GST and Employee Benefits, Allowances and Reimbursements

Are you an employer who pays benefits to your employees?

Do you know how to account for the GST on those benefits?

The following example is aimed at an employer who is registered for GST and pays employees various benefits, such as automobile allowances and meal allowances. The other assumption made in the following is that these expenses are deductible to the employer, the automobile allowance is reasonable and the amounts that the employee is being reimbursed for or paid an allowance for are for expenses incurred to earn income for the employer. Firstly, I will discuss benefits paid that are not taxable to the employee and then I will comment on benefits paid that are taxable to the employee and included on their T4.

The GST rate was reduced January 1, 2008 to 5% from 6%.

Reasonable Allowance Paid to Employee - Not Included on T4
If you fit the above assumptions and pay your employees a deductible automobile allowance, you can calculate the amount of GST included on this allowance as follows. The GST included in the allowance is calculated by taking the allowance or amount paid by the applicable rate (A x B. A = the allowance paid, B = the rate); after January 1, 2008, the rate is 5/105, in 2007 the rate was 6/106.

Therefore, if you pay your employee a per kilometer allowance that totals $500 in one month, the amount that you as the employer are able to claim as an input tax credit (ITC) is 500 x 5/105 = $23.80.

If your employees are paid a meal allowance when they travel on business and do not have to provide receipts, you are able to calculate the amount of ITCs using a modified rate. The modified rate that does not require receipts for documentation is 4/104 after January 1, 2008. This rate takes into consideration tips and provincial sales tax that would be included in the expenses incurred by the employee. An example to illustrate this would be an employee in B.C. who receives $100/ day to cover travelling and meal expenses. The GST allowed to be claimed by the employer is $100 x 4/104 = $3.86.

Please note that an ITC is only allowed to be claimed on expenses that would have had GST incurred on it. If the expense would not have been subject to GST, for example insurance, there is no calculation for an ITC.

Reimburse Actual Expenses - Not Included on T4
If we look at a different situation where the employer reimburses actual costs incurred by the employee and requests that receipts be provided. The employee spends $100, which consists of meal charges-$80, tip-$15, PST-$2 and GST-$3. The amount of GST allowed to be claimed in this example would be the actual GST paid by the employee of $3.

When reimbursing an employee for an expense incurred on your (the employer’s) behalf, actual receipts are required in order to claim an input tax credit. The receipt should contain all of the prescribed documentation such as date, description of supply, name of supplier, GST number and amount. Without proper documentation, an ITC may be disallowed on review, even though the employer is able to clearly show through a paper trail that the amounts were paid.

Benefits Paid to an Employee That Are Included on a T4
An example of these types of benefits would be auto benefits, where the employee also uses the vehicle for personal use. When this is the case, the employer must remit the deemed GST in the benefit as well as being able to claim an ITC. For 2008 and later, when an employer is calculating an operating benefit for using a vehicle, the employer is deemed to have paid 3% GST on the amount of the benefit. If the benefit is a standby charge as calculated under the income tax act the benefit is 4% of the amount paid.

These benefits that are taxable to an employee are required to be calculated by the end of February following the year they were incurred (when T4’s are prepared). The GST is required to be remitted on the GST return that includes the month of February. When reviewing taxable benefits, the employer is only required to remit GST if they are entitled to an ITC.