When your business hires individuals and pays them salary, bonuses or commissions and provides employee benefits, you become an employer and assume specific responsibilities. Today’s complex tax rules impact employee benefits such as group health and dental insurance, group term life insurance, training expenses, motor vehicle allowances, gifts and awards. These are the most common employment benefits offered today by Canadian businesses. Of crucial importance, these five benefits, along with over a hundred others and any new ones being added, need to be reviewed on a regular basis for tax implications by payroll departments when reporting their employee incomes at tax time.
Because employer sponsored benefit plans form an important part of any business organization’s total compensation package, knowing how to administer them correctly is integral to ensure payroll compliance and avoiding audits. A recent survey done by the Canadian Payroll Association of 4,000 payroll practitioners nationwide, helped to provide a better understanding of the challenges and successes faced by business owners in administering benefit plans.
In recent newspaper articles I have highlighted that many employers are either unaware of, or misunderstand the compliance responsibilities when developing employment policies, despite their willingness to comply. Most employer provided benefits are also taxable, with complex requirements that can change with new tax legislation, regulations or administrative policies. It’s vital that payroll practitioners’ knowledge of benefits administration is updated on a regular basis, as it is vital to mitigating any potential for business risk with benefit plans.
Food for thought and even more unsettling, is that the improper assessment of taxable employee benefits and allowances remain among CRA’s top audit drivers. Common employer-provided benefits such as paid parking and gift cards remain among the most difficult benefits to administer correctly. This is because employers often develop reward and recognition programs without considering payroll tax implications, which although well-intentioned, may end up triggering non-compliance audits.
Hence the important for employers to educate themselves and their payroll staff so that they have the necessary knowledge to properly identify and administer both taxable and non-taxable benefits and avoid costly penalties. Especially when one considers that each year Canada’s 1.5 million employers administer $901 billion in wages and taxable benefits.
You also need to have all employees complete both the federal and provincial copies of tax form TD1. These forms should be completed annually before the end of the first pay period. They allow you to set the appropriate tax-deduction rates for employees considering any deductions they are allowed, such as those for small children, study, or the care of a disabled person living with them.
Your accountant can often provide details about the different aspects of payroll deductions and employee benefits taxation, to help you avoid any problems.