Taxable benefits – cash or non-cash?

Taxable benefits, with one exception, are only insurable earnings for EI premium purposes where these are provided as cash or near-cash. If taxable benefits are non-cash, the general rule is that no EI premiums are due and there is no reporting anywhere on the ROE.

So how do employers tell the difference between cash and near-cash taxable benefits and those which are non-cash? By cash we mean payment by cheque, credit card or debit card, as well as with physical cash.

In one sense, of course, the answer is obvious. Some taxable benefits are payments straight by employers to employees. For example, if an employer reimburses employees for parking that is personal, the reimbursement is a cash taxable benefit.

But virtually every taxable benefit involves some form of employer payment. What’s the difference between the employer paying cash to a 3rd party for the supply of goods or services to employees, versus paying the cash directly to employees? Why is one a cash benefit and the other non-cash?

For goods or services, there is a distinction between the taxable benefit itself and how that benefit is measured. If an employer gives an employee a large-screen television as an award for successfully completing a project, that’s a taxable benefit. But unless, the employer manufactures these – or one conveniently fell off the back of a truck – likely the employer paid a vendor for the television purchase. Does that make the television a cash taxable benefit? No. The reason is the distinction between the taxable benefit – the television – and how that benefit is measured – its fair market value. Except in the rarest of cases, the best evidence of fair market value is what an employer actually paid to purchase a good or service. In other words, the cash paid for the television is just a convenient measure of the taxable benefit; the physical television remains the taxable benefit itself.

Another distinction exists where benefits are considered to be ‘near cash’. Near cash generally means something that’s easily converted into or usable in place of cash. Two common examples are gift cards and gift certificates. These are regarded as the equivalent of cash because they can be used to pay for goods or services that employees would otherwise have to purchase with cash. Of course, if a gift card or certificate can also be redeemed in cash (the value of the card refunded to employees, instead of being used to purchase goods), it’s just that much clearer the related taxable benefit is cash or near cash.

Where taxable benefits are the provision of insured group benefits, the CRA accepts that whether benefits are cash or non-cash depends on who is ordinarily liable for these premiums, employer or employee.

The clearest example of this is short and long term disability benefit plans. When a disability plan is established, one of the key terms is who bears the related premium costs. The plan may specify that the employer pays all costs, that costs are shared between employer and employee or that employees pay all related premiums.

Where a short or long-term disability plan is employee-pay-all, meaning that under the terms of the benefit plan, employees are strictly responsible for 100% of premium costs, the plan does not result in a taxable benefit. However, if the employer pays any part of the premiums owing under the plan, benefits received may be subject to income tax. Despite this, there are situations where employers may pay employee premiums and not taint the employee-pay-all nature of such a disability plan.

For example, during a waiting period to qualify for long-term disability benefits, there is no gross income from which an employer may deduct employee disability premiums. In such cases, the employer may pay premiums the plan specifies are to be borne by employees, without tainting the otherwise employee-pay-all nature of the plan. In these specific circumstances, the employer payment is a cash-taxable benefit, subject to EI premiums. In other words, the CRA recognizes that such payments are something other than an employer contribution to the disability plan and are cash taxable benefits in their own right.

The only exception to the rule that non-cash taxable benefits are exempt from EI premiums is for board and /or lodging benefits provided by employers, when there is also other gross pay from which to deduct EI premiums. For example, if an employer provides, as a taxable benefit, an employee with housing and the person has other gross pay, the fair market value of that housing is an insurable earning for premium purposes. On the other hand, if in a particular pay period, there is no employee gross pay, the housing benefit is not an insurable earning for that pay period.

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.

 

 

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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