Employees are taxable on pretty much everything they receive, whether it be cash remuneration in the form of a salary or bonus, deferred compensation through stock incentive programs or even fringe benefits, such as a free fitness membership at the local gym.
Indeed, the wording in the Income Tax Act regarding the taxation of employment income and benefits is extremely broad: “The value of … benefits of any kind whatever received or enjoyed … in respect of, in the course of, or by virtue of an office or employment” must be included in an employee’s income.
That said, there are some notable exceptions and one of them relates to employer-provided counselling services.
The term “counselling services” is not actually defined in the Tax Act, but the Canada Revenue Agency has said it refers to “guidance and assistance provided by a trained person on a professional basis.”
Under the tax rules, employee counselling services are not taxable if they fit into one of three categories: an employee’s re-employment, retirement or mental or physical health (other than a benefit for using a recreational facility or club) such as counselling for tobacco, drug, or alcohol abuse, stress management or various employee assistance programs.
But not all employer-paid counselling services can be received tax free.
For example, the CRA’s position is that the value of employer-paid legal and financial counselling services is generally not excluded from an employee’s income and is considered to be a taxable benefit.
The CRA has also stated that fees an employer pays for an employee’s income tax preparation are usually considered a taxable benefit. But this may not always be the case.
The CRA this week released a technical interpretation letter discussing whether federal employees, affected by the government’s troubled Phoenix payroll system, have to pay tax on the value of government-reimbursed fees paid for financial advice and tax preparation services to sort out their tax situation.
Since the launch of the government’s consolidated payroll system in early 2016, tens of thousands of current, former and retired government employees have reported being either underpaid, overpaid or, in some cases, simply not paid at all.
According to the Government of Canada’s website, all employees who had pay issues related to the Phoenix system and who required assistance from an accountant or another qualified tax professional may seek up to $200 (including tax) in reimbursement for tax advisory services for their 2016 or 2017 income taxes.
Eligible employees include those who were either underpaid or overpaid in the 2016 or 2017 calendar years or who had incorrect tax slips for either tax year.
For the purposes of submitting a claim, tax advisory services include qualified professional advice that helps an individual understand the impact of overpayments or underpayments as they relate to their 2016 or 2017 income taxes. It also includes income tax preparation fees and reconciliation fees for an individual’s 2016 or 2017 tax slips against income amounts employees actually received.
Affected employees who have already filed their 2016 income taxes but are uncertain about the potential current and future income tax issues related to Phoenix can still seek advice from an accountant or a qualified tax professional and be reimbursed.
Costs for tax advisory services related to an employee’s small business activities or investment activities are not eligible for reimbursement. Similarly, the cost of tax software and online services are not eligible, since the intent of reimbursement is to encourage employees who are uncertain about the Phoenix pay issues to seek professional advice.
In typical bureaucratic style, the government has designed a specific form for such claims, which must be accompanied by a receipt from an accredited professional accountant, tax preparation firm or individual tax preparer.
The CRA reiterated that the value of all benefits must generally be included in an employee’s income and then cited its “Benefits and Allowances Received from Employment” folio, which explains the federal income tax treatment of various benefits and allowances received from employment.
The folio discusses when a benefit may or may not be included in an employee’s income and cites a two-decades-old case in which the Federal Court of Appeal confirmed that, generally, the value of a benefit will be included in an employee’s income where the employee “receives an economic advantage measurable in monetary terms and is the primary beneficiary of the benefit.”
An employee generally receives an economic advantage when an employer pays or provides a reimbursement for their personal or living expenses or the employer reimburses the cost of an employee-owned asset, but “(t)here is generally no economic advantage if the employee is simply restored to a previous economic position.”
As a result, the CRA concluded that compensation paid to an employee by an employer for financial loss incurred due directly to the employer’s error is not included in income since the employee is being restored to a previous economic position.
Therefore, reasonable employer reimbursements for the cost of tax advisory services incurred as a direct result of Phoenix pay system errors will not be included in the employee’s income and won’t be reported on the employee’s T4.