Sania Ilahi and Bradley Drysdale, Toronto
Companies often overlook the requirement to calculate and remit goods and services tax (GST)/harmonized sales tax (HST) on taxable benefits (other than benefits that are exempt or zero rated) provided to employees or shareholders.
These benefits must be calculated by the end of February following the year they were incurred (when T4 slips are prepared). The GST/HST in respect of these taxable benefits must be remitted on the GST/HST return that includes the month of February.
Under the Income Tax Act, any benefit received or enjoyed by an employee (or someone related to the employee) by virtue of his or her office or employment must be included in income, subject to some exceptions.
An employer must determine whether a payment to an employee or shareholder in respect of property or service that the employer has provided constitutes a benefit.
The most common benefits provided to an employee are the personal use of an employer-provided automobile and automobile operation costs. Other examples include:
- Employer-paid parking (subject to certain conditions)
- Gifts, awards and social events
- Subsidized meals or accommodations
- Vacations or spouse’s travel expenses
- Professional fees and club membership dues
The Canada Revenue Agency’s Interpretation Bulletin IT-470R (consolidated), Employees’ Fringe Benefits, sets out various examples of employment-related benefits that are considered taxable benefits. You should consult this bulletin, as well as the CRA’s annual Guide T4130, Employers’ Guide: Taxable Benefits and Allowances, for information on the CRA’s administrative procedures in this area.
For GST purposes, where a benefit is subject to GST/HST, the employer is deemed to have used the property or service in the course of its commercial activity, thereby allowing it to claim an input tax credit (ITC) to recover any related GST/HST.
Where this is the case, the employer is required to calculate and remit GST/HST on the benefit. There is no requirement for the employer to actually collect the GST/HST from their employee, but it is to be included in the employee’s T4 slip. The intent is to put the employee in the same position as if they had acquired the benefit outside of their employment and to put the employer in the same position as if it had paid the employee an equivalent salary.
The value of the benefit for GST/HST purposes is the total of the amount of the benefit reported on the employee’s T4 slip. If the taxable benefit is for a standby charge or operating expense of an automobile, the value of the benefit includes the amount, if any, that the employee was reimbursed for that benefit.
If the employee reimburses the employer for any portion of the value of the benefit, the amount of the reimbursement is not included in the employee’s income, but the GST/HST must be calculated on the full value of the benefit prior to any reimbursements.
It is important to note that there is no requirement to remit GST/HST on a benefit where the employer cannot claim an ITC. For example, an employer is not entitled to claim an ITC on the cost of a golf membership because it is exclusively for the personal use of an employee. Similarly, no tax applies to exempt or zero-rated supplies, such as low-interest loans (exempt) or benefits enjoyed outside Canada (zero rated).
Table A is a simple decision tree that should assist in the process of assessing the potential GST/HST consequences of taxable benefits.
Calculating the GST/HST liability on taxable employee benefits is a two-step approach. First, the employer must determine the value of the benefit for purposes of including it in the computation of an employee’s income. Second, the employer must calculate and remit the GST/HST on the benefit.
For the 2012 year, employers must use the rates in Table B to calculate the liability for GST/HST on taxable benefits paid to employees:
Similar rules apply for Quebec Sales Tax (QST) purposes. Revenu Québec requires an employer to remit QST on most benefit amounts. As a consequence of the rate increase of the QST to 9.5% as of 1 January 2012 the corresponding liability for QST on taxable benefits paid to employees increased as follows:
- Standby charge or other benefits: 9.5/109.5
- Automobile operating expense benefits: 6%
Further information can be found in Revenu Québec’s brochure IN-253-V, Taxable Benefits.
For more information on the GST/HST obligations in respect of taxable benefits, contact your Ernst & Young advisor.
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