Taxing near-cash or non-cash benefits to employees

We previously discussed the benefits and limitations of paying a spouse or children for work on the farm. Usually, for record-keeping purposes it is most effective to issue cash amounts by cheque to meet the conditions set out by the Canada Revenue Agency.

There are other means of employee compensation, however, that are referred to as near-cash or non-cash that are still considered as taxable benefits for any employee, whether they are operating at arm’s-length to you or not. For example, if you give your employee free use of property you own, that, in most cases, is considered a taxable benefit.

A non-cash benefit includes a good, service or property you own that you give to your employee. If that property is paid for by you and provided to your employee, it is still considered a benefit of employment. Gift certificates, gift cards, stock or anything else that can be converted into cash are considered near-cash benefits.

Once it is established that these forms of payment are taxable in hands of your employees, Canada Pension Plan (CPP) comes into play and the appropriate deduction must be made from your employee’s compensation. You will also be responsible for the employer’s portion of the CPP. If the only type of payment made to your employee is a non-cash taxable benefit, then you do not have to withhold CPP or remit your employer’s portion. You do have to report the value of the non-cash benefit as pensionable earnings.

Non-cash or near-cash compensation are generally not insurable so Employment Insurance (EI) need not be deducted. One exception to this is if you pay an employee’s contribution to their Registered Retirement Savings Plan and it is accessible to the employee. In that case, EI comes into play.

The employee’s total pay must reflect deductions that include the non-cash or near-cash benefits unless the total pay is not sufficient to meet their basic family needs.

If you own or lease a vehicle and allow your employee to use it for personal use, or you reimburse an employee for use of their vehicle, then that is also considered a taxable benefit and can be complicated. Personal use of a vehicle can be any one or more of:

  • Vacation travel.
  • General driving for personal activities.
  • Travel between home and regular place of employment.

If your employee must travel to several different locations, then driving from home to the first location and driving home from the last location are still considered personal use. However, driving between the other locations is considered business related.

To differentiate between personal and business use of a vehicle, record-keeping is all important. The items recorded should include total kilometres driven in a year, date and name of individual destinations, purpose of meetings, kilometres specific to each visit and distances travelled between home and place of business.

If your vehicle is returned to your premises every day and there is no personal use involved, then there is no taxable benefit to the employee.

Like all such matters, seeking the advice of your tax or financial adviser on how to treat such benefits is recommended.

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