Employment – Page 3 – Doug Carroll

Electric cars and charging stations as employee benefits

At issue

It’s sometimes said that our society has a love affair with the car. Personally I don’t feel any emotional attachment to those lug nuts, but when it comes to getting to, from and around my work activities, I’m as committed as the next commuter (like it or not).

The car is so prevalent that our tax system keeps an active eye on it, to make sure that employers don’t use transportation perks as a back-door way to provide employee benefits. While the rules have been in place a very long time, technological developments – specifically the entry of electric cars into mainstream usage – can lead to uncertainty as to what is exposed to tax, and how to calculate it.

These challenges were brought before the Canada Revenue Agency (CRA) at a recent financial industry conference, and the agency provided some updated guidance on its approach.

Automobile benefits

As foundation (and this barely scratches the surface of the complexities in practice), there are two main ways that an employee may have a taxable automobile benefit:

A standby charge applies when an automobile owned or leased by an employer is made available for the employee’s personal use.
An operating expense benefit applies when an employer provides an automobile and pays expenses such as gas, oil, maintenance and licencing related to personal use of the vehicle.
Good recordkeeping is a must, in large part to distinguish business from personal use. If the employee reimburses the employer for personal use, that would reduce or eliminate the taxable benefit.

CRA 2017-0703881C6 – Electric vehicle taxable benefits

At an accounting organization conference, CRA was asked about its current views on electric vehicles. Unlike an internal combustion engine that can use any gas station, it is common, if not imperative, for the driver of an electric vehicle to have a charging station in the home. How does the charging station fit within the automobile benefits framework?

For starters, CRA advised that the charging station is not part of the vehicle price, nor does it fall within the operating expense benefit. It is a separate capital asset, for which capital cost allowance (CCA) may be claimed. Of course to the extent the vehicle is for personal use (though CRA did not comment further on the point), presumably there can be no CCA claim.

Beyond the automobile rules, there is the potential that the charging station would be considered a general taxable employee benefit. However, if it could be shown that the primary beneficiary of the charging station is the employer, for example if there is a clear business purpose and it relates to a condition of employment, then no benefit arises. This assumes the station is owned by the employer, and is not intended to be transferred to the employee. In the case of a shareholder-employee, there could potentially be a shareholder benefit even if the employer owns the station.

Finally there is the matter of electricity usage. Employee payments to the electric company for personal use of an employer vehicle may be used to reduce the operating expense benefit for the employee. Furthermore, an employer reimbursement for an employee’s electricity cost to charge up an employer vehicle will not be a taxable benefit. There is still the practical matter of calculating the electrical charges, for which the CRA offered no guidance.

Practice points

Taxation of automobile benefits is complex, and is likely to get even more challenging as new transportation technology develops. Keep clear and up-to-date automobile records.
A taxable employee benefit can arise if an electric car charging station is installed in an employee’s home for an employer vehicle. This can be rebutted if the employer is the owner of the station and is the primary beneficiary of its use.
As a final (and simpler) note for employees using their own cars, they may receive a non-taxable reimbursement from an employer for work-related mileage, though not for commuting to or from a workplace. For 2018, the “reasonable allowance” per CRA is 55 cents for the first 5,000 km driven, and 49 cents thereafter. That’s up a penny from 54 and 48 cents respectively that applied in 2017.

Depositing an employee bonus directly to RRSP

Implications of ‘no taxes withheld’

It’s February 2016, and many fortunate employees will be looking forward to the payment of their 2015 year-end bonus. Particularly in sales roles where year-end figures dictate the amount of those bonuses, payments necessarily occur after December 31st.

Most employers will target to have those bonuses paid before the end of February, in part to enable the employee to use those funds to make an RRSP contribution that can be applied against the prior year’s income. Often employers will go even further by offering to route the gross amount of the bonus – that is, with no federal or provincial income tax withheld – directly into an employee’s workplace group RRSP.

For a conscientious RRSP saver, this is a great way to assure that contributions are being systematically socked away. However, one must be careful to understand the mechanics of this process, in order not to receive a nasty tax surprise later.

Timing and source of RRSP deposit

By the way, the 60-day deadline this year is Monday, February 29, 2016 to be able to claim against 2015 income. For our ‘no-taxes-withheld’ bonus deposited directly to an RRSP, that means you will be using income taxable in 2016 to reduce income taxable in 2015.

To illustrate, let’s assume for simplicity that Bonnie claimed no RRSP contributions for 2014, and her marginal tax rate is 40% at all times in this example. She earned a base salary of $90,000 paid in 2015, and bonus of $10,000 paid in February 2016. By making the RRSP contribution in February 2016, she reduced her 2015 taxable income to $80,000, yielding a tax refund of $4,000. If Bonnie earns the same $90,000 base this year, her total income will be $100,000 in 2016.

Unfortunately, Bonnie is terminated at the end of 2016, and by her employment contract is not entitled to any further bonus payment.

Tax refund and next year’s tax return

It now comes to tax filing time in April 2017. Bonnie’s employer perfectly withheld the tax due based on her $90,000 base, but Bonnie actually earned $100,000 in 2016. She now owes another $4,000 in tax. If Bonnie had the foresight to set aside the refund money when she received it in the spring of 2016, she would have the exact cash necessary to pay that difference.

Though somewhat in hindsight, this begs the question: what should Bonnie actually do with the tax refund? A common recommendation is to make a further RRSP contribution with any refund that is generated from an RRSP contribution. Apart from cultivating a savings habit, this enables the person to boost the RRSP each year by repeatedly applying the tax refunds to, in a sense, pre-fund the tax liability on the eventual drawdown.

In this case however, had Bonnie made that second RRSP contribution, it would have generated a corresponding refund of $1,600. That certainly helps build her retirement savings, but from a cash flow perspective she would still be $2,400 short of the $4,000 she needs to pay her 2016 tax bill on that bonus payment.

Real, or could it be worse?

On a rolling annual basis, if Bonnie has a consistent income and RRSP deposit habit, this phenomenon may never even be noticed, at least not until the year (or rather the year after) she retires.

On the negative side of things, what if Bonnie had a $40,000 one-time/exception bonus one year that she used to catch up carried forward RRSP room? This could play havoc with her cash flow when it comes to filing her taxes the following year.

As a final note, be aware that premiums for Canada Pension Plan and Employment Insurance are applicable to bonus payments. That means that if the full bonus is directed to an RRSP, the employer will be taking those CPP and EI deductions out of the employee’s regular pay. Though not as substantial as the income tax implications, this helps explain the slightly lighter regular pay cheque the employee would receive at February month-end.

Bruins challenge 50% meal deduction limit – What about Canada?

At issue

Generally, amounts expended to produce business income are deductible. However, in the case of meals and entertainment, there is a potential that such outlays may be more entertainment than business.

While arguably a tax authority could require a detailed explanation of each expense claim, the more practical approach adopted in most jurisdictions is to simply place a limit on deductibility.

Section 67.1(1) of the Income Tax Act (ITA) Canada

Under our Income Tax Act, the current deduction limit of 50% has been in place since 1994, prior to which it was 80%.

ITA s. 67.1(1) provides that “an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is deemed to be 50 per cent of the lesser of

(a) the amount actually paid or payable in respect thereof, and

(b) an amount in respect thereof that would be reasonable in the circumstances.”

Exceptions to this limitation are noted in the following subsections, including explicit acknowledgement given to long-haul truck drivers.

CRA IT-518R Food, Beverages and Entertainment Expenses

The Canada Revenue Agency (CRA) provides its guidance on the deduction limitation and exceptions in this archived Interpretation Bulletin. Detailed commentary is provided on these potential exceptions:

Provision of food, beverages or entertainment for compensation
Fund-raising events for registered charities
Amounts for which the taxpayer is compensated
Benefits included in an employee’s income or provided to an employee at a remote work location
Employer-sponsored events or services available to all employees
Amounts included in fares for transportation, and
Conferences, conventions and seminars

Jacobs v. Commissioner, U.S. Tax Court Docket No. 019009-15

Hockey is an aggressive, competitive game, and the owner of the Boston Bruins appears to be taking the fight from the ice to the courts. In July 2015, Jeremy Jaocbs filed a petition challenging the Internal Revenue Service on its interpretation of the meal deduction under the U.S. Internal Revenue Code.

Like Canada, the United States generally limits the deduction for meals and entertainment to 50%. The relevant provision is s.274(n) of the Code.

The core of the Bruins’ argument appears to be that the team is effectively running its business operations when stationed at each out-of-town hotel. The players and other staff are required to attend and participate at meetings, which of course include meals. In that view, the contention would presumably be that the provision of the meals is entirely for the benefit of the employer, and therefore should be entitled to full deductibility.

Practice points

Meal and entertainment expenses are some of the most often reviewed and reassessed deduction claims. A quick search of reported cases turns up dozens of rulings, and these of course are the ones that ended up in court, with many more being resolved administratively between the taxpayer and CRA.
The 50% limitation is not applicable in all situations, so a taxpayer could benefit from a review of the exceptions, as discussed in IT-518R.
On October 8, a Notice of Trial was served in Jacobs v. Commissioner for a hearing to be held March 7, 2016. While foreign decisions have no precedent value in Canada, if the U.S. court finds that the arguments have merit, Canadian businesses – sports franchises or otherwise – may be emboldened to challenge the rules on this side of the border.