Taxable benefits affect employees and employers, which is why it’s important to understand how taxable benefits work. In this blog post, we will explore what taxable benefits are, how they are calculated, and their implications for both employees and employers.
What Benefits are Taxable?
Taxable benefits, also known as employee benefits or perks, are non-monetary advantages or privileges provided to employees by their employers. These benefits are typically in addition to regular salary or wages and can take various forms. Examples of taxable benefits include company cars, parking, housing allowances, health and dental insurance premiums, employer-provided meals, gifts, and more. The Canada Revenue Agency (CRA) requires employees to report the value of these benefits as part of their income.
For employees, taxable benefits increase their overall income and may push them into higher tax brackets. Consequently, they may face higher income tax obligations. Failing to report taxable benefits can result in penalties and interest charges.
Calculating Taxable Benefits
The value of taxable benefits is determined based on the fair market value (FMV) of the benefit provided. FMV is the amount that a buyer would pay to a seller for the benefit. The CRA provides guidelines and specific rules for calculating the value of different taxable benefits. Employers must accurately determine and report the FMV of each benefit to ensure compliance with tax regulations. The CRA released updates effective January 1, 2023 to taxable benefits policies on gifts, awards, long-service awards, social events, hospitality functions, and parking.
Employers must properly identify and report the value of each benefit provided to employees. Additionally, employers are responsible for withholding the appropriate amount of income tax from employees’ pay based on the value of the taxable benefits.