Chapter

3
Employment Income – Allowances,
Expenses and Benefits

Learning Objectives:

Upon completion of this chapter, you should be able to:

1. Identify the difference between taxable and non-taxable allowances, expenses

and benefits
2. Calculate allowances, expenses and benefits
• Car allowance
• Meal allowance
• Clothing allowance
• Personal living expenses
• Group term life insurance benefits
• Group sickness and accident insurance benefits
• Private health insurance benefits
• Provincial health insurance benefits
• Employee assistance plan benefits
• Cell phone and Internet benefits
• Gifts and awards benefits
• Parking benefits
• Tuition benefits
• Loan benefits
• Automobile benefits
3. Calculate net pay

Communication Objective:

Upon completion of this chapter, you should be able to explain the difference
between reasonable and unreasonable car allowances.

© National Payroll Institute – Payroll Fundamentals 1

Vs 18.0 3-1
Chapter 3
Employment Income – Allowances, Expenses and Benefits

Chapter Contents

Introduction .............................................................................................................................. 3-3

Allowances and Expenses ........................................................................................................ 3-4
Car Allowance ..................................................................................................................... 3-4
Meal Allowance ................................................................................................................... 3-7
Clothing Allowance ............................................................................................................. 3-8
Personal Living Expenses .................................................................................................... 3-9
Net Pay Calculation ............................................................................................................. 3-9
Content Review.................................................................................................................. 3-12
Benefits .................................................................................................................................. 3-14
Fair Market Value .............................................................................................................. 3-16
Provincial tax on insurance premiums ............................................................................... 3-17
Common employer-provided benefits ............................................................................... 3-17
Group Term Life Insurance Plans ...................................................................................... 3-18
Group Sickness and Accident Insurance Plans .................................................................. 3-20
Private Health Insurance Plans .......................................................................................... 3-20
Employee Assistance Plans................................................................................................ 3-22
Group Registered Retirement Savings Plan (RRSP) ......................................................... 3-22
Gifts and Awards ............................................................................................................... 3-24
Cell Phones and Internet Access ........................................................................................ 3-27
Parking ............................................................................................................................... 3-29
Tuition ................................................................................................................................ 3-30
Loans – Taxable Interest Benefit ....................................................................................... 3-31
Automobiles ....................................................................................................................... 3-35
Net Pay Calculation ........................................................................................................... 3-51
Content Review.................................................................................................................. 3-53
Common Situations................................................................................................................ 3-55

© National Payroll Institute – Payroll Fundamentals 1 3-2

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Introduction
Chapter 2 discussed regular earnings, one component of employment income. Other types of
employment income introduced in this chapter are allowances, expenses and benefits. To
properly calculate an employee’s pay, payroll professionals need to understand whether these
types of income are taxable or non-taxable. This chapter will examine each type of income and
the conditions determining their taxability.

Taxable cash allowances and taxable expense reimbursements are considered employment
income. They must be included in the employee’s pensionable earnings, insurable earnings and
net taxable income. Just like regular earnings, they are subject to Canada/Québec Pension Plan
(C/QPP) contributions, Employment Insurance (EI) and Québec Parental Insurance Plan (QPIP)
premiums, federal and provincial income taxes and Northwest Territories (NT) and Nunavut
(NU) payroll taxes.

Taxable benefits are another form of employee remuneration. When an employer provides
employees with items for the employee’s benefit, the Canada Revenue Agency (CRA) and
Revenu Québec (RQ) may determine that the benefit is taxable to the employee. If the employer
pays the benefit cost to a third party, the value of the benefit is included in the employee’s
income as a non-cash taxable benefit. If the employer reimburses employees for money they paid
for the benefit, the reimbursement is included in the employee’s income as a cash taxable
benefit.

Non-cash taxable benefits are subject to all statutory withholdings except EI and QPIP
premiums. Taxable benefits that are considered cash are subject to all statutory withholdings.

Payroll professionals must be prepared to explain the CRA or Revenu Quebec policies on the
taxability of allowances or benefits. Additionally, the method in which the allowance or benefit
is delivered will determine what statutory withholding amounts must be withheld from the value
of the allowance or benefit.

This chapter will explain the concepts of allowances, expense reimbursements and benefits,
taxable and non-taxable, that employers make or provide to their employees, in addition to
payments of salary and wages. We will also cover the concept of fair market value, which, in
addition to the cost of a benefit, includes any applicable taxes, such as GST/HST or provincial
sales taxes.

© National Payroll Institute – Payroll Fundamentals 1 3-3

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Allowances and Expenses

Allowances are amounts paid to employees, in addition to their earnings, for the use, or
anticipated use, of their personal property for business purposes. Allowances can also be
provided to employees to cover the cost of personal living expenses associated with employment.

Allowances may or may not be taxable, depending on the conditions they are paid. When an
allowance is non-accountable, meaning the employee does not have to provide proof of business
use, the allowance is considered taxable. The most common allowances cover employee costs for
cars, meals, uniforms, safety shoes or other specific work-related clothing. Taxable allowances
are included in an employee’s income and are pensionable, insurable and taxable, subject to all
statutory deductions. Non-taxable allowances, for example, a mileage reimbursement for
business travel that the government considers to be reasonable, are not included in an employee’s
taxable income.

Expense reimbursements are paid to employees to cover any expenses incurred on behalf of the
organization in their job performance. For the most part, expense reimbursements are not
included in the calculation of an employee’s pay because the expenses are part of the
organization’s cost of doing business. They are claimed on an expense report, supported by
receipts, and usually submitted directly to accounts payable for reimbursement to the employee.

Note:
If an allowance is deemed taxable, it is subject to federal and provincial income taxes, Canada
and Québec Pension Plan contributions, Employment Insurance and Québec Parental Insurance
Plan premiums, and Northwest Territories Nunavut payroll taxes. The term ‘taxable’ does not
refer to income taxes alone.

Car Allowance
A car allowance is paid or reimbursed to employees who use their personal automobiles for
business. The allowance is intended to cover the portion of the gas and maintenance costs related
to business use and the extra wear and tear on the automobile.

Car allowances can be provided as a:

• flat amount, for example, $350.00 per month

• fixed amount per business kilometre (km) driven, for example, $0.70/km
• credit card or reimbursement for gas purchases

The taxability of a car allowance or reimbursement is based on whether it is considered

reasonable or unreasonable by the Federal and Québec governments under their respective
Income Tax Acts.

© National Payroll Institute – Payroll Fundamentals 1 3-4

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Note:
2024 per kilometre rates have been used to demonstrate process and practice. To obtain current
rates, go to CRA Automobile Allowance Rates.

Reasonable Car Allowance

Both the Canada Revenue Agency (CRA) and Revenu Québec (RQ) consider a car allowance
reasonable when all of the following conditions apply:

• the allowance is based solely on business kilometres driven in a calendar year

• the amount provided is based on the following government-prescribed reasonable
guidelines:
o $0.70 per km for the first 5,000 business kilometres in the year ($0.74 per km in
Yukon, Northwest Territories and Nunavut)
o $0.64 for each business kilometre after that ($0.68 per km in Yukon, Northwest
Territories and Nunavut)
• the employer does not reimburse the employee for expenses related to the same use of the
vehicle

If the allowance or reimbursement meets all these conditions, it is considered reasonable;

therefore, it is non-taxable and excluded from income.

Example:
Jackie Burke is a salesperson in Manitoba who uses a personal car to visit the company’s
customers in the sales district. The company reimburses Jackie for business kilometres driven at
a rate of $0.70 for the first 5,000 kilometres and $0.64 for each kilometre above 5,000. The
employer does not reimburse Jackie for any other automobile expenses. As this arrangement
meets the government’s conditions, the allowance would be considered reasonable, non-taxable
and excluded from income.

Unreasonable Car Allowance

It is considered unreasonable when a car allowance or reimbursement does not meet the three
government-defined reasonable conditions. Unreasonable car allowances or reimbursements
include a:

• a flat amount that is not based solely on business kilometres driven, for example, $500.00
a month
• fixed amount per business kilometre driven that is either lower or higher than the
government-prescribed reasonable rates, for example, $0.28 or $0.78 per business
kilometre
• credit card or reimbursement for gas purchases

© National Payroll Institute – Payroll Fundamentals 1 3-5

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Taxable car allowances and reimbursements must be included in an employee’s income and are
subject to statutory deductions.

Flat Amount
A flat dollar amount paid to an employee not based on the actual business kilometres driven is
considered an unreasonable allowance and, therefore, taxable subject to statutory deductions.

Example:
Optimum Eyewear provides each employee with a $450.00 monthly car allowance. The
employees are not required to keep a logbook of the business kilometres they drive or report their
business kilometres to the company. These car allowances would be considered unreasonable as
they are not based on the actual business kilometres driven; the company must include the
$450.00 allowance in the employees’ taxable income.

Per Kilometre Reimbursement

When an employer provides an employee with reimbursement for business kilometres driven
higher or lower than the government-prescribed per kilometre rate, the allowance may be
considered unreasonable and taxable, subject to statutory withholdings.

Example:
Rachel Meyer uses a personal vehicle for business purposes. The employer reimburses Rachel
$0.70 for each business kilometre driven in the assigned sales territory. As this rate is higher than
the government-prescribed per kilometre rate, the reimbursement is considered unreasonable and
will be included in Rachel’s taxable income.

Combination Allowance
Some employers provide a car allowance that combines a flat dollar amount plus a per kilometre
amount for business kilometres driven. If the two allowances are paid for the same use of the
automobile, they are both considered taxable and must be included in the employee’s income,
subject to statutory deductions.

Example:
Alyson Charles is a salesperson using a personal vehicle for business purposes. The employer
provides Alyson with a monthly car allowance of $300.00 and reimburses the government-
prescribed per kilometre rate for each business kilometre driven in the sales territory. As Alyson
is receiving both a monthly car allowance and a per business kilometre amount for the same use
of the vehicle, the combination allowance is taxable. The employer must include the total of the
$300.00 and the per kilometre reimbursement in income, subject to statutory deductions.

© National Payroll Institute – Payroll Fundamentals 1 3-6

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Another employer pays the government-prescribed per kilometre amount for employment-related
travel outside the employment district and a flat-rate monthly allowance for travel inside the
employment district. Since the flat-rate allowance does not compensate the employee for any of
the “same use” of the vehicle that the reasonable per-kilometre allowance compensates the
employee for, the allowances are separate for purposes of the Income Tax Act.

Consequently, the reasonable per-kilometre allowance paid for travel outside the district is not
included in income. The allowance based on the flat-rate paid for travel inside the district is
included in income.

Meal Allowance
A meal allowance is an amount paid or reimbursed to an employee that is intended to cover the
cost of:

• a missed meal due to working overtime

• meal expenses incurred while on employer business

Using the government's criteria, the employer must determine if the meal allowance paid is
taxable.

Overtime Meal Allowance

An overtime meal allowance is considered non-taxable by the CRA if all of the following
conditions apply:

• the allowance or cost of the meal is reasonable; generally, a value of up to $23 (including
GST/HST and PST) will be considered reasonable.
• the employee must work two or more hours of overtime before or after their scheduled
hours of work and
• the overtime is infrequent and occasional in nature and usually occurs less than three
times a week; this condition may also be met where the meal or allowance is provided
three or more times per week on an occasional basis to meet workload demands such as
major repairs or periodic financial reporting.

If overtime regularly occurs three or more times a week, the allowance or reimbursement is
considered taxable, as it starts to take on the characteristics of additional earnings. Taxable meal
allowances or reimbursements are subject to statutory deductions.

© National Payroll Institute – Payroll Fundamentals 1 3-7

Chapter 3
Employment Income – Allowances, Expenses and Benefits

An overtime meal allowance is considered non-taxable by RQ if the:

• overtime is done at the employer’s request and is expected to last for at least two
consecutive hours
• overtime is done rarely or on an occasional basis (fewer than three times a week)
• the meal expenses are reimbursed (in whole or in part) upon presentation of receipts
• the meal expenses reimbursed or the value of the meal provided is reasonable

Meal Expenses
If an employee is conducting business or on a business trip, the employer reimburses the meal
expenses they incur. The meal expenses are submitted to the accounting department on an
expense report with receipts attached. These meals are considered business-related expenses, and
the expense reimbursement is not included in income.

Clothing Allowance
A clothing allowance is paid or reimbursed to an employee to purchase a particular type of
clothing required for work. The allowance is intended to cover or offset clothing costs and any
associated costs related to the upkeep, such as cleaning the clothing.

A clothing allowance can be provided to the employee as follows:

• an amount based on receipts submitted

• a flat dollar amount

The taxability of a clothing allowance is determined based on whether the clothing is a required
distinctive uniform or is needed for protection from hazards associated with work, such as safety
boots or shoes.

Distinctive Uniform and Special Clothing

The cost of supplying an employee with a distinctive uniform that must be worn while on the job
or providing special clothing (including safety footwear and safety glasses) designed to protect
the employee from hazards associated with work is not taxable to the employee.

Paying for, or reimbursing, an employee for uniforms or protective clothing supported by

receipts is considered a reimbursement of expenses, not a taxable benefit.

Reimbursement for the cost of protective clothing that is not supported by receipts is also
considered non-taxable if all of the following three conditions are met:

© National Payroll Institute – Payroll Fundamentals 1 3-8

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

• the law requires employees to wear protective clothing on the work site
• the employee bought the protective clothing, and
• the amount of the reimbursement is reasonable

When an employer pays or reimburses employees for the cleaning or laundering of uniforms or
special clothing, the payment is considered non-taxable even if the employee does not provide a
receipt.

A clothing allowance or reimbursement becomes taxable, where the employee has the freedom to
choose what they will wear. In other words, the clothing is neither a distinctive uniform nor
required for safety reasons.

Taxable clothing allowances or reimbursements are subject to statutory deductions.

Examples:
All employees at Logan Enterprises must wear safety shoes while working in the plant, as
protective footwear is required by law. Logan allows its employees to purchase their safety shoes
and reimburses them for the cost, whether the employee provides a receipt or not if the cost is
under $175.00. The reimbursement is not taxable to the employees.

A restaurant requires its servers to wear black pants or skirts and a white shirt or blouse. As the
employees are free to choose their outfits, any money paid by the employer for the clothing
would be a taxable allowance.

Personal Living Expenses

If an employer reimburses an employee for personal living expenses, for example, travel from
home to the office, then the expense reimbursement is taxable. This is not a common practice,
but if the employer pays personal living expenses, they become taxable expense reimbursements,
which are pensionable, insurable, and taxable.

Net Pay Calculation

Chapter 2 discussed the steps required to calculate an employee’s regular earnings, statutory
deductions, and net pay. When an employee receives allowances and expense reimbursements in
addition to their earnings, the payroll professional must determine whether the payments are to
be included in the employee’s taxable income, subject to statutory deductions.

© National Payroll Institute – Payroll Fundamentals 1 3-9

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Jasmine Forsythe works as a loss prevention manager for a retail clothing chain in Alberta. An
annual salary of $75,000.00 is paid on a bi-weekly basis. The federal and Alberta TD1 claim
code is 2.

Jasmine’s employment duties include travelling to store locations to conduct audits and
interviews. Jasmine uses a personal vehicle and has an annual car allowance of $3,250.00.
Reporting business mileage to the employer is not required; therefore, the car allowance is
taxable, subject to statutory deductions.

Jasmine is also required to oversee the physical inventory in the company’s warehouse. As
part of health and safety policies, all employees entering the warehouse must wear safety
boots. The company reimburses the reasonable cost of safety boots upon proof of purchase.
Jasmine has submitted a receipt for $95.00. Because this is required clothing under a health
and safety policy and the amount is reasonable, it will be non-taxable.

Salary per pay period: Annual salary

Pay period frequency

Salary per pay period: $75,000

= $2,884.62
26

Car allowance per pay period: Annual allowance

Pay period frequency

Car allowance per pay period: $3,250.00

= $ 125.00
26

Clothing allowance non-taxable reasonable reimbursement: $95.00

© National Payroll Institute – Payroll Fundamentals 1 3-10

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

MANUAL PAY STATEMENT

Taxable Payments
+ Earnings $2,884.62
+ Car allowance 125.00
+
= Gross Taxable Earnings (GTE) $3,009.62
Non-taxable Payments
+ Clothing allowance 95.00
= Total Gross Payment $3,104.62
CRA i RQ ii
GTE $3,009.62
+
+
+
= Pensionable Earnings (PE) $3,009.62
GTE $3,009.62
+
= Insurable Earnings (IE) $3,009.62
GTE $3,009.62
+
+
+
− Deduction for enhanced C/QPP contribution $ 28.75
−
= Net Taxable Income (NTI) $2,980.87
Statutory Deductions
− C/QPP contributions ($3,009.62 − $134.61) × 5.95% 171.06
− 2 C/QPP contributions
nd PE × 4.00%
− EI premiums $3,009.62 × 1.66% 49.96
− QPIP premiums Not applicable
− Income tax [federal + provincial (except Quebec)] $542.35 $247.70 790.05
− Quebec income tax Not applicable
Legal Deductions
−
Company Compulsory Deductions
−
Voluntary Deductions
−
= Total Deductions $1,011.07
= Net Pay (Total Gross Payment − Total Deductions) $2,093.55

i
The CRA values are used to determine CPP contributions, EI premiums and federal and non-Quebec income tax.
ii
The RQ values are used to determine QPP contribution, QPIP premiums and Quebec provincial income tax.

© National Payroll Institute – Payroll Fundamentals 1 3-11

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Content Review
• Allowances are amounts paid to employees, in addition to their earnings, for the use, or
anticipated use, of their personal property for business purposes.
• Taxable allowances are subject to all statutory deductions.
• Expense reimbursements are amounts paid to employees to cover any expenses they
have incurred on behalf of the organization in their job performance.
• A car allowance is paid or reimbursed to employees who use their personal automobiles
for business.
• A car allowance is considered to be reasonable when all of the following conditions
apply:
o the allowance is based solely on business kilometres driven in a calendar year
o the amount provided is based on the following government-prescribed reasonable
guidelines:
 $0.70 per km for the first 5,000 business kilometres (km) in the year
($0.74 per km in Yukon, Northwest Territories and Nunavut)
 $0.64 for each business kilometre after that ($0.68 per km in Yukon,
Northwest Territories and Nunavut)
o the employer does not reimburse the employee for expenses related to the same
use of the vehicle
• The government considers a car allowance to be unreasonable if it is a:
o flat dollar amount paid to an employee that is not based on the actual business
kilometres driven
o reimbursement for business kilometres driven that is higher or lower than the
government-prescribed per kilometre rate
o credit card or reimbursement for gas purchases
• When a combination allowance of a flat dollar amount and a per kilometre amount is
paid for the same use of the automobile, they are both considered taxable. They must be
included in the employee’s income, subject to statutory deductions.
• A reasonable overtime meal allowance is considered to be non-taxable by the Canada
Revenue Agency if the:
o the allowance or cost of the meal is reasonable; generally, a value of up to $23
(including GST/HST and PST) will be considered reasonable.
o the employee must work two or more hours of overtime before or after their
scheduled hours of work, and
o the overtime is infrequent and occasional in nature and occurs usually less than
three times a week; this condition may also be met where the meal or allowance is
provided three or more times per week on an occasional basis to meet workload
demands such as major repairs or periodic financial reporting.
• An overtime meal allowance is considered non-taxable by RQ if the:

© National Payroll Institute – Payroll Fundamentals 1 3-12

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

o overtime is done at the employer’s request and is expected to last for at least two
consecutive hours
o overtime is done rarely or on an occasional basis (fewer than three times a week)
o the meal expenses are reimbursed (in whole or in part) upon presentation of
receipts
o the meal expenses reimbursed or the value of the meal provided is reasonable
• Reimbursements of meal expenses incurred by an employee when conducting business
are not included in income.
• The cost of supplying an employee with a distinctive uniform that must be worn while on
the job or providing special clothing (including safety footwear and safety glasses)
designed to protect the employee from hazards associated with work is not taxable to the
employee.
• Reimbursement for the cost of protective clothing that is not supported by receipts is also
considered non-taxable if all of the following three conditions are met:
o the law requires employees to wear protective clothing on the work site
o the employee bought the protective clothing
o the amount of the reimbursement is reasonable
• If an employer reimburses an employee for personal living expenses, for example, travel
from home to the office, then the expense reimbursement is taxable.

© National Payroll Institute – Payroll Fundamentals 1 3-13

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Benefits
As part of a total compensation plan, an employer may offer certain employer-paid benefits to
employees. The employer is responsible for determining whether those benefits are taxable
employment income.

It is important to note that employers may also provide benefits to former or retired employees,
for example, employer-paid premiums for group term life insurance.

Both the Canada Revenue Agency and Revenu Québec provide criteria that must be used to
determine if the benefit is taxable to the employee. The primary payroll compliance requirement
concerning benefits is that if they are taxable, both the Federal and Québec governments require
that the value of the benefit is included in the employee’s income as it is earned or enjoyed,
meaning on a pay period basis.

The required statutory withholding amounts are determined based on how the benefit is provided
or delivered to the employee.

Cash benefits The employee receives payment through payroll for a benefit
considered taxable (e.g. taxable reimbursement of fitness club
membership).

Deemed cash benefits The employee has access to cash, not directly paid through payroll, for
a benefit considered taxable (e.g. taxable reimbursement of fitness
club membership reimbursed through accounts payable).

Near-cash benefits These are items that can be used like cash (e.g. gift cards) or easily
converted to cash (e.g. stock or gold nugget)

Non-cash benefits The employer provides goods, services or property to the employee
(e.g. use of an automobile owned or leased by the employer).

The statutory withholding requirements for taxable benefits, based on delivery method, are:

NORTHWEST
FEDERAL AND
C/QPP EI OR QPIP TERRITORIES AND
PROVINCIAL
CONTRIBUTIONS PREMIUMS NUNAVUT PAYROLL
INCOME TAX
TAX
Cash √ √ √ √
Deemed cash √ √ √ √
Near-cash √ N/A √ √
Non-cash √ N/A √ √

© National Payroll Institute – Payroll Fundamentals 1 3-14

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example - Cash:
Flowers Unlimited reimburses its employees for the cost of fitness club memberships at a club of
the employees’ choice. The employees submit their receipts to the company and are reimbursed
through payroll. The reimbursement is a taxable cash benefit to the employees. It is subject to
Canada/Québec Pension Plan (C/QPP) contributions, Employment Insurance or Quebec Parental
Insurance Plan premiums, income tax, Northwest Territories and Nunavut payroll taxes.

Example – Deemed cash:

Flowers Unlimited reimbursed an employee for a fitness club membership by providing a
company cheque through accounts payable. As the benefit is taxable and the employee was
already reimbursed, only the value of the benefit will be included to determine withholdings. It is
subject to Canada/Québec Pension Plan (C/QPP) contributions, Employment Insurance or
Quebec Parental Insurance Plan premiums, income tax, Northwest Territories and Nunavut
payroll taxes.

Example – Near-cash:
Flowers Unlimited rewards employees with high sales by providing them with a gift card. This is
a near-cash taxable benefit for the employees and is subject to withholdings for Canada/Québec
Pension Plan (C/QPP) contributions, income tax, Northwest Territories and Nunavut payroll
taxes.

Example Non-cash:
Flowers Unlimited provides group term life insurance for their employees. The company pays
100% of the cost of the insurance. As the employees enjoy the benefit of having life insurance
coverage throughout the year, the company must calculate the life insurance premium costs per
employee and include that amount in the employee’s taxable income on a pay period basis. The
premiums paid to the third party are considered a non-cash taxable benefit, subject to
withholdings for Canada/Québec Pension Plan (C/QPP) contributions, income tax and Northwest
Territories and Nunavut payroll taxes.

© National Payroll Institute – Payroll Fundamentals 1 3-15

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Fair Market Value

The fair market value of a taxable benefit includes the cost of the goods, services or property
provided, plus any applicable sales taxes. For instance, when calculating the taxable benefit
value for a company-provided automobile, the cost of the vehicle includes the purchase or lease
cost plus any applicable taxes.

The following chart details the GST/HST/PST/QST components across the country.

PROVINCE TAX RATE

Alberta Goods and Services Tax (GST) only 5%
British Columbia Goods and Services Tax (GST) 5%
Provincial Sales Tax (PST) 7%
Manitoba Goods and Services Tax (GST) 5%
Provincial Sales Tax (PST 7%
New Brunswick Harmonized Sales Tax (HST) 15%
Newfoundland and Harmonized Sales Tax (HST) 15%
Labrador
Northwest Territories Goods and Services Tax (GST) only 5%
Nova Scotia Harmonized Sales Tax (HST) 15%
Nunavut Goods and Services Tax (GST) only 5%
Ontario Harmonized Sales Tax (HST) 13%
Prince Edward Island Harmonized Sales Tax (HST) 15%
Québec Goods and Services Tax (GST) 5%
Québec Sales Tax (QST) 9.975%
Saskatchewan Goods and Services Tax (GST) 5%
Provincial Sales Tax (PST) 6%
Yukon Goods and Services Tax (GST) only 5%

Note:
This course does not provide instruction on federal or jurisdiction sales tax legislation. In our
examples, we will indicate what taxes apply to the fair market value of a benefit. In practice, we
suggest payroll professionals request a copy of any invoices or service agreements to determine
the benefit's fair market value. These documents would indicate the base cost and any additional
taxes.

When the benefit is considered non-taxable, the employee’s income excludes the value. Non-
taxable benefits can include providing employees with a gift or award that meets government-
specified conditions, paying the premiums for private health insurance coverage (for non-Québec
employees) or employee assistance plan coverage.

© National Payroll Institute – Payroll Fundamentals 1 3-16

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Provincial tax on insurance premiums

Insurance coverage is exempt from Goods and Services Tax (GST); however, Manitoba, Ontario
and Québec impose taxes on certain group insurance premiums. The tax rates on insurance are:

• Manitoba – 7%
• Ontario – 8%
• Quebec – 9%

As a result, the taxes paid on the premiums for Manitoba, Ontario and Quebec employees are
added to the premium cost in calculating the employee’s taxable benefit value.

Common employer-provided benefits

In this material, we will review the most common employer-provided benefits, including:

• Group Term Life Insurance Plans • Group RRSP

• Group Sickness and Accident Insurance • Cell Phones and Internet Access
Plans • Parking
• Private Health Insurance Plans • Tuition
• Employee Assistance Plans • Loans
• Gifts and Awards • Automobiles

For information on other employment benefits, refer to the Canada Revenue Agency (CRA) and
the Revenu Québec (RQ) taxable benefit publications:

• Employers’ Guide – Taxable Benefits and Allowances – T4130 (CRA)

• Taxable Benefits – IN-253-V (RQ)

These publications can be obtained from government websites.

For all jurisdictions outside of Quebec, the federal legislation regarding taxable benefits applies
to federal and provincial/territorial withholding requirements.

Quebec employers must follow the CRA's legislative requirements (for EI premiums and federal
income tax) and RQ (for QPP contributions, QPIP premiums and Quebec provincial income tax).
Sometimes, a benefit may be considered taxable under one authority but not the other.

© National Payroll Institute – Payroll Fundamentals 1 3-17

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Group Term Life Insurance Plans

Many employers offer group term life insurance as part of their employee benefits package. Life
insurance coverage is normally calculated as a multiple of the employee’s annual salary, rounded
up to the nearest thousand ($1,000.00). The premiums paid by the employer for coverage under a
group term life insurance policy are considered a taxable benefit to the employee. If the
employer shares the premium cost with the employee, for example, the employer pays half, and
the employee pays half, then the taxable benefit would only be the portion of the premiums the
employer pays or 50%. Group term life insurance taxable benefit calculations are based on the
employer's premium rates and sales taxes. Premium rates are expressed per $1,000.00 of
coverage on a monthly basis. The taxable benefit must be calculated on a pay period basis for
inclusion in the employee’s taxable income.

The following formula calculates the employee’s monthly taxable benefit:

Coverage amount = Annual salary x coverage multiplier

Round coverage amount up to the nearest $1,000.00

Monthly taxable benefit = Coverage amount x premium rate

$1,000.00
To ensure that the benefit is included in the employee’s income as it is earned or enjoyed, the
monthly benefit must be annualized and then prorated on a pay period basis, as follows:

Pay period taxable benefit = Monthly taxable benefit x 12

Pay period frequency

Example:
Through the employer's group plan, Rhonda Gold’s life insurance coverage is two times the
annual salary of $30,300.00. The employer pays the insurer 100% of the life insurance coverage
at a premium rate of $1.00 per $1,000.00 of coverage per month. Rhonda is paid weekly; the
taxable benefit is calculated as follows:

Coverage amount = Annual salary x coverage multiplier

Round coverage amount up to the nearest $1,000.00
= ($30,300 x 2)
= $60,600.00
= $61,000.00 (rounded)
Monthly taxable benefit = coverage amount x premium rate
$1,000.00
= $61,000 x $1.00
$1,000.00
= $61.00

© National Payroll Institute – Payroll Fundamentals 1 3-18

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Pay period taxable benefit = Monthly taxable benefit x 12

Pay period frequency
= $61.00 x 12
52

= $14.08

Premiums for life insurance are subject to the tax on insurance for employees in Manitoba,
Ontario and Quebec. In addition to the employer-paid premium, the taxable benefit value must
include the applicable tax.

Example for Quebec, including insurance tax

Example:
If Rhonda were a Québec employee, the benefit amount would increase by the applicable tax on
insurance premiums of 9%.

Monthly taxable benefit = $61.00 x 1.09

= $66.49

Pay period taxable benefit = Monthly taxable benefit x 12

Pay period frequency

= $66.49 x 12
52

= $15.34

© National Payroll Institute – Payroll Fundamentals 1 3-19

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Group Sickness and Accident Insurance Plans

These are group plans that provide employees with income for a period of time should the
employee be away from work for reasons of sickness or accident. A group plan generally
provides coverage to a class or association of employees. There can also be multiple plans for a
group of employees, for example, one for clerical staff and one for management staff. The types
of sickness and accident insurance plans considered in this category include:

• Short-term disability plans (wage-loss replacement, weekly indemnity)

• Long-term disability plans
• Accident insurance plans (accidental death and dismemberment)

When an employer pays the premiums for group short-term or long-term disability plans, there is
no taxable benefit implication for the employee; however, employer-paid accidental death and
dismemberment (AD&D) premiums are considered a non-cash taxable benefit. As a result,
employer-paid AD&D premiums, plus the 7% RST (Manitoba), 8% RST (Ontario) and the 9%
tax on insurance premiums (Québec) are considered pensionable for C/QPP contributions and
taxable for federal and provincial income taxes.

Employer-paid premiums for a non-group plan are considered a non-cash taxable benefit in all
jurisdictions. A non-group plan generally does not cover a group or association of employees.
For example, if the organization pays the premiums for a long-term disability plan for only the
organization's president, this would be considered a non-cash taxable benefit to the president.
When the benefit is taxable, it is also pensionable for C/QPP contributions; however, as it is a
non-cash benefit, it is not insurable, and no EI or QPIP premiums are deducted.

GST and HST are not included in the value of this type of benefit, but the provinces of Manitoba,
Ontario, and Québec assess sales tax on AD&D insurance premiums.

Private Health Insurance Plans

Private health insurance plans were designed to supplement Canada's universal health care
system that provides basic coverage for all residents, regardless of means. Private health
coverage can cover all or some of the following benefits:

• supplementary hospital • out-of-province emergency

• drugs • hearing aids
• private-duty nursing • vision care
• paramedical services • dental expenses
• medical supplies and services

Premiums for these plans are subject to the tax on insurance in Ontario and Quebec; however,
Manitoba does not assess a tax on premiums for private health insurance plans.

© National Payroll Institute – Payroll Fundamentals 1 3-20

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Under federal legislation, employer-paid premiums are not considered a taxable benefit to
employees who enjoy this benefit.

Example:
ABC Manufacturing, located in Nova Scotia, provides its employees with a private health
insurance plan that includes, among other services, dental coverage. The premium ABC pays the
insurance company for this coverage is considered a non-taxable benefit for the employees; the
value is not included in pensionable, insurable or taxable income.

John Truman, an ABC's Halifax office employee, paid $525.00 directly to a dentist for recent
dental services. The services are covered at 80% under the company's dental plan. A standard
dental claim form was submitted to the insurance company for reimbursement. The insurance
company reimbursed John 80% of the amount paid to the dentist. As the reimbursement came
from the insurance company for services covered under the plan, there is no taxable benefit.

Under Québec legislation, when an employer pays the premium for this type of plan, the value of
the premium is a non-cash taxable benefit to the employee. The taxable benefit is also subject to
the 9% tax on insurance premiums. The value of the taxable benefit and the tax is included in the
employee’s income and is subject to statutory deductions of QPP contributions and Québec
provincial tax.

Example:
Marque Limitée, located in Quebec, provides its employees with a private health insurance plan
that provides medical and dental coverage. Premiums are paid by the employer, and each
covered employee will be allocated a non-cash taxable benefit that includes the employer-paid
premium plus a 9% tax on insurance premiums. The taxable benefit value will be subject to
QPP contributions and Quebec provincial income tax. The benefit is not subject to federal
income tax.

When the employer pays the cost of an employee’s expenses directly to the provider of a
treatment not covered under a group insurance plan, the amount the employer pays would be
considered a non-cash taxable benefit to the employee. This amount is subject to C/QPP, income
taxes, Northwest Territories and Nunavut payroll taxes. If the employer reimburses the employee
for any amount the employee paid for these expenses, the amount would be considered a taxable
cash benefit, subject to all statutory withholdings, including EI and QPIP premiums.

Example:
The President of Omni Heating and Cooling paid a dentist directly for crown and bridge work
not covered under the company's dental plan. Omni reimbursed the $2,000.00 the employee paid
through payroll. This taxable cash benefit will be included in taxable income, as it is fully
pensionable, insurable and taxable.

© National Payroll Institute – Payroll Fundamentals 1 3-21

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Employee Assistance Plans

Under employee assistance plans, employers make confidential counselling services available to
employees for:
• physical or mental health counselling, for example, stress management or chemical
dependency
• family counselling, such as marital problems, behavioural issues, grief counselling
The fees an employer pays directly to the provider for employee assistance plan coverage are not
considered taxable to the employee.

If, however, the employer reimbursed the employee for the fees, the reimbursement becomes a
taxable cash benefit, subject to C/QPP, EI, QPIP, income taxes, Northwest Territories and
Nunavut payroll taxes.

When the employer pays for the following types of counselling services outside of an employee
assistance plan, the benefit is not taxable to the employee:

• physical or mental health counselling, for example, tobacco, drug or alcohol abuse and
stress management
• re-employment for employees whose employment services are being terminated, for
example, job placement counselling
• retirement counselling (for employees nearing retirement)

When an employer chooses to pay for an employee’s personal financial or legal counselling fees,
the amount the employer pays to the third party, plus all applicable taxes, is included in the
employee’s income as a non-cash taxable benefit if paid directly to the service provider. The
benefit is subject to C/QPP, income taxes, Northwest Territories and Nunavut payroll taxes; it is
not insurable for EI or QPIP premiums.

Group Registered Retirement Savings Plan (RRSP)

A Group Registered Retirement Savings Plan (RRSP) is an employer-sponsored retirement
savings plan, similar to an individual RRSP, but administered on a group basis by the employer.
Employees make contributions through payroll deduction. Employee contributions reduce net
taxable income.

When an employer chooses to make a matching contribution, that amount and any plan
administration fees paid by the employer will be considered a taxable benefit for the employee.

An employer contribution to an RRSP will be considered either a non-cash taxable benefit or a

deemed cash taxable benefit, depending on how the plan has been set up.

© National Payroll Institute – Payroll Fundamentals 1 3-22

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Group RRSP is restricted Group RRSP is unrestricted

Active employees are not permitted to Active employees can withdraw employer
withdraw employer contributions. contributions at any time for any reason.

Exception: withdrawals are permitted under

the CRA home buyer and lifelong learning
programs.
Result: non-cash taxable benefit Result: deemed cash taxable benefit

Additional information related to the home buyer and lifelong learning programs can be found on
the CRA website.

Home buyers plan

Lifelong learning plan

Because contributions to an RRSP are considered tax-deferred, the employer contribution is not
subject to income tax withholding. When funds are withdrawn from the RRSP, they would be
taxable at that time.

If the plan is a restricted group RRSP, the employer contribution will be a non-cash taxable
benefit subject to C/QPP contributions.

If the plan is an unrestricted group RRSP, meaning the employee has access to withdraw the
employer contribution at any time, that employer contribution will be a deemed cash taxable
benefit subject to C/QPP contributions EI or QPIP premiums.

Regardless of how the plan has been set up, the employer contribution will be subject to the
Northwest Territories and Nunavut payroll taxes for employees in those jurisdictions.

© National Payroll Institute – Payroll Fundamentals 1 3-23

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Gifts and Awards

A gift or award presented to an employee is generally a taxable benefit from employment,
whether cash, near-cash, or non-cash. However, the CRA and RQ have established
administrative policies that exempt gifts and awards in some cases.

To determine if a taxable benefit value must be included in an employee’s income, the employer
must review:

• The reason why the gift was presented

• How the gift was delivered: cash, near-cash or non-cash
• The total value of all gifts presented in the year

CRA-Specific Guidelines
There is no limit to the number of gifts and awards an employee can receive per year. There is,
however, a single $500.00 exemption that can be applied against the total value of all non-cash
gifts and awards or gift cards given to an employee annually for the following reasons:

• Presented for special occasions such as a religious holiday, a birthday, a wedding, or the
birth of a child.
• Awarded for an employment-related accomplishment such as outstanding service or
employee suggestions. It is recognition of an employee’s overall contribution to the
workplace, not recognition of job performance. Generally, a valid, non-taxable award has
clearly defined criteria, a nomination and evaluation process, and a limited number of
recipients.
The annual exemption of $500 may be applied to non-cash gifts or awards or to the value of a
gift card for a specific vendor (or group of vendors), provided the other gift and award criteria
are met. If the employee is provided with a cash or near-cash gift or award, the full value will be
considered a taxable benefit subject to all applicable statutory deductions.

Example:

Indira got married in July and received a crystal picture frame worth $300.00 as a wedding gift from the employer. In September,
a birthday gift of a $175.00 watch was received. In December, an MP3 player worth $195.00 was presented as an award for
exceeding safety standards.

Indira has now received two gifts and one award:

Crystal frame: $300.00 MP3 player: $195.00

Watch: $175.00 Total awards: $195.00*
Total gifts: $475.00*
*Includes applicable sales taxes

The total value of gifts and awards received in the year: $475.00 + $195.00 = $670.00

There is no limit to the number of gifts and awards the employee can receive; however, the total value of the gifts and awards
over $500.00 ($170.00) must be included in Indira’s income as a non-cash taxable benefit.

© National Payroll Institute – Payroll Fundamentals 1 3-24

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

A gift or award given to an employee for performance-related reasons (such as performing well
in the job they were hired to do, exceeding production standards, completing a project ahead of
schedule or under budget, putting in extra time to finish a project, covering for a sick
manager/colleague) is considered a reward. It is fully taxable and subject to all applicable
statutory deductions.

Additionally, there are special guidelines for long service awards. Once every five years, an
employer can give an employee a non-cash long-service or anniversary award valued at $500.00
or less, tax-free. The award must be for a minimum of five years of service, and it has to have
been at least five years since the employee received their last long-service or anniversary award.
The exemption of $500 may be applied to non-cash gifts or awards or to the value of a gift card
for a specific vendor (or group of vendors), provided the other long service award criteria are
met. Any amount over the $500.00 exemption is taxable.

These long service or anniversary awards do not affect the $500.00 gifts and awards exemption
for the year they were given. An employer can give an employee a non-cash long-service or
anniversary award worth $500.00 in the same year they gave the employee other gifts and
awards worth $500.00. If the value of the long-service award is less than $500.00, the shortfall
cannot be added to the annual $500.00 exemption.

Example:
Indira, from our previous example, also received an oil painting for a long-service award that
met the criteria in the same year:

Crystal frame: $300.00 MP3 player: $195.00

Watch: $175.00 Total awards: $195.00*
Total Gifts: $475.00*

Long-service award:
Oil painting: $470.00*

*Includes applicable sales taxes

There is no taxable benefit as the long-service award is less than $500.00. However, the value of
the total amount of gifts and awards over $500.00 ($170.00) must be included in income as a
non-cash taxable benefit.

The CRA has a series of questions on the ‘Rules for Gifts and Awards’ page on their website that
can assist in determining if a gift, award or long-service award is a taxable benefit to the
employee.

© National Payroll Institute – Payroll Fundamentals 1 3-25

Chapter 3
Employment Income – Allowances, Expenses and Benefits

RQ-Specific Guidelines
In Québec, there is no limit on the number of gifts or awards given to an employee. Annually,
two exemptions can be applied to non-monetary gifts or awards.

• Up to $500 (including taxes) per year for a non-monetary gift given for a special occasion
(such as Christmas, a birthday, a wedding or similar occasion); and
• Up to $500 (including taxes) per year for a non-monetary reward given in recognition of
certain accomplishments (such as reaching a certain number of years of service, meeting
or exceeding safety requirements, or achieving similar objectives).

Example:
Marie’s Québec employer gave the following gifts and awards during the calendar year:

Birthday gift – watch: $350.00 Safety award – hockey tickets: $250.00

Wedding gift – vase: $275.00 Suggestion award – artwork: $575.00
Total gifts: $625.00* Total awards: $825.00*

*Includes applicable sales taxes

Provincially:
For the gifts, the amount over $500.00 ($125.00) and the awards, the amount over $500.00
($325.00) would be included in Marie’s income for a total of $450.00, subject to QPP and
Québec provincial income tax.

Federally:
As there is only a single $500.00 exemption for all the non-cash gifts and awards given in a year,
the total amount over $500.00 ($950.00) would be included in Marie’s income, subject to federal
income tax.

In Québec, gifts and awards paid in cash are entirely taxable, subject to all applicable statutory
deductions. However, the exemptions may be applied to near-cash gifts such as gift certificates
or gift cards that must be used to purchase goods or services from a specified business or list of
businesses, provided the other gift and award criteria are met.

A gift or award given to an employee for performance-related reasons (such as performing well
in the job they were hired to do, exceeding production standards, completing a project ahead of
schedule or under budget, putting in extra time to finish a project, covering for a sick
manager/colleague) is considered a reward. It is a fully taxable benefit subject to all applicable
statutory deductions.

A summary of the guidelines is provided in the following table.

© National Payroll Institute – Payroll Fundamentals 1 3-26

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Exhibit 3-1

CRA GUIDELINES RQ GUIDELINES

Number of non-cash gifts No limit No limit
Dollar value criteria for gifts $500.00 on gifts is treated as
an exemption
Number of non-cash awards No limit No limit
Dollar value criteria for $500.00 on awards is treated
awards as an exemption
Dollar value criteria for $500.00 on the total combined
combined gifts and awards cost of all gifts and awards is
treated as an exemption
Number of long-service One every five years, for a Included in general awards
awards minimum of five years’ service
and at least five years since the
last award
Dollar value criteria for long $500.00 on long service Included in general awards
service awards awards is treated as an
exemption
Cash gift or award Pensionable, insurable and Pensionable, insurable and
taxable, subject to all statutory taxable, subject to all
deductions statutory deductions
Near-cash gifts and awards Gifts and awards that are easily Gift certificates, gift
convertible to cash are coupons and smart cards
considered taxable and include that must be used to
gold nuggets, stocks, and purchase goods or services
securities. These gifts and from a particular business or
awards are subject to CPP, list of businesses are not
income taxes and NT/NU considered taxable, provided
payroll taxes. the other gift and award
criteria are met.
Gift certificates, gift coupons
and smart cards that must be
used to purchase goods or
services from a particular
business or list of businesses
are not considered taxable,
provided the other gift and
award criteria are met.

© National Payroll Institute – Payroll Fundamentals 1 3-27

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Cell Phones and Internet Access

Many employers provide employees with cell phones and home internet access to help carry out
their duties when away from the workplace. Any fees an employer pays related to business use
are not a taxable benefit to the employee. If an employer gives an employee an allowance to
cover the cost of cell phone or internet services, the allowance would be considered a taxable
cash benefit, subject to C/QPP, EI, QPIP, income taxes and NT/NU payroll taxes.

When the employer provides a company cell phone or pays for internet services at an employee’s
home, the following guidelines apply.

CRA-Specific Guidelines
The value of the fees for the phone or internet related to personal use must be included in the
employee’s income as a taxable benefit. The value is based on the fair market value of the
personal use of the service minus any amounts reimbursed by the employee. The employer is
responsible for determining business and personal use percentages and the fair market value.

For cell phone service only, the Canada Revenue Agency does not consider an employee’s
personal use to be a taxable benefit if all of the following apply:

• the plan’s cost is reasonable

• the plan is a basic plan with a fixed cost
• the employee’s personal use of the service does not result in charges that are more than
the basic plan cost

RQ-Specific Guidelines
If the services are primarily for the employee’s benefit or if the employee’s personal cell phone
or internet use results in additional fees, the employer should include the value in the employee’s
income as a taxable benefit.

For both cell phone and internet service, Revenu Québec does not consider a reimbursement or
payment of the fees to be a taxable benefit if both of the following apply:

• the services are primarily for the employer’s benefit

• the employee’s personal use does not result in additional fees

© National Payroll Institute – Payroll Fundamentals 1 3-28

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Parking
Where an employer pays for all or part of an employee’s parking costs at the regular workplace,
the value of the parking costs is a non-cash taxable benefit to the employee. The taxable benefit
equals the employer-paid cost of the parking space, less any amount the employee pays towards
the cost.

Where the employer owns the land on which the employee is parking, the fair market value of
the parking space is the value of the taxable benefit. Fair market value is determined by finding
the cost of similar parking in the same vicinity as the work location. If the office building is
located in an area where there is plenty of free parking, the taxable value of the employer-
provided parking would be nil. When the work location is in an area where other visitors must
pay for parking, the fair market value would be the cost to park in a public parking lot near the
work location.

There is no taxable benefit in the following situations:

• when free or subsidized parking is provided to a physically disabled employee

• when there is a distinct and regular requirement for an employee to have a parking space
as part of their employment activities, for example, if the employee is required to make
regular daily visits to their customers. In the event of an audit, the employer must be
prepared to justify that the value of the parking space is not a taxable benefit
• when an employer pays for parking costs incurred by an employee who is travelling away
from the normal place of business; these are reimbursements of business-related expenses
and are non-taxable
• when a business operates from a shopping centre or industrial park, where parking is
available to employees and non-employees, the fair market value of parking, in this case,
would be nil
• when an employer provides scramble parking (for example, there are significantly fewer
spaces than there are employees, and the spaces are available on a first-come, first-served
basis)

Where parking fees are considered a taxable benefit, the fair market value should be included in
the employee’s income.

© National Payroll Institute – Payroll Fundamentals 1 3-29

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Dalton Industries has two locations in the Montréal area; the head office is located downtown,
while the plant is in an industrial park in Ville d’Anjou. The employees who work downtown
have their monthly parking fees paid for by the company; the plant workers have parking
available at the site.

As the plant operates in an industrial park, where there is no fair market value for parking, there
is no taxable parking benefit for the employees at that location.

The monthly parking fee is $300, and in Quebec, parking fees are subject to GST and QST. The
company pays the parking lot vendor:

Monthly parking cost = Cost + GST + QST

= $300.00 + ($300.00 x 5.0%) + ($300.00 x 9.975%)
= $300.00 + $15.00 + $29.93
= $344.93

The taxable benefit to be included in the employee’s income each pay, based on a bi-weekly
frequency, is determined as:

Pay period benefit = $344.93 x 12

26

= $159.20

Tuition
When paid on an employee's behalf by the employer, the costs related to taking education or
training courses and programs may be taxable. Where an educational institution provides free or
subsidized courses (through scholarships or bursaries) to an employee, the employee is
considered to have received a non-cash taxable benefit. The value of the benefit would equal the
fair market value of the tuition, less any amount that the employee pays.

Both the Canada Revenue Agency (CRA) and Revenu Québec (RQ) have established guidelines
for determining whether or not employer-paid tuition is taxable.

A taxable benefit results when the employer pays for any cost of an employee’s course that
primarily benefits the employee (for example, personal interest training). This applies whether
the employer pays the educational institution directly (a non-cash taxable benefit) or reimburses
the employee (a cash taxable benefit). An example of personal interest training would be an
employer paying for the organization’s receptionist to take a course in ballroom dancing.

© National Payroll Institute – Payroll Fundamentals 1 3-30

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

There is no taxable benefit in the following situations:

• when an employer pays for an employee’s course that is specifically related to the
employee’s position or career advancement, and the employer is the primary beneficiary
rather than the employee, for example, an employer paying for their bookkeeper’s
National Payroll Institute courses
• when an employer pays for a course that can benefit the employer, even though it is not
directly related to the employee’s current position. For example, an employer pays the
tuition for an employee’s courses in Administration and Management, anticipating that
the employee will move into a management position in the future.

When the following tuition-related items are provided to an employee’s family member, the
CRA requires that they are reported on a T4A slip for the family member, and RQ requires that
they are reported on an RL-1 slip for the family member:

• free tuition provided to an employee’s family member by a post-secondary educational

institution
• payment or reimbursement by an employer for tuition fees, books and supplies related to
post-secondary education for an employee’s family member
• a post-secondary scholarship or bursary provided by an employer to the family member
of an employee

The CRA and RQ require that the fair market value of scholarships, bursaries or tuition provided
by an employer to an employee’s family member who attends elementary or secondary school is
included in the employee’s income.

Loans – Taxable Interest Benefit

An employer may lend money to an employee interest-free or at a low rate of interest so that the
employee can purchase a personal computer, pay some bills or perhaps even buy a home.

In most cases, the interest benefit will be considered taxable. However, under the following
circumstances, the CRA does not consider the interest benefit as taxable:

• The loan principal is $10,000 or less per calendar year

• The term of the loan is 60 days or less
• The loan is not provided to a shareholder of the company

Loans that do not meet the above conditions will fall into one of the following categories:

• Loans received because of employment (regular loans)

• Loans received for a home-purchase

© National Payroll Institute – Payroll Fundamentals 1 3-31

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Loans received because of employment

In situations where the interest benefit is taxable, the first step is determining the value of the
benefit. The following information is required to calculate the taxable interest benefit:

The amount of the loan that still needs to be repaid by the

Outstanding loan principal:
employee.
CRA prescribed interest
The CRA announces prescribed rates for each quarter.
rate:
Interest rate charged by the An employer may provide an interest-free loan but could also
employer: charge an interest rate lower than the CRA prescribed rate.
Pay frequency: The number of pay periods in the year

Taxable Interest Benefit Calculation:

Outstanding loan principal × (prescribed interest rate – interest rate charged by the
employer) ÷ pay frequency

An employee who receives a loan may agree to regular pay period deductions to repay the
amount over an agreed number of payments. The employee and employer may also agree to an
alternative repayment plan, for instance, quarterly instalments.

© National Payroll Institute – Payroll Fundamentals 1 3-32

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Sergei was provided with a $15,000 loan by the employer on March 10 of the current year,
that was repaid over 15 semi-monthly pay periods. The loan was provided interest-free, and
the CRA prescribed rates were:

Quarter 1 – 3% Quarter 2 – 4% Quarter 3 – 5% Quarter 4 – 5%

The taxable benefit allocated to each semi-monthly pay period for the term of the loan is
calculated using the formula:
Outstanding principal × prescribed rate ÷ 24

Pay date Outstanding principal CRA prescribed rate Taxable interest benefit
March 15 $15,000.00 3% $ 18.75
March 31 $14,000.00 3% $ 17.50
April 15 $13,000.00 4% $ 21.67
April 30 $12,000.00 4% $ 20.00
May 15 $11,000.00 4% $ 18.33
May 31 $10,000.00 4% $ 16.67
June 15 $9,000.00 4% $ 15.00
June 30 $8,000.00 4% $ 13.33
July 15 $7,000.00 5% $ 14.58
July 31 $6,000.00 5% $ 12.50
August 15 $5,000.00 5% $ 10.42
August 31 $4,000.00 5% $ 8.33
September 15 $3,000.00 5% $ 6.25
September 30 $2,000.00 5% $ 4.17
October 15 $1,000.00 5% $ 2.08
$ 199.58

Loans received for a home-purchase

An employer may loan an employee money to purchase or acquire a home or repay a loan used
to purchase a home. The taxable interest benefit is calculated using the same formula as a loan
received because of employment, with the following limitations:

• The prescribed interest rate used to calculate the interest benefit is capped at the
prescribed interest rate in effect when the loan was granted.
• If the prescribed interest rate declines in another quarter, the lower interest rate will be
used. However, the capped rate will be used if the prescribed interest rate increases.
• If the loan term exceeds five years, the balance owing at the end of each five years is
considered a new loan. The prescribed interest rate at that time will become the new
capped rate.

© National Payroll Institute – Payroll Fundamentals 1 3-33

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Gemma’s employer-provided an interest-free $100,000 loan on February 1st of the current
year. The loan qualifies as a home purchase loan and is repayable in 10 years.

At the time the loan was granted, the CRA prescribed interest rates for the year were:

Quarter 1 – 3% Quarter 2 – 4% Quarter 3 – 4% Quarter 4 – 2%

The loan was granted in quarter 1; therefore, the prescribed rate of 3% will be the capped rate
for five years. During quarters 2 and 3, the prescribed rate increased to 4%, but the 3% cap
will be used. In quarter 4, the rate declined, so 2% will be used in the interest benefit
calculation.

Gemma will be making monthly payments of $1,000 starting in March. For the current year,
the taxable interest benefit will be calculated using the formula:

Outstanding principal × prescribed rate ÷ 12

Month Outstanding principal Interest rate applied Taxable interest benefit

February $100,000.00 3% $250.00
March $99,000.00 3% $247.50
April $98,00000 3% $245.00
May $97,00000 3% $242.50
June $96,000.00 3% $240.00
July $95,000.00 3% $237.50
August $94,000.00 3% $235.00
September $93,000.00 3% $232.50
October $92,000.00 2% $153.33
November $91,000.00 2% $151.67
December $90,000.00 2% $151.00
$2,386.00

For each of the following years during the first five years of the loan, the capped rate of 3% or
a lower rate announced for a quarter will be used to calculate the taxable interest benefit.

Because the term of the loan is greater than five years, the outstanding balance at the end of
five years will be considered a new loan. The prescribed interest rate at that time will become
the new capped rate.

Non-Taxable Loans
No taxable benefit is assessed when an employer provides an employee with a loan and charges
the employee interest at the government-prescribed interest rate or higher.

© National Payroll Institute – Payroll Fundamentals 1 3-34

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Automobiles
When an employer provides an employee with the use of an employer-owned or employer-leased
vehicle for personal and business driving, the employee must be assessed a non­cash taxable
benefit based on their personal use of the vehicle.

Even though there is no federal requirement for recording the kilometres driven, a record of the
number of personal and business-related kilometres (km) driven by the employee or a person
related to the employee in a calendar year should be provided to the employer at the end of the
calendar year. The employer must retain all records that would objectively determine the
employee’s tax payable.

In Québec, an employee is required to keep a logbook for recording the trips made with the
automobile and give a copy of the logbook to the employer no later than 10 days after the end of
the calendar year or the tenth day following the date on which the automobile was returned to the
employer.

To properly assess the taxable benefit, the payroll professional should be familiar with the
government-specific definitions associated with this benefit and the government-prescribed
formulas used for the calculation. The Canada Revenue Agency has an Automobile Benefits
Online Calculator on its website.

Automobile
An automobile is a motor vehicle designed or adapted primarily to carry individuals on highways
and streets. It has a seating capacity of not more than the driver and eight passengers.

An automobile does not include:

• an ambulance
• a motor vehicle bought primarily to be used as a taxi
• a bus used for transporting passengers
• a hearse or a motor vehicle bought to transport passengers used in connection with
funerals
• a motor vehicle bought to sell, rent or lease in a motor vehicle sales, rental or leasing
business, except for benefits arising from personal use of an automobile
• a van, pickup or similar vehicle that carries not more than the driver and two passengers
and, in the taxation year it is acquired or leased, is used:
o primarily to transport goods or equipment in the course of business or
o at least 90% of the time to transport goods, equipment or passengers in the course
of business

© National Payroll Institute – Payroll Fundamentals 1 3-35

Chapter 3
Employment Income – Allowances, Expenses and Benefits

• a pickup truck used primarily for the transportation of goods, equipment or passengers in
the course of earning or producing income at a work site at least 30 km from a
community of at least 40,000 people
• a clearly marked police and fire emergency-response vehicle
• a clearly marked emergency medical response vehicle that is used to carry emergency
medical equipment and one or more emergency medical attendants or paramedics

Note:
Employers who provide their employees with the use of a motor vehicle (truck, bus, etc.) for
personal use, which is not included in the definition of an automobile, must still calculate a fair
market value taxable benefit to include in the employee’s income.

Availability
Availability is the number of thirty-day periods the automobile is available to the employee in
the current taxation year. An automobile is considered available to an employee as long as the
employee has access to or control over the vehicle. Access ends only when an employee returns
the automobile and the automobile’s keys to the employer.

Business Driving
Business driving refers to any driving by an employee for business purposes, including:

• driving to existing and prospective clients, points of call, and other office locations of the
employer
• when an employee travels directly from home to a point of call, which is not the
employer’s place of business, where the employee regularly reports for work
• when the employee travels home directly from a point of call

Capital Cost
Capital cost is the cost of the vehicle, including options, accessories, and all sales taxes paid by
the employer toward the purchase of the vehicle. Also included are the costs for any additions
made to the vehicle after it was purchased if they are added to the vehicle's capital cost for
depreciation purposes. Excluded from the vehicle's capital cost are any costs for specialized
equipment added to the automobile to meet the employment requirements, including cellular
phones, two-way radios, heavy-duty suspension and power winches.

Employee Reimbursement
An employee reimbursement is an amount the employee pays the employer to offset the personal
use of the employer-provided automobile. A reimbursement reduces the automobile taxable
benefit assessed.

© National Payroll Institute – Payroll Fundamentals 1 3-36

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Lease Costs
Lease costs include the leasing costs, sales taxes, and any associated costs such as maintenance
contracts, excess kilometre charges, and terminal charges paid by the employer. Leasing costs do
not include liability or collision insurance costs.

Lump-sum Lease Payments

Lump-sum lease payments are payments made at the beginning or end of a lease not to purchase
the automobile. A lump-sum payment made at the beginning of a lease must be prorated over the
life of the lease.

Motor Vehicle
A motor vehicle is an automotive vehicle designed or adapted to be used on highways and
streets. It does not include a trolley bus or a vehicle designed or adapted for use only on rails.

Operating Expense Benefit

The operating expense benefit represents an employee's benefit when an employer pays the
operating expenses associated with the employee’s personal use of an employer-provided
automobile. Operating expenses include gasoline and oil, repairs and maintenance charges,
insurance and licenses. They do not include interest, the capital cost of an employer-owned
vehicle, the lease costs of an employer-leased vehicle and parking.

Personal driving
Personal driving refers to driving by an employee or person related to the employee for purposes
other than business, including:

• vacation travel
• driving to conduct personal business
• travel between home and work, even if the employer insists the employee drive the
vehicle home

Standby Charge
The standby charge represents the employee's benefit when an employer’s automobile is
available for personal use. The standby charge is calculated differently depending on whether the
employer owns or leases the automobile.

Taxes
Taxes include all applicable Provincial Sales Taxes (PST), Goods and Services Taxes (GST),
Harmonized Sales Taxes (HST) and Québec Sales Taxes (QST) associated with the capital or
lease costs.

© National Payroll Institute – Payroll Fundamentals 1 3-37

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Terminal Charge
A terminal charge is a lump-sum payment due at the end of a lease because the lease costs were
too low over the lease term. As a result, the taxable automobile benefit was understated, and the
employee and employer must agree on a method to correct the understatement by either:

• adding the terminal charge to the lease in the year the lease ends, or
• prorating the payment over the term of the lease

Terminal Credit
A terminal credit is a lump-sum payment the employer receives at the end of a lease because the
lease costs were too high over the lease term. As a result, the taxable automobile benefit has been
overstated. This overstatement can be corrected by either:

• deducting the terminal credit from the lease costs in the year the lease ends, or
• amending the employee’s annual information return and providing them with a letter of
explanation. The employee can then write to the CRA and RQ (if applicable) to request
an adjustment to their tax return filing.

Government-Prescribed Formulas
The formulas prescribed by the Canada Revenue Agency (CRA) and Revenu Québec (RQ) to
assess taxable automobile benefits will be explained in this material. For an employer-owned and
an employer-leased automobile, the taxable benefit is the total of the standby charge and the
operating expense benefit, less any employee reimbursement. However, the standby charge
calculation differs depending on whether the automobile is owned or leased.

Automobile taxable benefit is calculated as:

Standby charge + operating expense benefit − employee reimbursement

The following information is required to complete the calculations for the standby charge and the
operating expense benefit:

• the number of days the automobile is available to the employee in the current taxation
year
• the breakdown between business and personal kilometres driven by the employee in the
current taxation year
• the purchase cost or lease cost of the automobile, plus taxes

© National Payroll Institute – Payroll Fundamentals 1 3-38

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Availability Calculation
Availability is the number of thirty-day periods the automobile is available to the employee in
the current taxation year. Availability is calculated using the following formula:

Availability = Number of calendar days the automobile is available to the employee

30

The result is rounded to the nearest whole number.

Example:
Availability =130 days = 4.33 (round to 4) thirty-day periods
30
Availability = 135 days = 4.50 (round to 4)* thirty-day periods
30
Availability = 140 days = 4.67 (round to 5) thirty-day periods
30
*The government requirement is to round decimals down, not up, at .50.

If the total number of days available is less than 30, the number of days will be divided by 30
and rounded to two decimals.

Availability = 28 days = .93 thirty-day period

30

Business and Personal Use

The total number of kilometres driven in a calendar year must be split between business and
personal use. The employee is charged with a taxable benefit on only their personal use of the
automobile, not the business use.

Personal use would include, but is not limited to, the following:

• travel from home to a place where the employee regularly reports to work
• vacation trips
• travel for personal activities

Company-Owned Automobile Taxable Benefit

The first of the taxable automobile benefit components is the standby charge. The prescribed
formula for calculating the standby charge for a company-owned automobile is a percentage of
the cost of the automobile plus applicable sales taxes based on the period of availability.

© National Payroll Institute – Payroll Fundamentals 1 3-39

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Standby charge = 2% x (cost of automobile + taxes) x availability

Example:
Terrace Lakes Development Co. in Ontario provides Oliver Trahan with a company-owned
automobile available to him 365 days a year. At the end of the current year, Oliver provided the
company with the following information:

Business kilometres driven 48,000

Personal kilometres driven + 10,000
Total kilometres driven 58,000

Availability 365 days = 12 thirty-day periods

30

The company-owned automobile that Terrace Lakes provided to Oliver cost $24,200 plus $3,146
HST, based on 13% HST. Oliver had the automobile available for the full year, 12 thirty-day
periods.

Standby charge = 2% x ($24,200.00 + 3,146.00) x 12

= 2% x $27,346.00 x 12
= $6,563.04

Reduced Standby Charge

The standby charge component of the taxable benefit calculation can be reduced if the following
two conditions are met:

• the automobile is used more than 50% of the time for business purposes, and
• the kilometres for personal use do not exceed 1,667 per 30-day period, for a total of
20,004 kilometres per year

If the employee meets the two conditions required to be eligible for a reduced standby charge,
the following formula is used:

Reduced standby charge =

Personal kilometres x [2% x (cost of automobile + taxes) x availability]

1,667 x availability

© National Payroll Institute – Payroll Fundamentals 1 3-40

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Using Oliver's information, Terrace Lakes can determine whether a reduced standby charge
would apply.

Business use percentage 48,000 = 82.8%

58,000

Allowable personal
kilometres 1,667 x 12 = 20,004

As the automobile was used more than 50% for business purposes and Oliver’s personal use of
10,000 km was less than the allowable amount of 20,004, Oliver would be eligible for a reduced
standby charge.

Reduced standby charge = 10,000 x [2% x ($24,200 + 3,146) x 12]

1,667 x 12

= 10,000 x (2% x $27,346 x 12)

20,004

= $3,280.86

Note:
The 2024 operating expense per kilometre rate has been used to demonstrate process and
practice.

The second of the two components of the taxable automobile benefit is the operating expense
benefit. The prescribed formula for calculating the operating expense benefit is based on an
annual per kilometre rate established by the CRA multiplied by the employee’s personal
kilometres driven. The formula is the same for company-owned or company-leased automobiles.

Operating Expense Benefit = $0.33 x personal km driven

Example:
Oliver drove 10,000 personal kilometres in the current year. The operating expense benefit
would be calculated as:

Operating Expense Benefit: $0.33 × 10,000 = $3,300.00

© National Payroll Institute – Payroll Fundamentals 1 3-41

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Optional Operating Expense Benefit Calculation Method

There is also an optional method of calculating the operating expense benefit that can be used if
the following three conditions are met:

• the employee notifies the employer in writing before the end of the year to use the
optional method
• the business use of the automobile is more than 50%
• a standby charge component is included in the employee’s income

The formula for the optional method of calculating the operating expense benefit is the same for
a company-owned or a company-leased automobile:

Optional Method = Standby charge (or reduced standby charge, if applicable) x 50%

Example:
Oliver used the company-owned automobile more than 50% for business in the current year. A
reduced standby charge of $3,280.86 will be included in income as a taxable benefit, and Oliver
has advised Terrace Lakes to use the optional method in writing. The optional method for
calculating the operating expense benefit is:

Optional Method = $3,280.86 x 50%

= $1,640.43

The total annual automobile taxable benefit is the sum of the standby charge (either the full
charge or the reduced charge) plus the operating expense benefit (using either the regular or
optional method), less any employee reimbursement.

Automobile taxable benefit = Standby charge (or reduced standby charge)

+ Operating expense benefit
- Employee reimbursement

As with all other taxable benefits, the value of the taxable benefit must be included in the
employee’s income as it is earned or enjoyed, in other words, on a pay period basis. The annual
automobile taxable benefit is based on the employee’s personal kilometres driven in the calendar
year, which may not be known until the end of the year. To determine an estimated taxable
benefit amount to include in the employee’s income on a pay period basis, the employer can use
the previous year’s annual taxable benefit amount or an estimated amount. Once calculated, the
amount included on a pay period basis must be reconciled with the actual taxable benefit amount
for the current year.

Pay period taxable benefit = Annual automobile taxable benefit

Pay period frequency

© National Payroll Institute – Payroll Fundamentals 1 3-42

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Terrace Lakes has calculated Oliver’s current annual automobile taxable benefit as follows:

Standby charge (reduced) = $3,280.86

Operating expense (optional method) +1,640.43
Total annual automobile taxable benefit = $4,921.29

Oliver is paid on a bi-weekly basis. The employer will use the current year's taxable benefit
amount to estimate the pay period taxable benefit for the next year. When Terrace Lakes
calculates Oliver’s annual taxable automobile benefit next year, any required adjustments will be
made.

Pay period taxable benefit in current year = $4,921.29

26
= $189.28

A taxable automobile benefit of $189.28 will be included in Oliver’s income on each pay for the
next year.

Company-Leased Automobile Taxable Benefit

The two components of the taxable automobile benefit for a company-leased automobile, the
standby charge and the operating expense benefit, are the same as for a company-owned
automobile. The prescribed formula for calculating the standby charge for a company-leased
automobile is a fraction of the monthly cost of the automobile plus applicable sales taxes based
on the period of availability.

Standby charge = 2/3 x (monthly cost of automobile + taxes) x availability

Example:
Prince Packaging, in Ontario, leases automobiles for its senior management team. Diana Wilson
joined the company on July 1 of the current year as Director of Product Development and was
assigned a car for exclusive use for the balance of the year (184 days). In January of the
following year, Diana submitted automobile usage as follows:

Business kilometres driven 35,000

Personal kilometres driven +20,000
Total kilometres driven 55,000

Availability 184 days = 6 thirty-day periods

30

© National Payroll Institute – Payroll Fundamentals 1 3-43

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Prince Packaging paid monthly costs of $350, plus $45.50 HST, based on 13% HST for Diana’s
automobile. Diana had the automobile available from July 1 of the current year, i.e., 184 days or
six thirty-day periods.

Standby charge = 2/3 x ($350.00 + $45.50) x 6

= 2/3 x $395.50 x 6
= $1,582.00

Reduced Standby Charge

As with a company-owned automobile, the standby charge component of the taxable benefit
calculation for a company-leased automobile can be reduced if the following two conditions are
met:

• the automobile is used more than 50% of the time for business purposes
• the kilometres for personal use do not exceed 1,667 per 30-day period, for a total of
20,004 kilometres per year

If the employee meets the two conditions required to be eligible for a reduced standby charge,
the following formula is used:

Reduced standby charge =

Personal kilometres x [2/3 x (monthly cost + taxes) x availability]
1,667 x availability

Example:
Prince Packaging will use Diana's information to determine whether a reduced standby charge
applies.

Business use percentage 35,000 = 63.6%

55,000

Allowable personal kilometres 1,667 x 6 = 10,002

While the automobile was used more than 50% for business purposes, Diana’s personal use of
20,000 km was more than the allowable amount of 10,002 for the six-month period the
automobile was available. Diana would not be eligible for a reduced standby charge.

Had Diana only driven 9,000 personal kilometres in the current year, the reduced standby charge
would be calculated as:

© National Payroll Institute – Payroll Fundamentals 1 3-44

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Reduced standby charge = 9,000 x [2/3 x ($350 + $45.50) x 6]

1,667 x 6

= 9,000 x [2/3 x $395.50 x 6]

10,002
= $1,423.52

The second of the two components of the taxable automobile benefit is the operating expense
benefit. The prescribed formula for calculating the operating expense benefit is based on an
annual per kilometre rate established by the CRA multiplied by the employee’s personal
kilometres driven. The formula is the same for company-owned or company-leased automobiles.

Operating Expense Benefit = $0.33 x personal km driven

Example:
Diana drove 20,000 personal kilometres in the current year. The operating expense benefit
would be calculated as:

Operating Expense Benefit: $0.33 × 20,000 = $6,600.00

Optional Operating Expense Benefit Calculation Method

The optional method of calculating the operating expense benefit can be used if the following
three conditions are met:

• the employee notifies the employer in writing before the end of the year to use the
optional method
• the business use of the automobile is more than 50%
• a standby charge component is included in the employee’s income

The formula for the optional method of calculating the operating expense benefit is the same for
a company-owned or a company-leased automobile:

Optional Method = Standby charge (or reduced standby charge, if applicable) x 50%

© National Payroll Institute – Payroll Fundamentals 1 3-45

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Diana met the three conditions required for using the optional method. The company-leased
automobile was used more than 50% for business in the current year. A standby charge of
$1,582.00 will be included in income as a taxable benefit, and the employee has notified the
company in writing to use the optional method. The optional method for calculating the
operating expense benefit is:

Optional Method = $1,582.00 x 50%

= $791.00

The total annual automobile taxable benefit is the sum of the standby charge (either the full
charge or the reduced charge) plus the operating expense benefit (using either the regular or
optional method), less any employee reimbursement.

Automobile taxable benefit = Standby charge (or reduced standby charge) + operating
expense benefit - employee reimbursement

The annual automobile taxable benefit can be used to estimate a pay period taxable benefit for
the following year. Once calculated, this annual estimated amount must be reconciled with the
actual taxable benefit.

Pay period taxable benefit = Annual automobile taxable benefit

Pay period frequency

Example:
Prince Packaging has calculated Diana’s current annual automobile taxable benefit as follows:

Standby charge = $1,582.00

Operating expense (optional method) = + 791.00
Total annual automobile benefit = $2,373.00

Diana is paid weekly. As the current year’s taxable benefit is based on only six months of use,
the company will use two times the benefit amount to estimate the pay period taxable benefit for
the next year. At the end of the next year, the estimated taxable benefit will be reconciled against
Diana’s actual taxable benefit, and any adjustments will be made.

Next year pay period taxable benefit = $2,373.00 x 2

52

= $91.27

© National Payroll Institute – Payroll Fundamentals 1 3-46

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Employee’s Personal Portion of Operating Expenses

An employee can eliminate the operating expense component of their taxable benefit by
reimbursing the employer for their share of the employer’s actual costs related to the automobile
within 45 days after the end of the year. Note that this reimbursement is of the actual employer
out-of-pocket costs for gasoline and oil, repairs and maintenance charges, insurance and licenses.
The reimbursement does not include interest, the capital cost of an employer-owned vehicle or
the lease costs of an employer-leased vehicle and parking.

To determine the amount of the actual costs attributable to the employee’s personal use of the
automobile, the following formula is used:

Personal costs = Personal kilometres x (operating expenses + applicable taxes)

Total kilometres

Example:
Terrace Lakes’ actual operating expenses for Oliver (from the company-owned automobile
example) were $790.00, including taxes, in the current year. Oliver’s portion of these costs is:

Personal costs = 10,000 x $790.00

58,000

= $136.21

Oliver reimbursed the employer $136.21 for the personal share of the actual operating expenses
within 45 days after the end of the year. Therefore, the operating expense component of the
taxable benefit will be eliminated. The total taxable benefit will only be the amount of the
reduced standby charge, $3,280.86.

When an employee only reimburses a partial amount of their portion of the actual operating
expenses, the employer must use the usual operating expense benefit formula (personal km x
$0.33) and then subtract any reimbursement to determine the total benefit of the employee.

Operating Expense Benefit = ($0.33 x personal km driven) - reimbursement

If the optional method of calculating the operating expense benefit was used, a partial
reimbursement is applied to that result.

Optional Method = [Standby charge (or reduced standby charge, if

applicable) x 50%] - reimbursement

© National Payroll Institute – Payroll Fundamentals 1 3-47

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Example:
Prince Packaging paid $3,560.00, including taxes, on actual operating expenses for Diana (from
the company-leased automobile example) from July to December of the current year, as the
automobile required some major repair work. Diana’s portion of these expenses is:

Personal costs = 20,000 x $3,560.00

55,000
= $1,294.55

Diana reimbursed the company only $500.00 of the personal share of the expenses. Since the full
amount was not reimbursed, the operating expense component of the taxable benefit will be
reduced, not eliminated. The company used the optional method to calculate the operating
expense component of Diana’s taxable benefit.

Optional Method = ($1,582.00 x 50%) - $500.00

= $791.00 - $500.00
= $291.00

Diana’s total automobile taxable benefit for the current year will now be:

Standby charge = $1,582.00

Operating expense benefit = + 291.00
Total taxable benefit = $1,873.00

Employees Selling or Leasing Automobiles

Employees who are engaged in selling or leasing automobiles are eligible to have the standby
charge component of their taxable benefit reduced, provided the following three conditions are
met:

• the individual is employed principally to sell or lease automobiles

• an automobile was made available to that individual or to someone related to that
individual
• the employer acquired at least one automobile during the year

When all three conditions are met, the employer will calculate the standby charge using a rate of
1.5% instead of 2%. The lower rate is then applied to the automobile cost, which is defined as
the greater of the following two amounts:

• the average cost of all automobiles the employer acquired to sell or lease in the year
• the average cost of all new automobiles the employer acquired to sell or lease in the year

© National Payroll Institute – Payroll Fundamentals 1 3-48

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

The standby charge formula used when an employee is principally engaged in selling or leasing
automobiles is:

Standby charge = 1.5% x [(average cost of automobiles acquired in the year +

taxes) x availability]

A reduced standby charge can be calculated if the employee meets the following conditions:

• business use is more than 50%

• personal kilometres are 1,667 or less in every thirty days of availability

The formula for the reduced standby charge for employees principally engaged in selling or
leasing automobiles is:

Reduced standby charge =

Personal kilometres x 1.5% x [(average cost of automobiles acquired in the year +

1,667 x availability taxes) x availability]

The rate for calculating the operating expense benefit for employees engaged in selling or leasing
automobiles is reduced to $0.30 (for 2024) per personal kilometre driven.

Operating expense benefit = $0.30 x personal kilometres driven

A summary of the automobile taxable benefit calculation components is provided in the

following table.

© National Payroll Institute – Payroll Fundamentals 1 3-49

Chapter 3
Employment Income – Allowances, Expenses and Benefits

Exhibit 3-3
Automobile Taxable Benefit =
Standby Charge + Operating Expense Benefit – Employee Reimbursement

SELLING OR
OWNED LEASED LEASING
AUTOMOBILES

1.5% x (Average
2% x (Cost of
2/3 x (Monthly Cost of Cost of automobiles
Standby automobile
automobile + taxes) acquired in a year +
Charge + taxes)
x Availability taxes)
x Availability
x Availability

Personal kilometres x Standby Charge

Reduced 1,667 x Availability
Standby If:
Charge • kilometres used are more than 50% for business, and
• personal kilometres used are less than 1,667 per 30 day period

Operating
$0.30 x personal
Expense $0.33 x personal kilometres driven
kilometres driven
Benefit

Standby charge (or reduced standby charge) x 50%

Optional
If:
Operating
• kilometres used are more than 50% for business, and
Expense
• a standby charge component is included in the employee’s income,
Method
and
• the employee requests in writing

© National Payroll Institute – Payroll Fundamentals 1 3-50

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Net Pay Calculation

We can now calculate the net pay of an employee who receives taxable allowances and taxable
benefits in addition to their salary.

Example:
Marc Potvin is a marketing coordinator for a large retail clothing chain in Quebec. An annual
salary of $56,400.00 is paid semi-monthly.

Marc is also provided with the following:

• A monthly car allowance of $162.50.
• A parking space at the employer’s head office, with a fair market value of $250.00 per
month.
• Employer-paid life insurance coverage is equal to two times the annual salary. The
company pays $0.85 per $1,000.00 of group term life insurance coverage.
• An unrestricted Group RRSP to which Marc contributes 5% of salary and the employer
matches 100%.
Determine semi-monthly pay period values:
Salary $56,400.00 ÷ 24 = $2,350.00
Car allowance ($162.50 × 12) ÷ 24 = $81.25
Parking ($250.00 × 12) ÷ 24 = $125.00
Group term life insurance Coverage: $56,400.00 × 2 = $112,800.00
Rounded: $113,000.00
Monthly premium: ($113,000.00 ÷ $1,000.00) x $0.85 = $96.05
Monthly premium + Quebec insurance tax: $96.05 × 1.09 =
$104.69
Semi-monthly taxable benefit: ($104.69 × 12) ÷ 24 = $52.35
Group RRSP Employee semi-monthly contribution: $2,350.00 × 5% = $117.50
Employer match (100%): $117.50

Marc worked four hours of overtime to complete a project and meet the employer’s deadline in
the current pay period, and the overtime is considered occasional. In addition to regular pay
period earnings and benefits, the following will be paid:

• Overtime earnings 4 hours × $27.12 × 1.5 = $162.72

• Non-taxable meal allowance (receipts submitted) of $20.50

© National Payroll Institute – Payroll Fundamentals 1 3-51

Chapter 3
Employment Income – Allowances, Expenses and Benefits

MANUAL PAY STATEMENT

Taxable Payments
+ Salary $2,350.0
+ Car allowance 81.25
+ Overtime 162.72
= Gross Taxable Earnings (GTE) $2,593.97
Non-taxable Payments
+ Meal allowance 20.50
= Total Gross Payment $2,614.47
CRA i RQ ii
GTE $2,593.97
+ Employer-paid parking 125.00
+ Employer-paid group term life insurance 52.35
+ Employer RRSP match (unrestricted) 117.50
= Pensionable Earnings (PE) $2,888.82
GTE $2,593.97 $2,593.97
+ Employer RRSP match (unrestricted) 117.50 117.50
= Insurable Earnings (IE) $2,711.47 $2,711.47
GTE $2,593.97 $2,593.97
+ Employer-paid parking 125.00 125.00
+ Employer-paid group term life insurance 52.35 52.35
+ Employer RRSP match (unrestricted) 117.50 117.50
− Deduction for enhanced C/QPP contribution 27.43 27.43
− Employee + Employer RRSP contributions 235.00 235.00
= Net Taxable Income (NTI) $2,626.39 $2,626.39
Statutory Deductions
− C/QPP contributions ($2,888.82 − $145.83) × 6.40% 175.55
− 2 C/QPP contributions
nd PE × 4.00%
− EI premiums $2,711.47 × 1.32% 35.79
− QPIP premiums $2,711.47 × 0.494% 13.39
− Income tax [federal + provincial (except Quebec)] 366.90
− Quebec income tax 477.95
Authorized Deductions
−
Company Compulsory Deductions
−
Voluntary Deductions
− Employee RRSP contribution 117.50
= Total Deductions $1,187.08
= Net Pay (Total Gross Payment − Total Deductions) $1,427.39

i
The CRA values are used to determine CPP contributions, EI premiums and federal and non-Quebec income tax.
ii
The RQ values are used to determine QPP contribution, QPIP premiums and Quebec provincial income tax.

© National Payroll Institute – Payroll Fundamentals 1 3-52

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Content Review
• Non-cash benefits are items the employer provides to an employee or pays for on an
employee’s behalf.
• The primary payroll compliance requirement concerning benefits is that if they are
taxable, both the federal and Québec governments require that the value of the non-cash
benefit or cash reimbursement amount is included in the employee’s income as it is
earned or enjoyed.
• Non-cash taxable benefits are subject to statutory deductions for Canada/Québec Pension
Plan (C/QPP) contributions, income tax, Northwest Territories and Nunavut payroll
taxes. They are not considered insurable earnings and are not subject to Employment
Insurance (EI) or Québec Parental Insurance Plan (QPIP) premiums. EI and QPIP
premiums only apply to cash taxable benefits, considered insurable earnings.
• Premiums the employer pays for coverage under a group term life insurance policy are
considered a taxable benefit to the employee.
• The taxable benefit value for employer-paid insurance includes the premium plus the
applicable tax in Manitoba (7%), Ontario (8%) and Quebec (9%).
• In Québec only, when an employer pays the premium for a private health insurance plan,
the value of the premium, plus the tax on insurance premiums, is a non-cash taxable
benefit to the employee.
• The fees an employer pays for employee assistance plan coverage are not considered
taxable.
• Gifts or awards given in cash are subject to all statutory deductions.
• Federally, a single $500.00 exemption can be applied against the total value of all the
gifts and awards that meet the policy, given to an employee annually; any amount over
$500.00 is included in the employee’s income as a non-cash taxable benefit.
• In Québec, there is no limit on the number of gifts or awards given to an employee. If the
total cost of the gifts is greater than $500.00 or the total cost of the awards is greater than
$500.00, then only the amount over the $500.00 limit is taxable for each category.
• If an employer gives an employee an allowance to cover the cost of cell phone or Internet
services, the allowance would be considered a taxable cash benefit, subject to all
statutory withholdings.
• Where an employer pays for all or part of an employee’s parking costs at the regular
workplace, the value of the parking costs is a non-cash taxable benefit to the employee.
• A taxable benefit results when the employer pays for any cost of an employee’s course
that primarily benefits the employee (for example, personal interest training).
• When an employer charges no interest or an interest rate lower than the government-
prescribed interest rate on a loan given to an employee, the employee has received a
taxable benefit from employment.
• When an employer provides an employee with the use of an employer-owned or
employer-leased vehicle for personal and business driving, the employee must be
assessed a non-cash taxable benefit based on their personal use of the vehicle.

© National Payroll Institute – Payroll Fundamentals 1 3-53

Chapter 3
Employment Income – Allowances, Expenses and Benefits

• In Québec, an employee is required to keep a logbook for recording the trips made with
the automobile and give a copy of the logbook to the employer not later than 10 days
after the end of the calendar year or the tenth day following the date on which the
automobile was returned to the employer.
• For an employer-owned and an employer-leased automobile, the taxable benefit is the
total of the standby charge plus the operating expense benefit, less any employee
reimbursement.

© National Payroll Institute – Payroll Fundamentals 1 3-54

 Chapter 3
Employment Income – Allowances, Expenses and Benefits

Common Situations
Throughout your career in payroll, you will likely experience some very common situations.
Being prepared to respond to an employee or a manager confidently demonstrates your
competence.

Over time, you will be able to elevate yourself within the organization by building people’s trust
in you when you demonstrate you are knowledgeable and have a practical understanding of how
to handle situations in a compliant manner that also considers the best interest of your
stakeholders.

Consider how you would respond to the following situation.

----------------------------------------------------------------------------------------------------------------

An employee in the sales department was recently awarded a prize for achieving the highest
sales for the previous year. Employees who win this prize are usually awarded $1,000, which is
processed through payroll, subject to statutory withholding. In this particular instance, the
employee had requested that instead of a cash payment, the employer purchase a set of golf clubs
for them.

As a payroll professional, you allocated a non-cash taxable benefit to the employee’s pay for the
value of the golf clubs (plus applicable sales tax), subject to statutory withholding.

Upon reviewing their recent pay statement, the employee calls you angry about the inclusion of a
taxable benefit. The employee says, “I specifically requested that the company purchase the golf
clubs instead of giving me cash so I would not have to pay income tax”. The employee demands
that you reverse the taxable benefit and refund the statutory deductions applied to that value.

Were you correct in applying a taxable benefit to the employee’s pay? How would you respond
to the employee’s request for a refund?

© National Payroll Institute – Payroll Fundamentals 1 3-55

Chapter 3
Employment Income – Allowances, Expenses and Benefits

[SUGGESTED BEST PRACTICE]

Although the CRA does have a gifts and awards policy that allows a $500 exemption, this only
applies to:

• Presented for special occasions such as a religious holiday, a birthday, a wedding, or the
birth of a child.
• Awarded for an employment-related accomplishment such as outstanding service or
employee suggestions. It is recognition of an employee’s overall contribution to the
workplace, not recognition of job performance. Generally, a valid, non-taxable award has
clearly defined criteria, a nomination and evaluation process, and a limited number of
recipients.

The sales prize the employee won was a job performance reward and does not qualify for the
exemption. Therefore, as a payroll professional, you were correct in applying a non-cash taxable
benefit for the fair market value of the golf clubs gifted to the employee.

It is not uncommon for employees to be under the impression that they can avoid paying income
tax by having the employer provide them with a physical gift in lieu of a cash payment.

You will need to explain to the employee that the CRA considers any value provided to an
employee in exchange for their work performance to be employment income. In addition to cash
remuneration, this includes the value of a gift.

In order to remain compliant with the CRA reporting requirements, the value of the performance
reward must be included as employment income, subject to statutory withholding.

Communicate with employees when gifts are provided

Employers that provide gifts to employees should be transparent regarding the tax implications.

• the value of a performance reward, whether cash or non-cash, is fully taxable

• in situations where the exemption does apply if the value of the gift is greater than the
exemption, a taxable benefit applies to the value in excess of $500.

© National Payroll Institute – Payroll Fundamentals 1 3-56