Release date: January 23, 2017
Guest: Nicole Nazareth
Running time: 06:27 minutes
In the first episode of our “Canadian payroll compliance” podcast series, Nicole Nazareth outlines the concept of taxable benefits and discusses issues that companies need to be aware of when performing their reconciliation and reporting of taxable benefits, especially in light of recent CRA audit activity.
Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax professionals information they require.
Edmond: Hi, this is Edmond Kwan of PwC Canada, and I’d like to welcome you to our “Canadian payroll compliance” podcast series, where we’ll discuss some of the highly audited areas by the Canada Revenue Agency (or the CRA) from a payroll compliance perspective. As the 2016 tax year has come to a close and to start out the 2017 tax year in the right direction, companies should be looking for ways to mitigate compliance risks in the case of a payroll audit.
Here with us is Nicole Nazareth. Nicole is a Senior Manager who specializes in Employment Taxes and Global Payroll in our Global Mobility Services practice in Toronto. Today, we’ll first focus on Canadian payroll compliance for taxable benefits.
Nicole: Thanks, Edmond – it’s great to be here.
Edmond: Nicole, can you give us a high level introduction as to what companies should be concerned with when performing their reconciliation and reporting of taxable benefits?
Nicole: Absolutely! Over the past year, we have seen an increase in CRA audits specifically in this area. The overarching themes being identified by the CRA really boil down to proper reporting, remittance, and valuation. These themes, which seem to be the main focus of CRA audits, are what we’ll be discussing today using examples related to taxable benefits. But these themes also apply across the board for payroll compliance and are often overlooked when everything seems to be running smoothly.
When dealing with the taxable benefit topic, companies need to ensure they’re capturing the benefits in a timely manner, properly quantifying the value of the taxable benefits, as well as ensuring the software used is correctly mapping the benefits to their T4 reporting.
Edmond: This is an excellent area of focus. Perhaps, you can start by describing what a taxable benefit is in general?
Nicole: Basically, when an individual receives an economic advantage as a result of their employment relationship, that advantage is supposed to be recorded in their total income from employment, and is subject to source withholding. For example, if I purchase home fitness equipment, let’s say a treadmill, and my employer reimburses me for a portion of the total cost, that is an economic advantage I have over my next door neighbour who is not an employee at the same company. When my employer reimburses me for the allowable portion, that amount is added to my income, and the income and social security taxes deducted from my pay that period will increase as a result.
Where something is provided to an employee primarily for the benefit of the employer, it’s generally not considered a taxable benefit and no payroll reporting or withholding is required.
Taxable benefits are a tricky component of payroll reporting simply because of the nature of its requirement. Employers are left to establish an accurate value of the benefit. This is easy enough when the benefit is a cash benefit such as the treadmill in my example. But when the benefit is non-cash, such as a gift, the employer needs to determine the fair market value of that gift in order to record the proper benefit in income. Withholding is required on the benefit at the time it has been conferred – this is often difficult to comply with as it is administratively burdensome to be reviewing all potential benefits with each payroll run. Think about reviewing expense reports each month with the purpose of capturing any expense that should be a taxable benefit, or because some benefits are non-cash based, a valuation has to be done – this process can be practically challenging to manage!
Edmond: So, what are some of the practical consequences you have seen when an employer does not properly withhold and report on taxable benefits?
Nicole: Unfortunately, the CRA doesn’t place a materiality on their audits. Activity we’ve seen over the past year has resulted in requirements for employers to reissue T4s going back for 3 years, applicable to a portion or all of their employees, for as little as $300 per year. While this amount seems minimal, the fallout from the revisions is compounding. Revised T4s increasing total income results in revised notices of assessment for the employees in question, ultimately increasing the tax they should have paid for those 3 years, plus interest charges.
When amendments are required, employers are faced with the decision of whether or not they should absorb the additional tax cost for their affected employees. If they do, this in itself is a taxable benefit, and the cycle continues.
Edmond: That’s interesting to know. But Nicole, what can employers do to make sure they capture their taxable benefits properly?
Nicole: A full review of the benefits they currently provide should be undertaken to ensure they have been correctly identified as taxable or non-taxable. They should also review the software mapping to the T4s to be certain that the correct reporting is in place before the T4s are issued. A few audits that were not very favourable for the employers were a direct result of benefits not being revisited to ensure legislative changes have been factored in or their internal staffing changes have not impacted their payroll process.
Edmond: Well, it certainly sounds like there are a lot of things to consider when it comes to successfully navigating through the payroll compliance for taxable benefits. Thanks again, Nicole, for joining us today. I appreciate your time.
Nicole: Thanks, Edmond – it’s been a pleasure.
Edmond: For any questions, Nicole’s contact details are available on our PwC podcast website at www.pwc.com/ca/taxtracks. I encourage our listeners to stay tuned for upcoming podcasts in this series.
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