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Employees are taxed on their salaries, bonuses, and any other type of direct compensation they may receive, but they may also end up paying taxes on various non-monetary work perks or benefits.
Under the Income Tax Act, employees must include in their income the value of any benefits of any kind that the employee receives “in connection with, in the context of, or on the judgment of, his employment.” When deciding whether an employee should include the value of the benefit he or she received, the Canada Revenue Agency considers three specific factors: Does the benefit give the employee an economic advantage? Is the benefit measurable and quantifiable? Does it benefit the worker or the employer in the first place?
Two recent CRA letters of technical interpretation, each released in the last month, discussed whether certain employer-provided benefits would be considered taxable. The first relates to the COVID-19 test provided by the employer, and the second is the identity theft protection services provided by the employer. Let’s take a look at what the CRA has to say about each one.
The taxpayer, presumably an employer, wrote to the CRA asking about the employer-paid COVID-19 test, specifically a PCR test where employees send the sample to a lab for analysis. Results take several days to process and return. Testing is fully funded by the employer, employee participation is voluntary, and an unfavorable test result (i.e. a positive COVID-19 test result) will prevent the employee from entering the employer’s premises. Notably, the employee will still be able to maintain his employment status by arranging alternative work in the event of a positive test result.
The CRA responded that it was the agency’s “longstanding view” that an employer is the first beneficiary of medical tests in cases where such testing is necessary to meet an employment condition. However, in the situation described in the letter, employees are not required to take a COVID-19 test and test results (either positive or negative) have no bearing on the employee’s employment status. As a result, voluntary COVID-19 testing does not create working conditions.
However, in the context of the pandemic, “significant efforts are being made to control the spread of the virus”, with governments encouraging employers to make tests available to employees. As a result, the CRA concludes that when the results of a COVID-19 test provided by an employer are primarily for the employer’s use, it is “neither likely nor intended for the employee to be enriched or considered to have gained an economic advantage, and therefore the CRA does not consider Employer-provided COVID-19 testing as a taxable benefit for employees.
Identity Theft Shield Premiums
The second technical explanation letter was written by the employer asking whether premiums for identity theft protection that they are supposed to pay to a third party on behalf of their employees would be considered a taxable benefit to employees, and whether those premiums would be considered tax-exempt work at the employer’s expense.
Identity theft protection services generally provide identity or credit monitoring services to determine if an individual’s personal information has been compromised. According to the details of the plan, the policy issuer provides privacy monitoring, security, identity consulting and identity recovery services. Specifically, the service monitors for matches of an individual’s personally identifiable information: name, date of birth, social security number, driver’s license number, up to five passport digits, and up to 10 of each of the following: bank account numbers, and World Bank numbers Accounts, credit/debit card numbers, medical identification numbers, email addresses, and phone numbers.
The TRA has decided, after reviewing the details of the plan and the services offered, that in the absence of additional information indicating an increased risk of identity theft for company employees or some sort of link between the personal information being monitored and the employer’s work, the employer’s paid plan appears to provide an economic advantage back The benefit to the employees in the first place. As a result, the TRA has concluded that premiums paid by the employer will actually be included in the employee’s income as a taxable employment benefit.
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The CRA then moved on to the question of whether the premiums paid would be tax-deductible to the employer as a business expense. In general, in order to qualify as a tax-deductible business expense, it must be incurred for the purpose of earning business income, it must not be a capital or personal expense, and it must be reasonable under the circumstances.
Based on the details of the identity theft protection plan described above, the TRA felt that the services were about protecting an individual’s personal and financial information, and not related to an employee’s employment or business information. However, the TRA has concluded that to the extent that premiums paid by the employer are included in employees’ income as taxable benefits, the premiums will also be tax deductible for business purposes provided they are also considered reasonable. This conclusion is consistent with most employer-paid benefits, which are generally tax-deductible to the employer.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is Managing Director, Tax and Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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