What are Fringe Benefits in Canada?

To effectively manage a Canadian workforce, it's important to understand how employees are paid and taxed on both sides of the border. Employees typically receive wages through direct deposit, printed checks, or occasionally in cash. Regardless of the method, all wages are considered taxable income and usually subject to income tax withholding.

In Canada, employers must provide certain benefits like contributions to pension plans, the medicare system, and employment insurance.  However, many employers go beyond these requirements, offering additional fringe benefits to attract, reward, and retain top talent.

So, what exactly are fringe benefits, and how are they taxed in Canada?

What Are Fringe Benefits?

Fringe benefits are additional forms of compensation provided to employees beyond their standard salary. According to the Canada Revenue Agency (CRA), these benefits can include various forms of non-cash compensation. Essentially, a fringe benefit is any good, service, or cash benefit provided to an employee in addition to their regular pay.

Even if a third party provides the benefit, it’s still considered a fringe benefit offered by the employer. For example,  if a family member of an employee benefits from a company-sponsored gym membership, the employee is still the recipient of the fringe benefit.

Common Examples of Fringe Benefits

If you're an US-based or out-of-country employer thinking about what fringe benefits to offer your Canadian employees, consider these common perks: 

• Transportation both providing vehicles and commuter benefits 

• Board and lodging 

• Gifts and awards 

• Group life insurance policies 

• Health club memberships and facilities

• Spousal reimbursements 

• Low or interest free loans

• Meals

• Security 

• Tool/supply reimbursements and allowances 

• Tuition reimbursement 

Taxation of Fringe Benefits

Understanding the taxation of fringe benefits in Canada is crucial. Most fringe benefits are taxable and must be included in the employee’s income. This means they are subject to federal and provincial income tax, as well as Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.

However, there are some exceptions. Certain fringe benefits may be either partially or fully exempt from taxation. For instance, low-cost holiday gifts or achievement awards may be excluded from taxable income. 

It’s important not to assume that a fringe benefit is non-taxable just because it isn’t explicitly mentioned in tax laws, the Canadian government has an extensive breakdown of taxable fringe benefits to help employers understand. 

Understanding GST/HST taxes

In Canada, the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) are two important components of the tax system, particularly when it comes to any benefits provided to employees. 

Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a federal tax that applies to most goods and services sold or provided in Canada. The current GST rate is 5%.

Harmonized Sales Tax (HST)

The Harmonized Sales Tax (HST) is a combination of the federal GST and a provincial sales tax (PST). The HST applies in provinces that have harmonized their provincial sales tax with the GST. These provinces are:

• Ontario

• New Brunswick

• Newfoundland and Labrador

• Nova Scotia

• Prince Edward Island

The HST rate varies by province, as it includes the 5% federal GST plus a provincial portion that varies.

Application to Employee Benefits

When it comes to employee benefits, both GST and HST can apply. Here’s how they impact taxable benefits:

1. Taxable Benefits:

   • If you provide a taxable benefit to an employee, you generally have to include the value of that benefit in the employee’s income.

   • The value of the benefit is typically the amount the employee would have had to pay for the same service or product in an arm’s length transaction.

   • GST/HST must be accounted for when calculating the value of the taxable benefit.

2. GST/HST on Benefits:

   • If the benefit is a good or service subject to GST/HST, the tax must be included in the value of the benefit.

   • Employers can often claim input tax credits (ITCs) for the GST/HST paid on expenses incurred to provide taxable benefits.

3. Exempt Benefits:

   • Certain benefits are exempt from GST/HST. For example, most health care services, certain educational services, and some other specific types of benefits may be exempt.

   • It’s important to identify which benefits are exempt to ensure proper tax handling.

For example, suppose a business provides a company car for an employee’s personal use. The value of the benefit includes the fair market value of the car’s use plus any GST/HST that would apply. If the fair market value is $10,000 and the applicable HST rate is 13%, the taxable benefit would include the HST amount, making the total benefit value $11,300.

Key Considerations for U.S. Employers

For U.S. employers offering fringe benefits to Canadian employees, understanding the nuances of GST and HST is essential. Ensuring compliance with Canadian tax laws helps avoid penalties and maximizes the tax efficiency of the benefits offered.

• Determine the correct GST/HST rates for the province where the employee works.

• Include GST/HST in the taxable benefit value calculation.

• Claim input tax credits for the GST/HST paid on expenses incurred to provide taxable benefits, where applicable.

• Stay informed about which benefits are exempt from GST/HST to properly exclude them from taxable calculations.

Tailoring Your Benefits for a Canadian Workforce

As a U.S. employer, offering competitive fringe benefits to your Canadian employees can set you apart in the job market. Understanding the differences in taxation and cultural expectations is key to creating an attractive benefits package. By offering a mix of taxable and non-taxable benefits, you can enhance your overall compensation strategy and appeal to a broader range of employees.

How Justworks helps with Fringe Benefits 

Ready to explore how you can optimize your fringe benefits strategy for your Canadian employees? With Justworks EOR, we’re here to support you with tailored solutions to meet your business needs. Get started today to learn more about how we can help you streamline your HR and benefits administration.