INCOME TAX PAID BY EMPLOYER
When an employer pays an employee's personal income tax liability, the Canada Revenue Agency (CRA) considers this a taxable benefit for the employee. As a result, the amount paid must be included in the employee’s income for the year and is subject to standard payroll deductions.
Tax Treatment
- Taxable Benefit for Employees: Any income tax paid by the employer on behalf of the employee is added to the employee’s total taxable income. This ensures that the benefit is taxed as if it were part of the employee’s salary or wages.
- Employer Obligations: Employers are required to calculate the value of this taxable benefit and apply the necessary payroll deductions, including Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.
Reporting and Compliance
- Reporting on T4 Slips: The total taxable benefit must be reported on the employee’s T4 slip. It should be included in box 14 ("Employment income") and detailed in the "Other information" section under code 40.
- Grossing-Up Method: In some cases, employers may use a grossing-up method to account for both the tax liability and the taxable benefit arising from the employer’s payment. This ensures that the full tax obligation is covered.
Additional Considerations
- Employer-Funded Tax Payments: While this approach can provide convenience for employees, it increases their taxable income, which may result in additional taxes owed at the end of the year.
- Proper Record-Keeping: Employers must maintain detailed records of tax payments made on behalf of employees to ensure compliance with CRA regulations and accurate reporting.
Additional Resources
