Fit to be taxed

Programs to help employees achieve their health goals may result in taxable benefit

Exercising more, eating better, losing weight and quitting smoking are common New Year’s resolutions. Programs to help workers achieve these goals may have payroll implications for employers and employees.

To attract and retain top workers, some employers offer employment benefits beyond medical/dental plans, group term life insurance and paid parking, and provide programs aimed at helping employees improve their health and wellness. On-site gyms, fitness club memberships and diet and nutrition counselling are common employee perks offered by companies appearing on lists of top-rated employers. 

When employers offer these benefits, though, there may be tax implications for employees in the form of taxable benefits. To ensure employers are complying with federal (and Quebec, if applicable) tax rules, payroll departments need to be aware of all of the benefits their employer offers to employees and whether they need to include them in employees’ income for calculating source deductions and employer contributions.

Here is a look at some health-related employee perks that may be taxable benefits: 

Fitness club memberships/ fitness facilities:

Some employers like to offer benefits that promote physical fitness, such as paying for fitness club memberships for workers or providing on-site fitness facilities for employees to use. Providing these types of benefits gives workers an opportunity to exercise, but it may also result in a taxable benefit. 

Paying for, reimbursing or subsidizing membership fees for an employee to join a fitness club, gym or swimming program is a taxable benefit for the employee. If an employer offers this benefit, payroll must include the value of the membership in the employee’s pay for calculating source deductions. 

This applies whether the employer requires employees to use a specific fitness club or whether it lets employees choose a facility.
The Canada Revenue Agency (CRA) also requires employers to assess a taxable benefit if they pay for, subsidize or reimburse an employee for membership fees to a business or professional club that has recreational, fitness, sports or dining facilities for its members, but is not primarily a recreational club.

The CRA says there will be no taxable benefit if an employer makes an arrangement with a fitness facility to pay a fee for using it if the membership is in the employer’s name rather than the employee’s and the employer makes the membership available to all employees, not just a select group. 

“Membership will be considered to be made available to all employees as long as each employee can use the membership even if an employee chooses not to,” the CRA says.

Another way to promote physical fitness without having a taxable benefit arise is to provide an in-house fitness facility for employees to use. The CRA says there is no taxable benefit as long as the facility is available for free or for a minimal fee to all of the employer’s employees, whether or not they use it.

If an employer allows only a certain group of employees to use the on-site facility for free or for a low cost and the rest of the staff have to pay the full cost, there would be a taxable benefit for the employees who pay the lower cost or nothing at all to use it.
Employers can also provide tax-free memberships at fitness facilities if they can show that an employee’s membership at the fitness club or centre primarily benefits the employer. However, to be successful in taking this stance, the employer must be able to show the CRA clear evidence that the employer, not the employee, mainly benefits. 

Two CRA responses to employer queries about fitness facilities, published as CRA Views on Carswell’s Taxnet Pro research service show the challenges employers face when claiming they are the primary beneficiaries and what the CRA may look for in deciding whether there is a taxable benefit.

In responding to an employer question about fitness club memberships, the CRA’s Income Tax Rulings Directorate stated, “In general terms, we do not consider a situation to be advantageous to the employer where the employee’s membership in a fitness facility is part of an employee-wellness program designed to provide indirect benefits to the employer, such as the employee being healthier and better able to perform his or her duties as a result of utilizing the facility.”

In another response to an employer question about an in-house fitness centre, the Income Tax Rulings Directorate wrote “(T)here may be situations in which the nature of the particular employment and/or terms of an employment contract require that an employee meet stringent fitness standards. 

Where it can be demonstrated that a particular fitness training course or fitness membership fulfills this specific employment requirement, the employer may be considered the primary beneficiary.”

Counselling:

Some employers pay for employees (or a person related to the employee) to have counselling for a mental or physical health issue, such as drug or alcohol abuse or stress management. Employer-paid fees for this type of counselling are not a taxable benefit for employees.

If an employer pays for counselling sessions that an employee has with a personal trainer or nutritionist or for a weight management program, the fees the employer pays may be a taxable benefit. 

When asked about this type of benefit, the Income Tax Rulings Directorate said in a CRA View that it would generally consider the employees to have received an economic benefit from the counselling unless the employer could clearly show it was the primary beneficiary. 

“It is our view that employees, and not the employer, would usually be regarded as the primary beneficiary where the employees become physically healthier and generally better able to perform their duties (e.g., sick less often, less downtime, remain fit for duty) by using the services of a personal trainer or nutritionist,” it said.

Although the federal Income Tax Act excludes counselling services for an employee’s (or a family member’s) mental or physical health from being a taxable benefit, the CRA says the term “counselling” does not necessarily refer to services such as those provided by nutritionists or personal trainers. 

“The phrase ‘counselling services’ is not defined in the act,” the Rulings Directorate stated in the CRA View. “Where legislation does not define a phrase, we generally rely on case law and the ordinary meaning of the words (e.g., dictionary definition).”
It added that “The Concise Canadian Oxford Dictionary defines ‘counselling’ as ‘the act or process of giving counsel; the process of assisting and guiding clients, (especially) by a trained person on a professional basis, to resolve (especially) personal, social, or psychological problems and difficulties.’ It is a question of fact whether any of the services provided by a personal trainer or nutritionist are counselling services.” 

Employers that pay for counselling programs for weight management or fitness or similar programs may want to request a ruling from the CRA on whether the particular program is a taxable benefit or if it is covered under the exceptions in the act.

Bonuses or gifts: 

As part of a wellness plan, some employers may provide bonuses or prizes to employees who achieve certain health goals (such as quitting smoking or losing weight). For employers that offer these types of rewards, payroll departments need to be aware of the source deduction requirements.

If employers are paying bonuses, payroll must calculate and deduct C/QPP contributions, EI and QPIP premiums and income tax on the bonus. Bonuses may also be subject to provincial/territorial employer levies for health care, labour standards (Quebec), worker training (Quebec) and workers’ compensation. 

If an employer gives employees gifts, such as gift cards, to recognize employee health achievements, the employees who receive them will have a taxable benefit. Payroll has to include the fair market value of the gift in the employee’s earnings for calculating source deductions. 

Subsidized meals:

Stocking the employee cafeteria with healthier food choices is one way to encourage employees to make positive health changes. If employees pay the full cost of meals provided in the cafeteria, no taxable benefit arises since the employees are paying for the meal themselves.

If an employer subsidizes the cost of meals for employees at the cafeteria, the meals are still not a taxable benefit as long as the employee pays a “reasonable” charge for them. The CRA says a reasonable charge is “one that covers the cost of food, its preparation, and service.” 

If the charge is not reasonable or the employer provides the meals for free, the cost of the meal is a taxable benefit. The benefit is the value of the meal after subtracting any amount that the employee paid for it. 

Knowing which benefits an employer offers and whether they are taxable will help payroll departments ensure they comply with CRA source deduction and reporting rules. Payroll and human resources departments should also ensure they inform employees if benefits are taxable so there are no surprises when workers look at their pay statements or T4 slips.

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