Employee taxable benefits in a pandemic (February 2021)
Under Canadian tax law, the general rule is that all amounts paid by an employer to his or her employees are treated as taxable income. That rule holds whether those amounts are paid as cash remuneration, or in the form of non-cash benefits. However, in some circumstances, that general rule is altered to permit employees to receive certain non-cash benefits on a tax-free, or tax-advantaged, basis.
Like so much else during 2020, the usual structure of working arrangements and employee compensation was displaced, and those changes have led the Canada Revenue Agency (CRA) to take another look at the tax treatment of the kinds of compensation and benefits paid during 2020. The CRA has now released information on some of the benefits or allowances which many employers have paid for the first time during 2020, and on how those benefits and allowances will be assessed for income tax purposes on the 2020 individual income tax return.
The announcements made by the CRA generally deal with compensation, benefits, or allowances paid by an employer to allow his or her employees to work partially or fully from home, as has been required under public health orders.
Home Office Equipment
In March of 2020, millions of employees were suddenly required to work from home during public health states of emergency. Doing so required, of course, that those employees have (or acquire) the necessary tools and equipment to allow them to do so — including, but not limited to, computers, desks, desk chairs, and, in many cases, upgraded Internet connections.
To allow their employees to work from home, many employers furnished the necessary equipment or provided their employees with the funds to do so themselves. The CRA has now indicated that in some — but not all — circumstances, there may be no taxable benefit to the employee from any such assistance. The general rule is as follows: where an employer pays for, or reimburses an employee for, the cost of computer or home office equipment to enable the employee to carry out his or her employment duties, there is no taxable benefit to the employee.
As is always the case in tax, there are limitations and exceptions to this rule. First, the maximum amount which can be provided to an employee (whether through direct purchase by an employer or reimbursement of expenses incurred by the employee) is $500. Any amount received over that $500 limit will be treated as a taxable benefit to the employee, to be reported on the return for 2020 and taxed as income.
Second, the way in which the employer assistance was structured makes a difference. Where the needed equipment or resources is furnished by the employer or the employer reimburses the employee for such purchases, there is no taxable benefit. Where the employee is provided with an advance to make such purchases and is required to provide an accounting (with receipts) for funds spent, and to return any unspent amount to the employer, there is similarly no taxable benefit received. (In both cases, of course, the amounts received or reimbursed are subject to the $500 limit outlined above.) Where, however, the employee receives an allowance but is not required to account to the employer for amounts spent, there will be a taxable benefit assessed equal to the amount of that allowance.
Commuting and Parking Costs
The CRA’s longstanding policy is that costs incurred by an employee to get to and from work, including parking costs, are a personal expense. Where those personal expenses are paid by an employer, the employee is considered to have received a taxable benefit.
The Agency recognizes, however, that employees who do continue to commute to work under current conditions may incur additional expenses, in order to minimize their risk of illness. For instance, an employee could choose to drive to work, rather than incurring the additional risk posed by taking public transit. As well, employees who are working from home may need to “visit” the workplace in order to obtain needed equipment or for other employment-related purposes.
In light of those realities, the CRA is prepared, as a matter of administrative policy, to relax the usual rules relating to employee taxable benefits for commuting. Where an employee continues to go to a workplace on a regular basis, and the employer pays for, reimburses, or provides a reasonable allowance for additional commuting costs incurred, no taxable benefit will be assessed for such reimbursement or allowance. The CRA has indicated, as well, that this administrative concession is extended to situations in which an employer-owned motor vehicle is provided for the commute, provided that this represents a change, in that the employee did not, pre-pandemic, commute to work using an employer-provided vehicle. Where the workplace is closed and employees work from home but must “visit” the workplace for any purpose that enables them to continue to perform their employment duties from home, a similar policy will apply. Specifically, where the employer pays for, reimburses or provides a reasonable allowance for the commuting costs involved in doing so, there will be no taxable benefit to the employee. Once again, this policy is extended to apply to the use of employer-owned motor vehicles.
Finally, where an individual has an employer-provided parking space at his or her workplace, but that workplace is closed, no taxable benefit will be assessed to the employee.
While there are no dollar limits imposed on the amounts outlined above, there are administrative restrictions and requirements. Most important, the administrative concessions exist to account for costs incurred by an employee only for reasons related to the pandemic and the need to comply with resulting public health measures and restrictions. Second, the overriding requirement of reasonableness will continue to apply and, finally, both employers and employees will be required to maintain records — both to demonstrate the reasonableness of any allowance or reimbursement provided, and to account for the kilometers driven for work-related purposes.
Cell Phones and Meal Allowances
The CRA has existing policies with respect to payment by an employer of costs incurred for employment-related use of an employee’s cell phone, and to the payment of meal allowances, and the CRA has indicated that such policies will continue to apply for 2020. More information on those policies can be found in CRA Guide T4130, Employers’ Guide — Taxable Benefits and Allowances, which can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130.html.
The changes to the CRA’s policies with respect to employee taxable benefits are outlined in a Backgrounder which is available on the CRA website at https://www.canada.ca/en/revenue-agency/news/2020/12/employer-provided-benefits-and-allowances-cra-and-covid-19.html.
That Backgrounder indicates that all such administrative policy changes are effective only from March 15, 2020 to December 31, 2020.