TAXABLE BENEFITS AND ALLOWANCES

Anything of value a sole proprietor gives an employee in addition to salary or wages, whether cash, a gift, the use of property or the payment of a personal expense, is generally a taxable benefit unless a specific exception applies. The employer must work out the value, include it in the employee's pay for withholding, and report it on the T4 slip. This page explains how benefits are taxed, which common benefits are taxable or tax-free, how allowances are treated, and how the automobile benefit is calculated. Figures are for 2026. The same rules apply when the employee is a family member of the proprietor.

HOW BENEFITS ARE TAXED

• Cash and near-cash: cash, gift cards and anything easily converted to cash are always taxable, however small.

• Non-cash benefits: valued at fair market value, generally including GST/HST and provincial sales tax.

• Withholding: income tax must be withheld on taxable benefits, as if they were paid in cash, in the pay period they are provided.

• CPP: taxable benefits, cash or non-cash, are generally pensionable, so CPP is calculated on them.

• EI: taxable cash benefits are insurable; most non-cash benefits are not, so EI is generally not deducted on them.

• Reporting: taxable benefits are included in employment income in box 14 of the T4 slip, and many are also shown separately with an "other information" code.

COMMON TAXABLE BENEFITS

• Group term life insurance: premiums paid by the employer for life insurance on an employee.

• Employer RRSP contributions: contributions to an employee's RRSP, or to a group RRSP, made by the employer.

• Gift cards and cash bonuses: taxable in full, even at holiday time.

• Personal expenses paid: an employee's personal phone plan, gym membership or home internet paid by the employer.

• Parking: employer-provided parking is generally taxable, unless the employee regularly needs a vehicle for work or parking is offered free to the public.

• Low-interest or interest-free loans: the difference between the CRA prescribed rate and the interest actually paid.

• Board and lodging: free or subsidized housing or meals, except at special work sites and remote locations.

COMMON TAX-FREE BENEFITS

• Private health and dental plans: employer-paid premiums are not taxable federally. In Quebec, they are taxable for provincial purposes.

• Non-cash gifts and awards: up to $500 a year in total, plus a separate long-service award of up to $500 every five years. Only the amount over $500 is taxable.

• Social events: a party or event open to all employees, costing up to about $150 per person.

• Business-related training: courses mainly for the employer's benefit, even if they lead to a qualification.

• Uniforms and protective clothing: clothing required for the job and not suitable for ordinary wear.

• Overtime meals: a meal or allowance of up to $23, where the employee works two or more hours of overtime and it happens only occasionally.

• Business phone: a basic plan on a phone provided mainly for work, where personal use does not add to the cost.

ALLOWANCES AND REIMBURSEMENTS

• Reimbursements: repaying an employee for a business expense, supported by receipts, is not a benefit.

• Flat allowances: a fixed monthly amount for a phone, car or meals, paid without receipts, is generally taxable.

• Vehicle allowances: a per-kilometre allowance of up to 73 cents for the first 5,000 km and 67 cents after that in 2026 (4 cents more in the territories), based only on business kilometres, is tax-free. Combining a flat allowance with a per-kilometre allowance for the same driving makes the whole allowance taxable.

• Travel allowances: reasonable allowances for travel away from the area where the employee normally works are generally not taxable.

EMPLOYER-PROVIDED VEHICLES

• Standby charge: where a vehicle owned by the business is available to an employee for personal use, the benefit is 2% of the vehicle's cost for each month it is available. For a leased vehicle, it is two-thirds of the lease cost.

• Reduced standby charge: if the vehicle is used more than 50% for business and personal driving is no more than 20,004 km a year, the charge is reduced in proportion to personal use.

• Operating expense benefit: where the employer pays operating costs, the benefit is 34 cents for each personal kilometre in 2026, or the employee may elect 50% of the standby charge if business use is more than 50%.

• Commuting is personal: driving between home and the regular place of work counts as personal kilometres.

WORKED EXAMPLE

In December, a proprietor gives an employee a $300 gift card and a $400 non-cash gift, and pays $240 of group term life insurance premiums for the year.

• Gift card: $300, taxable because it is near-cash.

• Non-cash gift: $400, tax-free because it is under the $500 limit.

• Life insurance premiums: $240, taxable.

• Total taxable benefit: $540, on which income tax and CPP are withheld and which is included in box 14 of the T4.

KEY POINTS

• Cash is always taxable: including gift cards.

• Know the exceptions: health and dental premiums, non-cash gifts up to $500, social events and business training.

• Allowances need care: per-kilometre allowances at or below the CRA rate are tax-free; flat amounts are not.

• Withhold and report: benefits go through payroll and onto the T4 in the year they are provided.

SOURCES

• Canada Revenue Agency: Guide T4130, Employers' Guide, Taxable Benefits and Allowances.

• Income Tax Act: sections 6(1)(a), 6(1)(b), 6(1)(e) and 6(1)(k).

• Department of Finance Canada: 2026 automobile deduction limits and expense benefit rates.