Employees are taxable on their salaries, bonuses and any other type of direct compensation they may receive, but they could also end up paying tax on various non-cash employment benefits or perquisites.
Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” In determining whether an employee must include the value of a benefit received, the Canada Revenue Agency looks at three determining factors: Does the benefit give the employee an economic advantage? Is the benefit measurable and quantifiable? And does it primarily benefit the employee or the employer?
Two recent CRA technical interpretation letters, each released in the past month, discussed whether certain employer-provided benefits would be considered taxable. The first concerned employer-provided COVID-19 testing, and the second was employer-provided identity theft protection services. Let’s take a look at what the CRA said about each one.
The taxpayer, presumably an employer, wrote to the CRA asking about employer-paid COVID-19 testing, specifically a polymerase chain reaction test where employees mail in the sample to a laboratory for analysis. The results take several days to process and come back. The testing is fully funded by the employer, participation by employees is voluntary, and an unfavourable test result (that is, a positive COVID-19 test result) would prevent the employee from entering the employer’s premises. Notably, the employee would still be able to maintain their employment status through an alternative work arrangement if a positive test result were to occur.
The CRA responded that it was the agency’s “long-standing view” that an employer is considered to be the primary beneficiary of medical testing in situations where such testing is necessary to fulfil a condition of employment. In the situation described in the letter, however, employees are not required to take a COVID-19 test and the test results (whether positive or negative) have no impact on an employee’s employment status. As a result, voluntary COVID-19 testing does not create an employment condition.
That said, in the context of the pandemic, “considerable effort is being made to control the spread of the virus,” with governments encouraging employers to make testing available to employees. As a result, the CRA concluded that where the results of employer-provided COVID-19 testing are mainly for the use of an employer, it is “both unlikely and unintended that an employee would be enriched or considered to have received an economic advantage,” and so the CRA does not view employer-provided COVID-19 testing as a taxable benefit to employees. (Phew.)
Identity theft shield premiums
The second technical interpretation letter was written by an employer asking whether identity theft shield premiums it presumably would pay to a third party on behalf of its employees would be considered a taxable benefit to employees, and whether those premiums would be considered a tax-deductible business expense for the employer.
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 issuer of the policy provides privacy and security monitoring, identity consultation services and identity restoration services. Specifically, the service monitors for matches of an individual’s personally identifiable information: name, date of birth, social insurance number, driver’s licence number, up to five passport numbers, and up to 10 of each of the following: bank account numbers, international bank account numbers, credit/debit card numbers, medical identification numbers, e-mail addresses and phone numbers.
The CRA, after reviewing the details of the plan and services on offer, and in the absence of additional information suggesting a heightened risk of identity theft for the company’s employees or some type of link between the personal information monitored and the employer’s business, determined that the employer-paid plan would appear to provide an economic advantage primarily for the benefit of the employees. As a result, the CRA concluded that employer-paid premiums would, indeed, be included in the employee’s income as a taxable employment benefit.
The CRA then turned to the question as to whether the premiums paid would be tax deductible to the employer as a business expense. Generally, in order to qualify as a tax-deductible business expense, it must be incurred for the purpose of earning business income, must be neither a capital expenditure nor a personal expense, and must be reasonable in the circumstances.
Based on the details of the identity theft protection plan described above, the CRA felt that the services relate to protecting an individual’s personal and financial information, and were not related to either the employee’s employment or business information. That said, the CRA concluded that to the extent the employer-paid premiums are included in the employees’ income as a taxable benefit, the premiums would also be tax deductible for business purposes provided they are also considered reasonable. This conclusion is consistent with most employer-paid perquisites, which are generally tax deductible to the employer.