Why do employee benefits require internal controls?

Employee benefits require internal controls in addition to all the effort that goes into designing benefit packages to attract and retain talent. As such, human resources, payroll, benefits administrators and finance must be involved in benefits administration to ensure compliance, accuracy, effectiveness, and efficiency. In fact, this is considered the first internal control over employee benefits.

What do benefits refer to?

A benefit refers to any advantages, privileges, or rights beyond salaries and wages that an employer provides to an employee and may be statutory (mandatory under a statute) or non-statutory (optional or a fringe benefit or perk, but could be required by employment contracts, collective agreements, policies, or other arrangements).

According to the Canada Revenue Agency, an “employee” includes an individual who holds an office, unless otherwise noted.

Statutory benefits are those found, for example, under employment/labour standards legislation, such as vacation time, public holidays, and leave of absence, among others, depending on the jurisdiction.

Non-statutory benefits vary widely and may include group health benefits, pensions, meal allowances, low-interest loans, and vehicle and travel allowances.

With an increasingly competitive market for talent, creative benefits packages may include employment assistance programs, free onsite therapy, unlimited vacation and paid time off, and flexible and remote work. 

According to the Canada Revenue Agency, a benefit is defined as goods or services that you provide your employees or a close relative of the employee that is personal in nature.

Taxable and non-taxable benefits

Benefits are often taxable and should be included in an employee’s earnings and on their T4 slip. These taxable benefits are usually subject to statutory deductions, including Canadian Income Tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. 

Generally, benefits that employers provide to their employees are taxable under section 6 of the Income Tax Act (ITA), unless specifically excluded in the ITA. The administrative policies of the CRA identify conditions under which some of these benefits may or may not be taxable.

Consider this the second internal control over benefits—ensure appropriate tax treatment. The rationale is simple. If benefits did not attract taxes like salaries and wages, employers and employees could agree to circumvent tax laws by remunerating employees in benefits instead of salaries and wages.

Some examples of benefits that can be considered taxable if certain conditions are met are:

• Use of company vehicle for personal use
• Parking spaces or public transit passes
• Meals
• Gift cards and monetary awards
• Group life-term insurance, if paid by the employer
• Non-business-related complimentary or reduced-rate accommodation
• Low-interest or interest-free loans
• Event tickets

A taxable benefit could also include an allowance or a reimbursement of an employee’s personal expenses.

According to the CRA, an allowance or an advance is any periodic or lump-sum amount you pay your employee on top of salary or wages to help the employee pay for certain anticipated expenses without having them support the expenses.

Also, according to the CRA, reimbursement is an amount the employer pays employees to repay expenses they incurred while carrying out the duties of employment.

An employer may provide many benefits and perks that an employee may receive on a non-taxable basis. When a benefit is non-taxable, it does not count toward an employee’s income.

Some examples of benefits that may be considered non-taxable if certain conditions are met are:

• Cellphone and Internet services
• Education and professional development fees/tuition
• Professional dues
• Recreational facility or club dues
• Gifts and awards – generally under $500
• Mileage for work travel as per a reasonable CRA-prescribed mileage rate
• Counselling services for the purpose of re-employment, retirement, or physical/mental health
• Short and long-term disability insurance

For example, the use of a recreational facility or club does not result in a taxable benefit for an employee in any of the following situations:

• The employer provides an in-house recreational facility and the facility is available to all employees. This applies whether the employer provides the facilities free of charge or for a minimal fee.
• The employer makes an arrangement with a facility to pay a fee for the use of the facility. The membership is with the employer and not the employee and the facility or membership is available to all employees. Membership will be considered to be made available to all employees as long as each employee can use the membership even if an employee chooses not to.
• The employer provides employees with a membership in a social or athletic club, and it can be clearly demonstrated that the employer is the primary beneficiary of the membership. The membership is a taxable benefit to employees if the membership in or use of the club’s facilities provides only an indirect benefit to the employer. This would be the case where the employee becomes physically healthier as a result of using the club’s facilities and becomes generally better able to perform their duties (for example, fewer sick days, less downtime, remain fit for duty)

Moreover, whether or not a benefit is taxable depends on:

• Whether the employee or officer receives an economic advantage that can be measured in money
• Whether the individual is the primary beneficiary of the benefit

Since this can be a grey area, it is best for both the employee and employer to clearly understand the benefits provided and define what is considered taxable and non-taxable. This can be outlined in a new employee welcome package prepared by Human Resources and payroll.

How do you determine if a benefit is taxable and calculate its value?

The most basic way to determine if a benefit is taxable is to examine how the benefit is being used. The benefit may be taxable if it is being used for personal reasons outside of the workplace and on personal time.

The value of a taxable benefit is usually based on the benefit’s “fair market value” (FMV) – is the amount of money a product or service would be sold for on the open market. It is what an employee would have ordinarily paid for the benefit had the employer not provided it for them.

After the value of the benefit is calculated, HST and GST might need to be included.

Best practices for effective internal controls over employee benefits

Ensure effective internal controls exist over the following aspects of employee benefits:

• Paying or providing benefits only to employees entitled to the benefits, based on statutes, employment contracts, collective agreements, employer policies, or another basis.
• Calculating benefits correctly and paying out, deducting, or remitting the right amounts.
• Obtaining employee authorization for benefit deductions.
• Recording payment and other benefit transactions correctly.
• Taxing, remitting, and reporting income tax and other statutory amounts associated with benefits. Nearly everything related to payroll is time-sensitive. Once an employee is entitled to benefits, payroll should promptly add those benefits to the employee profile to avoid delays in receiving those benefits. In some cases, failure to pay a third party for a benefit-cost on time could mean the employee has to forfeit some or all of the underlying benefit, and the employer could be liable for the associated damages that the employee suffers.
• Providing, processing, paying, and remitting benefit amounts promptly.
• Reconciling benefit transactions and accounts.

Maintain internal controls for the accurate and timely processing of employee benefits, including proper authorization, calculation, remittance, and reporting of benefits in compliance with statutes, employment agreements, collective agreements, policies, and other requirements.

By Apolone Gentles, JD, CPA,CGA, FCCA, B.Sc. (Hons)

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