32 What are the optimal kinds of employee benefits (for both the employer and the employee)?

ITA 5(1) states that “Income from office or employment includes salary, wages and other remuneration that is received by the taxpayer during the year as a virtue of their employment.”   Per ITA 6(1)(a) this includes the value of “benefits of any kind that is enjoyed by the taxpayer during the year as a virtue of their employment.” This section of the ITA also features an “except for” clause which documents numerous benefits which, although they provide a benefit, are not taxable.  This includes items like some private health insurance plans, registered pension plans and group life insurance policies.

We can use these sections of the ITA (along with some ITA sections regarding deductibility of business expenses) to help find ‘optimal’ employee benefits, i.e. benefits that are non-taxable to the employee but still deductible to the employer.

In addition to the ITA guidance provided above we may need to determine who is the primary beneficiary of the benefit.   Typically, if the employee is the primary beneficiary the benefit is taxable, but if the employer is the primary beneficiary it would not create a taxable benefit.

Ultimately, any benefit received in the year by virtue of your employment is taxable unless there is a specific exemption or the employer is the primary beneficiary.  The taxable benefit would be added to your employment income and include in S3(a) when calculating Net Income for Tax Purposes.  The following flowchart is a helpful guide to determining if a benefit is taxable:

In many situations, there isn’t a clear or distinct answer. For instance, if an employer provides payments to each employee to purchase a laptop, is this a taxable benefit? You could argue that the employee is the primary beneficiary as they receive a free laptop, but you could also argue that the employer has a greater benefit as this could increase productivity.

What are the optimal benefits?

Optimal benefits are essentially not taxable for employees, and deductible for employers. This means they aren’t included in the employee’s income, and according to ITA 18(1), can be deducted from the employers’ business income.

Interactive content (Author: Karn Josan, January 2019)

Interactive content (Author: Natalie Haviland, January 2020)

References and Resources:

• ITA- (5)(1), (6)(1)(a), and (18)(1)
• Article – “T4130 Employers’ Guide – Taxable Benefits and Allowances” (Author: Government of Canada)
• Competency map: 6.3.2

January 2019

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