As a business owner, you know that employee morale is key to your company’s success. To help motivate morale and keep competitive with other businesses, you likely provide employee benefits such as health and dental insurance.
Did you know that if you don’t report taxable benefits accurately on employees’ T4 slips, a Canada Revenue Agency (CRA) audit may find that they owe back taxes, resulting in the exact opposite effect of what you were hoping to achieve.
Whereas contributions to a registered pension plan and private medical, sickness or accident insurance are not taxable to your employees, parking, automobiles, relocation reimbursements, as well as allowances, transportation, awards, gifts, life insurance, employee loans and stock options may be considered taxable as though the employee received an equivalent amount of income. There are some corresponding deductions employees will be able to make; however, a CRA “employer compliance audit” will assess whether you correctly reported these taxable employee benefits. Should the audit find that you are not compliant, both your tax bill and your employees’ tax bills may increase, sometimes going back several years including interest and penalties.
Recently, I spoke to my colleague, Paul Lynch, who specializes in advising business owners on tax dispute resolution, about the consequences of inadequately recording employee taxable benefits. Paul shared a situation where an employer with about 50 employees had their taxes reassessed following an audit of employee benefits – and all for multiple years. The employees faced additional tax bills, some in the thousands, including interest for unpaid taxes. The employer’s tax bill was increased for additional Canada Pension Plan and Employment Insurance contributions, as well as for GST/HST that should have been remitted on the “supply” of the taxable benefits to the employees, plus interest and penalties.
The employer and the employees formally contested the audit results. The employer supported the employees through the process even though some of them had left the company.
Each employee had to file a notice of objection for each year audited. To make it more complicated, not all their situations were the same because employees were reassessed for different types of taxable benefits depending on the work they did. As you can imagine going through this process was not a great morale booster and proved to be an administrative nightmare.
What can you do to avoid an “employer compliance audit”?
How about performing a routine checkup on the items the CRA could view as taxable benefits to ensure you are accurately reporting them on your employee’s T4 slips?
Check out the CRA’s Employer’s Guide, Taxable Benefits and Allowances. This publication contains a chart that lists the many taxable allowances or benefits that you can compare against your own offerings to your employees to see whether you are compliant with CRA’s policy.
Keep in mind the non-traditional taxable benefits the CRA may scrutinize, such as cellular phone service, Internet service, Tax Free Savings Account contributions and administration fees. It’s important to remember to keep up to date on the CRA’s administrative position on the tax status of items; the CRA updates its policy regularly as laws are amended or decisions are made in court.
Paul advises business owners to remember that whether an employer-paid amount is a taxable benefit is not always straightforward. Even the amount that should be taxable may also be open to interpretation. It’s important to make sure you understand the CRA’s guidelines and that decisions are documented on reporting taxable benefits. If you are not sure what the best course of action is, it’s best to stay on the conservative side to avoid the consequences of a potential CRA employer compliance audit.
As an employer, the onus of responsibility lies with you to get it right. Remember, you are not alone if you have questions about taxable benefits. Contact a professional service adviser who can help shed some light on the CRA’s guidelines. The benefits of doing so are twofold: happy employees and decreased risk of a tax reassessment.
