
- disability insurance plan.
For example, an executive may negotiate individual paid participation in a health/wellness plan with a private facility as part of their total compensation. The annual fee would be taxable.
4. Pension plans and Group Registered Retirement Savings Plan (RRSPs)
Your employer's contributions to a registered pension plan on your behalf aren't taxable. So what happens when your employer contributes to or matches your group RRSP contributions? Then this amount is a taxable benefit that increases your employment income.
What if you notify your employer that you have sufficient RRSP contribution room? Then your employer may be able to reduce the income tax that they're required to withhold from your pay related to the RRSP contribution taxable benefit amount.
Be aware that your employer's contribution to your pension plan reduces your RRSP contribution room the following year. This is called a “pension adjustment” and it's reported on your T4. The CRA informs you of your RRSP contribution room on your income tax Notice of Assessment.
5. Work phone
Companies frequently provide employees with smartphones plus a voice and data plan. But the CRA may not consider the payments on your work mobile as a taxable benefit. Not as long as:
- the cost of the phone plan is reasonable and
- you don't incur costs for personal use (e.g., additional long-distance charges) beyond the basic fee for the plan.
6. Equipment for working from home
Many industries now offer full- or part-time arrangements for working at home. But computer equipment or other supplies provided by your employer are not taxable benefits.
What if you must provide your own office space or equipment? Then you may deduct all or part of these expenses for tax purposes. That's if your employer completes and signs a Form T2200 that you file with your tax return.
7. Tuition reimbursement
Tuition paid by your employer isn't a taxable benefit if you require the training to progress in your job. For example, let's say you're employed by a bank and are working towards becoming a Certified Financial Planner. In this case, any tuition reimbursed by the bank for this program would not be taxable.
And what if the company gives your child a bursary or scholarship? Then neither you nor your child have to pay taxes on the amount.
8. Gifts and awards
Does your employer give non-cash gifts or awards worth under $500 for outstanding service? What about for milestones such as a wedding or the birth of a child? In such cases, the value of the award is not a taxable benefit.
Similarly, non-cash awards for long service worth less than $500 aren't considered taxable benefits if:
- you've worked for the organization for at least five years and
- you're not eligible for such an award more often than every five years.
However, incentive awards and performance bonuses are included in your taxable income.
Are you starting a new job or enrolling in a benefits plan? It's useful to know how your benefits are taxed so you can structure your choices accordingly. For more information, contact your employer or benefits provider.