One of the oft forgotten topics in payroll is the relationship between employee benefits and federal and/or provincial sales taxes, GST, HST and QST. Here we’ll use the single term GST to refer to all three.
Most employee benefits have no impact on employer GST remittances or Input Tax Credits (ITCs), since the majority of these are either exempt supplies (benefits provided through any form of group insurance) or are zero-rated supplies (any form of registered savings plan – RPPs, RRSPs, etc.).
However, non-cash taxable benefits, taxable allowances and employee reimbursements do have GST implications, either on the ITCs allowed or on the remittances that must be made.
The general rule for non-cash taxable benefits (goods or services) that are also taxable supplies is that employers are denied an ITC on their purchase, where the purchase is exclusively (i.e. at least 90%) for employee personal use. For example, if an employer purchases a flat screen TV to be given as an employee reward, the taxable benefit that this triggers means the employer can’t claim an ITC on the purchase.
In this rule, there are two conditions that must both be met before an ITC is denied.
First, benefits have to be income taxable. For example, if an employee were to fully repay the employer cost of the TV, there would be no taxable benefit and hence no denial of the employer ITC. Similarly, if the TV in this example met the CRA criteria for non-taxable gifts, the employer would be permitted to claim an ITC on its purchase.
Two, benefits have to be intended as exclusively for personal use. An employer may purchase an automobile for use primarily (i.e. at least 50%) for business purposes. Since the anticipated usage is not exclusively personal, no ITC is denied on the purchase. Note, it’s the intended use at time of purchase that counts, not the actual pattern of later use.
But there are exceptions. There are two specific situations where income tax status has no bearing on whether an employer is eligible for an ITC on non-cash benefits.
First, employers are denied an ITC on membership dues in social, recreational or athletic clubs or facilities, whether or not such memberships are a taxable benefit to employees.
Second, employers may be denied an ITC on property provided for primarily for employee use, where the property is leased rather than purchased. For example, where an employer rents parking spaces in an office building and makes them available to employees, an ITC may be denied if the parking space use is primarily (i.e. at least 50%) for personal rather than business purposes. If an ITC is denied, the denial applies to the full parking cost, even if this is partially repaid by employees.
In the above situation, the type of employer matters, as well as the relationship between employer and employee. Employers are denied an ITC on leased property, obtained primarily for employee personal use, where employees don’t bear the full cost and where the employer is:
- an individual (i.e. a proprietorship) and the leased property is used for the personal benefit of a related individual (spouse, child, sibling, etc.);
- a partnership and the leased property is used for the personal benefit of a partner or a partner’s employee (as opposed to an employee of the partnership itself); or
- a corporation and the leased property is used for the personal benefit of a shareholder or an individual related to a shareholder. For example, where a corporation has a share purchase plan, an individual may be both an employee and a shareholder.
For non-cash taxable benefits, the obligation to remit GST on the benefit is linked to the employer ability to claim an ITC. If an employer is denied an ITC, there is no requirement to remit GST on employee benefits that are taxable supplies.
However, there are exceptions that relate to standby charge and operating expense taxable benefits.
The first exception is the base cost used in GST remittances. Normally, this is the amount included in employee income (full employer cost, less any employee reimbursements). However, for both leased and purchased vehicles, the base for GST remittances is the sum of the taxable benefit and any employee reimbursements. Where, because of such a reimbursement, there is no T4-reportable automobile benefit, GST is owing on the reimbursement amount itself.
The second exception relates to GST remittances themselves. No employer GST remittances are required where the employer:
- opts to forgo an ITC that would otherwise be available. This option is available for leased vehicles that were leased or are driven primarily for employee personal use. Where the employer is a financial institution, this option is available for both purchased and leased automobiles, no matter the degree of personal or business use;
- is an individual or partnership and usage of purchased vehicles is at least 10% personal; or
- is a corporation (other than a financial institution) and usage of purchased vehicles is primarily personal.
So far we have been discussing the treatment of non-cash taxable benefits. However, many employee benefits are either provided in cash, as allowances for or reimbursement of expenses initially incurred by employees.
For allowances, employers are entitled to claim an ITC where:
- The allowance is non-taxable to employees, for example, a reasonable allowance for travel or for the business use of an employee’s own vehicle;
- The expense may be claimed by the employer as a legitimate business expense for corporate income tax purposes; and
- Substantially all (i.e. at least 90%) of the expenses covered by the allowance are GST taxable supplies.
Where an ITC is permitted on allowances, it’s calculated as the allowance amount times a rate specific to the province where the taxable supplies were initially made. For example, where an employee is provided a non-taxable allowance for driving a personal vehicle in Ontario, the ITC is the allowance amount times 12 over 112.
For reimbursements, employers may claim an ITC on expenses where GST has actually been paid by employees. The employer is able to claim an ITC on the full amount of the employee-paid GST, unless the expense reimbursement or business use are less than 100%. For example, an employee may spend $75 on a meal, related to business travel. However, the employer only reimburses $60 of this meal cost. An ITC on the reimbursement would be calculated as the GST paid times 60 over 75. Where there is both a partial reimbursement and a percentage of personal use, calculate the ITC using the lowest of reimbursement and business use percentages.
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 firstname.lastname@example.org, (250) 228-5280 or visit www.alanrmcewen.com for more information.