Fringe benefits

Fringe benefits are various non wage compensations provided to

employees in addition to their salary or wages.
Not all fringe benefits are considered taxable benefits.
Paragraph 6(1)(a)
paragraph
6(1)(a) lists fringe benefits that are not taxable
This include employer's contributions to the following:
registered
• pension plan or deferred profit sharing plan
• group
• accident, sickness or life insurance plan
• private
• health services plan
• provincial
• health tax levies
• employer
• contributions to provincial health care plans, where the
employee is liable for the premium,
are considered taxable benefits because the plan is public and not
private in nature

nontaxable benefits also include employer provided:

• use of an automobile provided its used exclusively for business
• counseling services in respect of mental or physical health,
retirement or reemployment
•
The taxable benefit resulting from the use of an employee provided
automobile are computed using

paragraphs 6(1)(e) and (k), and therefore, there is not taxable benefit
per paragraph (a)

Value of board and lodging

the
fair market value of housing and meals provided by an employer to an
employee are taxable
unless:
(i) the employee is working at a distance away from their ordinary
residence such that they
cannot be expected to travel daily and the temporary nature of their
duties or remoteness of
worksite
is such that they cannot be expected to establish and maintain a new
residence and the
lodging is necessary for at least 36 hours, or
(ii) the employee has paid a reasonable amount to cover the cost of
housing and meals
if
the employee pays less than a reasonable amount, the amount paid is
subtracted from the fair market
value of housing and meals received in computing the employment
deduction
if
the employee receives an allowance in respect of board of lodging, the
allowance is not taxable
provided it meets condition (i) and is reasonable in amount
IT470R
Interpretation
Bulletin 470 clarifies the CRA's position on the taxation of a number of
fringe benefits
The following fringe benefits are considered nontaxable:
fees, paid by an employer, for an employee's membership in a social
club, provided it is
principally for the employer's advantage (e.g. employee uses
membership to network)
business
• trips for spouses of employees if the spouse was engaged
primarily in business
• activities on behalf of the employer, as opposed to personal
activities
• home
• computer supplied by employer, provided it is used primarily for
business purposes
• employer
• provided parking

Allowances
Allowance versus reimbursement

Allowance is a amount paid to an employee in excess of their salary

for a work related
purpose that need not be substantiated by receipt
Reimbursement involves an employee incurring an expense on
behalf of their employer and being
repaid (requires the employee to submit a receipt)
Paragraph 6(1)(b)
Allowances must be included in income unless they are specifically
exempted per paragraph 6(1)(b) the most common exceptions are:
6(1)(b)(v) reasonable
allowance for travel expenses (including motor vehicle expenses)
received by a sales person
6(1)(b)(vii) reasonable
allowance for travel expenses (excluding motor vehicle expenses)
received by a nonsales
person traveling away from the municipality or area
where they normally report for work
6(1)(b)(vii.1)reasonable
allowance for motor vehicle expenses received by a nonsales
person
a sales person is someone who sells property or negotiates contracts
for their employer
a motor vehicle is any type of automotive vehicle

subparagraphs
(vii) and (vii.1) are separate because travel expenses have a territorial
limitation while
motor vehicle expenses do not
"Reasonable allowance"
Reasonability is not specifically defined; an unreasonable allowance
can be either too high or too low
in
the case of travel expenses, reasonability is usually determined based
on the employee's rank (i.e.
partners travel business class while junior staff travel economy)
in
the case of motor vehicle expenses, an allowance is considered
unreasonable if either:
(i) it is not based solely on kilometres, or
(ii) the employee receives both an allowance and reimbursement
As a general rule, the amount paid per kilometre is reasonable if it
approximates amounts deductible
by employers for motor vehicle expenses (i.e. $0.52 on the first 5,000
km and $0.46 thereafter)
if the employee receives a flat rate
allowance and a per kilometre allowance, both amounts will be
included in employment income
however,
a flatrate allowance is permissible if both:
(i) there is a beginning of year agreement between the employee and
employer that the employee
will receive a stated amount per kilometre for business travel
(ii) there is a year end
adjustment to compensate the employee for any difference between
the
flatrate
allowance and allowance based on kilometres

Automobile benefits
Suppose an employer provides an employee with an automobile and
the employer also pays the
operating costs of the automobile. If the automobile is used entirely for
business reasons, there is no taxable benefit to the employee.
However, a taxable benefit arises if any portion of use is personal.
Specifically, there are two benefits: the standby
charge and operating cost benefit.

Standby charge
Relates to the availability of use of the automobile for personal reasons
(i.e. employee does not have to spend taxpaid
dollars to either purchase or lease a car)

formula is as follows (tab subsection 6(2))

Employer owns automobile

Standby
charge = A/B x 2% x C x D

Employer leases automobile

Standby
charge = A/B x ⅔ x (E- F)
A = number of personal use kilometres driven during the year, not to
exceed B
B = 1,667 kms x months available for use*
2% → benefit of the car amortized over 4 years (i.e. 2% x 48 months =
96%)
C = original cost of the automobile including GST & PST, not subject to
capital cost limitation 13(7)(g)
D = months available for use*
⅔ → portion of lease payment related to automobile and not financing
E = lease payments including GST & PST
F = portion of lease payments related to insurance (reflected in
operating expense benefit)
* months available for use = # days available for use / 30 , rounded to
the nearest whole number
NB: GST & PST are included in the cost of the automobile and in the
lease payments because taxable
benefits include excise taxes (for further discussion, see the article
titled GST)
Operating expense benefit
Represents the benefit of gasoline, insurance, maintenance, etc.
expenses incurred by the employer and related to personal use
formula
is as follows (tab paragraph 6(1)(k))
A/B > 50% Operating benefit = $0.24 x personal use kms
A/B < 50% Operating benefit = lesser of:
(i) $0.24 x personal use kms
(ii) ½ stand by charge
Even if A/B < 50%, the lesser of condition only applies if the employee
informs employer in writing
before end of year (otherwise, benefit computed using $0.24 x
personal use kms)
Loans
Employees who receive low or no interest loans from their employer
are considered to have a taxable interest benefit. Specifically, there is
a benefit when the interest rate of the loan is below the Act's quarterly
prescribed rate.
The list of prescribed rates can be found in the Table of Rates and
Credits at
the front of the Act. For further discussion on prescribed rates, see
Administration & procedures Interest.
Note that the employee is not taxed on the principal amount when the
loan is received, so, payment of principal is not deductible. However,
any portion of the loan forgiven by the employer is included in the
taxable income of the employee.
The method for calculating the benefit depends on whether the loan is
to purchase a home.
Loans other than for a home
Interest benefit is computed as follows:
Interest on the loan based on prescribed rates XX
Interest paid by employee (XX)
= Interest benefit XX
Prescribed interest is computed daily1, so, if the loan was outstanding
for the last month of 2009, and the prescribed rate for quarter four is
q4 , then:
Interest @ prescribed rate = employee loan x r4 x 31/365

Interest paid by employee includes amounts calculated in respect of

year but paid up until January
30th of next year (e.g. the employee makes a December interest
payment in January)
Loans to purchase a home
The interest benefit is computed the same except that the quarterly
prescribed rate is the lesser of:
(i) the prescribed rate for the quarter the loan was outstanding, and
(ii) the quarterly prescribed rate in effect when the loan was first made
(updated every fifth year) this method results in a lower income
inclusion
If the loan is in respect of an eligible home relocation, the taxpayer can
claim a Division C deduction an eligible home relocation occurs when a
taxpayer moves at least 40 kms closer to a new work location (same
definition as for moving expenses)
The Division C deduction is the interest benefit the taxpayer would
have received on the first $25,000 of the loan and is available for the
length of time of the loan to a maximum of five years
1 The Act normally computes prescribed interest compounded daily. However, in the
CCH textbook (Beam, Laiken and
Barnett), the
Housing loss
An amount paid by an employer to compensate an employee for the
loss on the sale of a house is a taxable benefit however,
if the loss qualifies as an eligible housing loss, only a partial amount of
the loss qualifies as
a benefit an
eligible housing loss is a loss incurred as a result of an eligible home
relocation
an eligible relocation occurs when a person moves at least 40 km
closer to a new work location
for an eligible housing loss, the benefit is computed as:
benefit = ½ [ loss reimbursed by employer $- 15,000]

Employee stock options

An employee stock option gives an employee the option to purchase a
share of their employer at a
specific price, called the exercise price (X). At the time the option is
granted, if the share price (PG) is
greater than the exercise price, the option is "in the money" because
exercising it would be profitable.
The option is "out of the money" if, at grant date, the share price is
less than the exercise price. When
the option is exercised, the employee pays their employer the exercise
price and receives a share. The
employee can either sell that share at the current share price (PX), or
they can hold onto it and sell it in
the future (PS).
There are two general rules regarding income and stock options:
(1) the difference between the price of the share when exercised and
the exercise price is
recognized as an employment benefit when the option is exercised
employment benefit = # of shares * (PX X)
recognize when exercised
(2) the difference between the price of the share when sold and the
price of the share when
exercised is recognized as a capital gain when the shares are sold
capital gain = # shares * (PS PX)
recognized when sold
Because the employment benefit is fully taxable but the capital gain is
½ taxable, there is incentive for
the taxpayer to exercise their options when the share price (PX) equals
the exercise price, and wait to
sell them at a higher price (PS). However, if the employee exercises
their options but does not sell their
shares, they may not have the cash to pay the tax on the employment
benefit. As a result, the Act has
two relief mechanisms that the taxpayer might qualify for:
(1) the employment benefit is deferred and recognized at the time of
sale
(2) Division C deduction reduces the employment benefit by ½
Whether the taxpayer qualifies for the relief mechanisms depends if
the options were issued by a CCPC
or a public corporation.
CCPC
employment
benefit is always deferred until the time of sale
Division
C deduction is available if either:
(i) the options were out of the money when granted (i.e. X > PG), or
(ii) after being exercised, the shares are held for at least two years
before being sold

Non sales person's expenses

Before reading this article, you should familiarize yourself with the
general limits on deductions against all sources of income.

There are three deductions that apply to all employees, regardless of

whether they are in a sales position:
8 (1)(b) Legal
expenses incurred by an employee to collect or establish a right to
remuneration owed by an employer
8(1)(i) where an employee is allowed to deduct the salary of assistant,
the CPP and EI contributions in respect of that assistant are also
deductible

8(1)(m) employee
contributions to a registered pension plan

The remaining deductions depend on whether the individual is a sales

person. A sales person is
someone who sells property or negotiates contracts on behalf of their
employer.

All other employees are referred to as nonsales

persons. Because there are many conditions involved, you should be
tabbing these sections.

Nonsales
persons can deduct under the following provisions:
8(1)(h) traveling
expenses other than motor vehicle expenses
8(
1)(h.1) motor
vehicle expenses
8(
1)(i) dues
and other expenses
8(
1)(j) motor
vehicle costs

8(1)(h) Traveling
expenses other than motor vehicle expenses
in
order to deduct under paragraph (h), the nonsales
person:
(i) is ordinarily required to carry out their duties away from the
employer's place of business
(ii) is required to pay for traveling expenses as part of contract
(iii) cannot be in receipt of a nontaxable
allowance for traveling expenses
travel
expenses between the employee's home and usual place of work are
not deductible
8(1)(h.1) Motor vehicle expenses
in order to deduct under paragraph (h.1), a nonsales
person must meet the same conditions as
stipulated in paragraph (h), substituting motor vehicle expenses for
traveling expenses
motor
vehicle expenses cannot be capital in nature, therefore, a nonsales
person can only deduct
operating costs (e.g. gasoline, maintenance, etc.) and operating lease
payments (restricted per 67.3)
expenses deducted under paragraph (h.1.) prorated
for employment usage based on kms

if nonsales person is in receipt of a unreasonable allowance for travel

or motor vehicle expenses, they
are eligible to deduct under paragraphs (h) and (h.1); if they are in
receipt of a reasonable allowance,
the allowance must be taken into income in order to deduct
paragraphs
(h) and (h.1) are separate deductions so that the receipt of a motor
vehicle allowance
excluded from income does not preclude the deductibility of travel
expenses

Sales person's expenses

A sales person is someone who sells property or negotiates contracts
on behalf of their employer. A
sales person can deduct expenses under the following provisions:
8(1)(f) sales
person's expenses, OR
8(1)(h) traveling
expenses other than motor vehicle expenses +
8(1)(h.1) motor
vehicle expenses
8(1)(i) dues
and other expenses
8(
1)(j) motor
vehicle costs
Sales people have the option of deducting expenses under paragraph
(f) or paragraphs (h), (h.1), but not
both. As you will see, the deduction per paragraph (f) is limited to the
sales person's commission
income. The sales person should first compute their deduction under
paragraphs (h), (h.1) and if it
exceeds commission income, then it should be used. However, if it
does not, paragraph (f) should be
chosen because it allows the sales person to claim other types of
expenses.
8(1)(f) Sales
person's expenses
in order to be able to deduct under paragraph (f), sales person must
meet all of the following:
(i) must be required to pay for their own expenses as per the
employment contract
(ii) is ordinarily required to travel away from employer's place of
business
(iii) must be paid in whole or part by commission
(iv) cannot be in receipt of a nontaxable
allowance from their employer
total
amount deductible under paragraph (f) is limited to the employee's
commission
expenses
not deductible include:
(i) outlays of a capital nature
(ii) golf fees or membership fees in respect of a private club as per
18(1)(l)
deductible
expenses include:
(i) travel expenses
(ii) motor vehicle operating costs prorated for employment usage
based on kms
(iii) motor vehicle lease costs (limited by 67.3) prorated based on kms
(iv) promotional expenses
(v) meals and entertainment (limited by 67.1); in order to be
deductible, meals must have
been consumed while the employee was away from the municipal area
where they
normally report for work, for at least 12 hours
(vi) property tax and insurance provided the employee owns the home
and the workspace
meets the conditions per 8(13)
T2200
form must be filed to deduct under this paragraph
The other provisions are the same for sales persons as they are for
nonsales
persons.

Introduction to business income

The rules for computing income from a business are listed in Division B
Subdivision b. Beginning
with accounting income, the taxpayer adjusts for the differences
between the Act and GAAP. The
reconciliation is as follows:
Income or loss from business (i.e. accounting income) XX
- Capital gains (losses) XX
+ Income not included in GAAP XX
+ Disallowed expenses for tax purposes XX
Allowable
expenses for tax purposes XX
= Business income for tax purposes XX
Capital gains
Capital gains and losses represent a separate source of Division B
income and therefore, are not
included in business income.
Income not included in GAAP
The Act requires that amounts receivable for services rendered and
amounts received for services not
yet rendered be included in business income. However, the Act allows
the taxpayer to claim a reserve
(i.e. allowance) for unearned amounts. The Act also requires that
reserves recognized in a prior year be
brought into income the subsequent year, when the taxpayer
recognizes a new reserve. The net effect is
the same as it would be for accounting purposes1.
Inducement payments or government subsidies must also be included
in income unless they are respect
of capital, in which case they are deductible from the cost of the
property.
Nonmonetary
transactions are accounted for tax purposes generally the same way as
GAAP.
Expenses
Expenses disallowed by the Act are listed in sections 18(1) and 19.
Also, the Act denies unreasonable
amounts listed in section 67. However, subsection 20(1) contains
expenses not deductible per GAAP
that the Act allows. This is discussed in greater depth in the following
articles