Farmers offer a variety of benefits to attract and retain employees. Two common benefits are low-rent housing and interest-free loans.
These benefits are a good incentive for employees, but they are considered taxable benefits. You need to be aware of the tax requirements for calculating your employees’ payroll deductions and year end T4 filings.
Free or low-rent housing
Offering employees free or low-rent housing can sometimes be a necessity on a farm. However, this is considered a benefit, which is taxable to the employee. Any utilities (telephone, electricity, natural gas, water, cable or internet) paid by the farm are also considered benefits received by the employee.
The amount of the taxable benefit is calculated as the difference between the fair market value of rent that could be charged to a non-related individual and the actual amount that the employee is paying. The greater amount of rent paid by the employee, the lower the taxable benefit will be. For example, you have a house that could be rented for $1,000 per month but you rent the house for $500 per month to your employee. The taxable benefit will be calculated as $500 per month ($1,000 to $500).
Interest free orlow-interest loans
Another common benefit is providing employees with a low-interest or interest-free loan for the purchase of a home or a vehicle. Because the loan is generally received at a lower interest rate than funds borrowed from the bank, the employee is receiving an advantage, which is a taxable benefit.
The taxable benefit is calculated based on the Canada Revenue Agency’s (CRA) prescribed interest rate, which is two percent at this time. The benefit is the difference between the interest paid by the employee and the prescribed interest rate.
For example, John receives a loan of $10,000 on Jan. 1, 2018, to be repaid within three years without interest.
The taxable benefit would be $200 per year based on the prescribed rate of two percent. However, if your agreement charged interest of one percent per year, then the taxable benefit would be reduced to $100.
As the employer, you are responsible for determining if the benefit is taxable, calculating the value of the benefit, and including the benefit in the employee’s taxable income. The benefit is taxed when received or enjoyed, and the appropriate Canada Pension Plan, Employment Insurance, and tax must be withheld and remitted to the CRA.
Not reporting the taxable benefit or remitting the appropriate payroll deductions can result in interest and penalties. The CRA can assess a 10 percent penalty along with a six percent interest charge on CPP, EI, and tax amounts that were not deducted. You may also be on the hook for both the employer and employee portion of CPP and EI payable if this is not correctly done.
Determining the taxable benefits and payroll deductions can get complicated. It is important to consult with a payroll or tax professional to help you determine your filing and remittance requirements.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.