ON and QC Sales Taxes on Group Benefits – Who Has to Pay?

It’s not often that payroll staff associate payroll with provincial sales tax. It’s true that payroll staff relate sales taxes – GST, HST and QST – to the T4 reporting of taxable benefits, but that’s just because the cost base of taxable benefits for source deduction purposes includes all such taxes.

No, what I’m referring to are the separate ON and QC provincial sales taxes on group benefits, whether these benefits are insured, self-insured, funded or unfunded. These taxes are separate and apart from the HST in Ontario or the QST/GST in Quebec.

One reason these sales taxes on group benefits are relatively unknown is that, mostly, they are collected by insurance companies and other 3rd party benefit administrators, via invoices for group premiums and/or benefit contributions. However, if the employer self-insures group benefits, these taxes have to be paid separately by employers and employees. For example, if an employer has an unfunded, self-insured group plan that reimburses employee expenditures on eye glasses, these reimbursements are subject to 8% Retail Sales Tax in Ontario and 9% Quebec Sales Tax in Quebec.

What I find most interesting about these two taxes is how Ontario and Quebec claim jurisdiction over the group benefits subject to tax. These claims mean that on a single premium payment to an insurer, the employer payment may be subject to tax, but not the employee contribution. Similarly, the opposite may be true. The employee contribution might be taxable, but not the employer’s.

The following chart is structured to show how these Ontario and Quebec sales taxes apply on employer paid group benefits. For example, the phrase “resident employers” in the chart below means, when looking at the Ontario requirements, employers with permanent establishments or who carry on business in Ontario. When looking at the Quebec requirements, the reference is to establishments or businesses operated within that province.

 

Benefits Provided Via

Sales Tax on Employer Paid Group Benefits

Which Employers

Which Current/
Former Employees

Tax Exemption on
Employer Paid Premiums

Insured benefit coverage

Resident employers

For current employees, where Ontario or Quebec is the province of employment; for all others, where Ontario or Quebec is the province of residence

No exemptions

Non-resident employers (Ontario only)

Ontario sales tax only applies to former employees, who are Ontario residents

Self-insured, benefit plans, funded and unfunded

Resident employers

For current employees, where Ontario or Quebec is the province of employment; for all others, where Ontario or Quebec is the province of residence

For Ontario, employer payments toward CRA taxable benefits are exempt from sales tax. For Quebec, employer contributions to unfunded wage loss replacement plans, where benefits are MRQ taxable when paid to employees, are exempt from sales tax. This exemption includes the direct employer payment of self-insured WLRP claims.

Non-resident employers (Ontario only)

Ontario sales tax only applies to former employees, who are Ontario residents

For Ontario, employer payments toward CRA taxable benefits are exempt from sales tax.

 

As you can see from the above, there are differences between the treatment of resident versus non-resident employers, as between Quebec and Ontario.

Quebec does not levy its sales tax on employer payments toward group benefits, when the employer is not a resident of, or does not carry on business in, that province. By contrast, Ontario does assert the right to tax non-resident employer payments; however, only for group benefits provided to retirees and other former employees who are Ontario residents. In practice, Ontario would only likely be able to enforce the collection of such tax, where benefits were provided through insurance companies or other 3rd party administrators, who were themselves resident in Ontario.

For employee contributions toward group benefits, in both Ontario and Quebec, individuals are only liable for sales tax, when they are residents of the province concerned. By contrast, employers are only liable for sales tax on employer-paid benefits, where the province of employment is either Ontario or Quebec, as applicable. However, this province of employment rule only applies to employer contributions on behalf of current employees. For retirees and other former employees, employer benefit contributions are subject to tax only for former employees resident in the province concerned.

Example: Sophie is an Ontario resident. She lives near Cornwall, in eastern Ontario, and commutes to work every day near Pincourt, on Ile Perrot, just west of Montreal Island. Her employer provides a variety of group benefits, including group term life insurance, extended medical care and short-term disability. All of these benefits are provided through an insurance carrier. The related benefit costs are shared equally between Sophie and the employer. Since the province of employment is Quebec, the employer must pay 9% Quebec sales tax on the employer portion of the premiums related to Sophie’s coverage. If the employer is also resident in Ontario, Sophie must pay 8% Ontario sales on her payments to the employer for the benefits and coverage received. If the employer does not carry on business in Ontario, Sophie is responsible for remitting this 8% sales tax directly to the Ontario government. Since she is not a Quebec resident, Sophie owes no sales tax on these benefits to the Quebec government.

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posted on Canadian HR Reporter on October 21, 2013.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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