Last updated: Dec. 6, 2024 

Optimizing Your Farm’s Tax Strategy: A Guide to Benefits, Allowances, and Reimbursements 

When it comes to farm work, it’s not unusual to offer additional perks to sweeten the deal for employees. These can include a mileage allowance, use of a farm truck, and providing home-cooked meals on those long harvest days. 

While these extras may seem like business as usual, the Canada Revenue Agency (CRA) may consider some taxable benefits. But how do you determine if something is a taxable benefit? And what about the family you pay for farm work?  

In this article, we’ll answer these questions and more as we walk you through the basics of taxable benefits for farm employees. As always, seeking expert tax advice for your farm operations is best. 

Taxable Benefits: What Farmers Need to Know 

Understanding Cash, Near-Cash, and Non-Cash Benefits 

The Canada Revenue Agency classifies employee benefits as follows: 

• Cash: These are straightforward monetary payments, such as physical currency, cheques and direct deposits. 

• Near-Cash: These benefits, like stock options, gold, or other precious metals, can be easily converted into cash. 

• Non-Cash: These are goods, services, or property provided to employees instead of cash.  

Non-cash benefits can include reimbursements—where you pay your employee to cover specific work-related expenses—and allowances—a fixed and variable amount of money paid to an employee to cover specific expenses.  

To be considered a taxable benefit, it must be provided in the course of employment and have a monetary value. Non-cash benefits, like allowances, can be taxable and non-taxable, depending on the nature of the benefit. 

Using Non-Taxable Allowances as a Tax Planning Tool 

In Canada, allowances are payments made to employees to cover work-related expenses or other specific costs. These allowances can be either taxable or non-taxable, depending on their nature and how they are provided. Here’s a breakdown of the differences: 

Understanding Taxable Allowances 

These allowances are considered part of an employee’s income and are subject to income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. 

 Here are some of the more common examples of taxable allowances: 

• Car Allowances (Flat Rate): If an employee receives a flat car allowance for using their personal vehicle for work, this is typically taxable because it is not based on actual kilometres driven.
• Housing Allowances: Payments to cover rent or housing costs are generally taxable unless specific exemptions apply (e.g., for employees in prescribed remote areas). 
• Meal Allowances (Exceeding Reasonable Limits): If meal allowances exceed a “reasonable amount” (e.g., $23 per meal as per CRA guidelines), they are considered taxable. 
• Clothing Allowances: Payments to cover the cost of regular clothing (not uniforms or protective clothing required for the job). 
• Cash Allowances for Miscellaneous Expenses: Any unspecified or general allowances provided in cash are usually taxable. 

Understanding Non-Taxable Allowances 

These payments are not subject to income tax, CPP, or EI if they meet specific conditions set by the Canada Revenue Agency (CRA). To qualify as non-taxable, the allowance must usually reimburse employees for expenses incurred for work purposes and be reasonable in amount. 

 Here are some more common examples of non-taxable allowances: 

• Kilometric Car Allowance: Allowances based on a reasonable per-kilometer rate for work-related travel (e.g., $0.68 per km for the first 5,000 km in 2023) are non-taxable. 
• Travel Expenses: Allowances for reasonable meals, accommodation, and transportation costs when travelling for work. 
• Tools And Equipment Allowances: Reimbursements or allowances for tools required for trade employment are often non-taxable, provided they are reasonable and meet CRA criteria. 
• Uniforms And Protective Clothing: Payments for specific work-related clothing or uniforms employees must wear are usually non-taxable. 
• Relocation Allowances: Moving expenses may be non-taxable if they comply with CRA rules. 

Key Differences of Taxable and Non-Taxable Allowances 

Aspect	Taxable Allowances	Non-Taxable Allowances
Purpose	Often general or personal benefits.	Directly related to work expenses.
Tax Treatment	Subject to tax, CPP, and EI.	Exempt if conditions are met.
Examples	Flat car allowance, housing allowance.	Per-kilometer car allowance, travel costs.
Reasonableness	Amount is irrelevant for taxability.	Must be reasonable and work-related.

The Tax Planning Advantage of Non-Taxable Employee Allowances 

By structuring your employee compensation packages to maximize non-taxable benefits, both you and your employee can benefit as follows: 

•  Increase Employee Take-Home Pay: Offering non-taxable allowances effectively increases employees’ disposable income without increasing their overall tax burden. 
• Reduce Employer Costs: In many cases, employers will receive tax deductions for specific non-taxable allowances, reducing their overall tax bill. 
• Enhance Employee Satisfaction: Non-taxable allowances can be valuable for employee retention and motivation. They provide additional financial benefits without increasing the employee’s tax burden. 

How to Calculate Payroll Deductions for Taxable Benefits 

It’s best to take a methodical approach to calculating payroll deductions for taxable benefits because they may have different tax implications. For example, certain benefits may require you to remit Canada Pension Plan (CPP) and Employment Insurance (EI) contributions, while others may not. Here are the recommended steps:

1. Is the benefit taxable? 

You give your employees a value benefit, like cash, a company car, or free housing.  

Tip: Use the CRA’s website to determine whether a benefit is taxable. 

2. How much is it worth? 

To determine the value of a benefit, you need to work out what the benefit would cost on the open market between two strangers – the fair market value (FMV). You may need to include GST/HST as part of the value of the taxable benefit. 

3. Determine the tax treatment.
As we’ve said above, different benefits are taxed differently, so you must determine the tax implications for each. 

Tip: Use the CRA’s website to determine the tax treatment of payments other than regular employment income. 

4. Calculate and withhold taxes.
Once you know how to treat the benefit, you must deduct the appropriate tax and deductions from its value, whether paid in cash, near-cash, or non-cash, just like regular pay.  

Tip: Use the CRA’s online calculators and formulas to determine payroll deductions and contributions.

5. Accurately report it on the T4 slip. 

You must report the taxable benefit in Box 14 (Employment income) and place the appropriate benefit code in the “Other information” area. 

 Tip: Use the CRA’s Benefits chart to help you confirm the benefit code, your CPP and EI deductions, and if you must include GST/HST. 

CRA Guidelines 

The CRA provides specific rules for determining whether an allowance is taxable or non-taxable. To ensure compliance, businesses and employees should maintain proper records and receipts. When in doubt, consult a tax professional or refer to CRA publications. 

Want to dive deeper into farm tax strategies? 

Download our free guide, Ultimate Guide to Tax Planning and Preparation for Canadian Farmers, Contractors, and Small Business Owners. It’s packed with tips and information to help you maximize your bottom line and keep more of your hard-earned money. 

About Us 

For more than 70 years, we have helped hard-working Canadian farmers and agricultural producers save time and money by connecting them to a people-powered network of tax, bookkeeping, payroll and financial planning experts. 

We deliver industry-specific support for your business, helping you maximize your tax savings, simplify your books, and manage your payroll. 

Our paralegal team can incorporate your business and file your minute books and annual returns. Our financial and estate planning team can help you manage your wealth and plan your transition to retirement. 

Leave your unique tax situation to us. We’ll get you every dollar you deserve. Please book online or call us at 1-800-265-1002. 

 

 Please note: This blog post is adapted from an original article in the Western Producer. We’ve updated the content for accuracy and clarity.

Disclaimer: The material above is intended for educational and informational purposes only. Always consult a qualified tax advisor like FBC regarding your specific tax situation.