Generally speaking, a free, dedicated parking spot provided to an employee by an employer is a taxable benefit to the employee.
There are some exceptions to this rule. For example, if the parking spot is considered “scramble parking” (there are fewer spots than employees, i.e. first come first serve), then the “free” parking will not be considered taxable to the employee.
How serious is the CRA with respect to this?
Pretty serious actually. In fact, this exact issue was recently dealt with at the Federal Court of Appeal.
The Smith case goes something like this:
The taxpayer was a flight attendant whose airline provided a free parking spot. The CRA assessed the spot as a taxable employee benefit. Smith had to pay tax on the benefit.
The case was taken to the tax court of Canada. The court upheld the assessment (agreed with the CRA). The taxpayer appealed and lost again at a higher court.
Even though the Federal Court of Appeal agreed that the airline had sound business reasons to provide the employee with a spot for free they decided that the business reason was irrelevant. The fact is, the employee received a significant personal benefit which should be taxable.
Employee compensation can be a tricky area of tax. As your small business grows, it’s important to understand that many of the benefits you choose to award to your employees can have negative tax consequences. Be sure to work closely with your accountant to ensure you are compensating your key employees in a tax-efficient manner.
Other examples of tricky employee compensation are stock options, auto benefits, meals and entertainment, gifts. When compensating your employees or giving them benefits you should always be cognizant of the potential of a negative tax consequence.
While we agree that employee benefits are an important part of employee retention, a surprise tax bill at the end of the year will have the exact opposite effect the employer is looking for.
Some examples of tax-efficient employee perks would be:
- Employee Profit Share Plans (EPSP)
- Certain extended health benefits
- Employee RPP retirement programs
- Certain types of stock options
- Individual Pension Plans (IPPs)
Simply giving your employees perks and benefits that have a measurable monetary value is often a red-flag that should be discussed with your accountants.
You have options and many of these options are extremely tax efficient.
One of the best places to start are health benefits and retirement programs such as RPPs. These types of plans are available to businesses of all sizes and are administered by large insurance companies that can provide additional tax know-how to ensure your employees receive the benefits in the most tax-efficient manner possible.
Feel free to contact us with any questions related to employee compensation and we’ll be happy to help.