An Unhealthy Cut
Not all perqs and benefits are created equally when it comes to rewarding your employees, at least from a tax perspective. Consider the traditional salary or bonus. Both are considered tax deductible to the employer, but are fully taxable to employees at their marginal tax rate. There are, however, several benefits you can provide that don't result in a taxable benefit to your employees, but are still tax deductible to you as the employer.
Consider the most common one: the group health insurance plan. Under the Income Tax Act, employees are specifically not taxed on the value of benefits from a private health services plan (PHSP). In other words, neither the employer's contributions to a PHSP nor the reimbursement of medical expenses from the PHSP are taxable.
For a plan to be considered a PHSP, the Canada Revenue Agency (CRA) has stated that it must meet its criteria, which would be "an undertaking by one person to indemnify another person for an agreed consideration from a loss or liability in respect of an event, the happening of which is uncertain." In addition, any covered expenses must qualify as valid medical expenses under the Tax Act.
A health spending account (HSA) is a form of PHSP and is a tax-effective way employers can offer additional health benefits to employees by depositing HSA "credits" or dollars into employees' accounts. Each year, the employee can use the allocated credits as needed for eligible health-related expenses not regularly covered under a provincial health plan or the employer's traditional PHSP. Since the HSA is also considered to be a PHSP, any benefits received from such a plan are specifically exempt from being a taxable benefit under the Act.
Recently, however, the CRA announced that it will be changing its administrative policy that permits employees to redirect a portion of their bonus to "purchase" additional flex credits in an HSA.
Currently, the CRA's position, as acknowledged in various advance tax rulings, is that the allocation of credits to an HSA in lieu of employees receiving a cash bonus would not result in a taxable employment benefit.
As of 2013, the CRA will consider the allocation of a bonus to an employee's HSA to purchase additional flex credits to be an "allocation of forgone cash remuneration" and, therefore, the amount so allocated should be taxed currently as employment income.