Taxable Benefits in the Construction Industry
If you provide benefits to an employee (or officer or shareholder), then you may need to include the value of the benefit in the employee’s income. Whether or not the benefit is taxable often depends on its type and the reason for which the employee (officer, shareholder) has received it.
In this article, we identify and provide information on common taxable benefits in the construction industry. Such taxable benefits also provide some examples of where the Canada Revenue Agency (CRA) often focuses their attention when conducting an income tax or commodity tax audit. This article focuses on the income tax implications but please note that the GST/HST implications should also be considered on these taxable benefits.
Automobile use is a necessity for construction companies. As a result, costs of supplying and operating automobiles are often legitimate business expenses. Generally, an employer will either provide an employee with a company-owned vehicle, which the employee will use for both business and personal travel, or the employee will receive an allowance for the use of his or her personal vehicle. If your employee drives a company vehicle for personal reasons, or receives reimbursement for the personal use of his or her vehicle, there is a taxable benefit that has to be calculated and included in the employee’s income.
Personal Use of a Vehicle
Most personal use of a vehicle is apparent – such as driving for family vacations or personal tasks. However, sometimes distinguishing between business use and personal use is less clear. For example, travel to the location where your employee regularly reports for work or performs the duties of employment, is considered personal travel. In the construction industry, employees often have more than one location to which they regularly report for work. The CRA has specifically commented that travel to an initial work site is considered personal use, but travel between work sites is considered business use.
The employee (or shareholder) should keep a log book tracking the total business kilometres and personal kilometres travelled for each calendar year and be ready to present the log book to the CRA upon request.
Corporate Ownership vs. Employee Ownership
Generally, corporate ownership of an automobile creates an increased administrative burden for the employer. For example, the company needs to ensure the employee is keeping a log book; calculates the value of the taxable benefit based on personal use of the vehicle; makes proper payroll withholdings on the taxable benefit; and reports such benefits on T4 slips.
On the other hand, employee ownership of an automobile may ease the administrative burden of the employer. For example, the company may pay a reasonable non-taxable allowance to an employee for the business use of his or her vehicle. The non-taxable allowance requires minimal calculations, no payroll withholdings and no T4 reporting. The CRA website states that a reasonable allowance to be $0.59 per business kilometre on the first 5,000 km and $0.53 per km driven after that. It is important to note that the corporation cannot pay for any other vehicle expenses of the employee otherwise the CRA considers the per kilometre allowance plus the reimbursement of vehicle expenses to be a taxable allowance.
While the above provides general comments on the ownership of an automobile, all of the facts and circumstances should be considered in making this determination.
Employees in the construction industry often use protective equipment and clothing in order to safely complete their daily duties. The employee will not receive a taxable benefit if the employer supplies distinctive clothing that must be worn while performing the employment duties or provides special clothing designed to protect the employee from the hazards of employment.
Alternatively, a non-taxable reimbursement or reasonable allowance may be paid to an employee for the purchase of protective clothing if it is required by law to be worn by the employees on the worksite. In addition, a non-taxable reimbursement or reasonable allowance may be paid to an employee for the cleaning of uniforms or clothing.
Low Rent, Free Housing, or Discounted Home Purchases
Housing may be offered at a discount to employees or shareholders in the construction and real estate industry. If a corporation provides an employee (including shareholders) with free rent, low rent, or discounts on home purchases, then the employee (or shareholder) will have received a taxable benefit. The value placed on this benefit is equal to its fair market value. For example, where a house is made available for the personal use of shareholders, the value of the benefit will be the difference between the fair market rent of the property and any consideration paid to the corporation by the shareholder for the use of the property.
Cellular Phones and Other Hand-Held Devices
Providing an employee or shareholder with a cellular phone or similar hand-held device will not result in a taxable benefit as long as the device was provided primarily for business purposes. However, the CRA will consider personal usage of the phone to be taxable. The value of the benefit will be calculated as the difference between the total cost and the amount of the cost without personal use. The CRA continues to scrutinize cellular phone expenses and where a log or reasonable determination of business expenses has not been kept they will significantly decrease or entirely disallow the cellular expenses claimed.
There may be other benefits that you provide to your employees besides those noted above (such as meal and travel allowances). In addition, benefits given to shareholders may have adverse tax consequences for the corporation.
It is important to consider and assess the benefits that you are currently providing and consult with your DJB tax advisor.