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Salary vs. Benefits: How to Create a Tax-Smart Plan

11/04/2014 05:44 EST | Updated 01/04/2015 05:59 EST
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You aced the interview and the company can't wait to get you on board. Or maybe you've just finalized an excellent performance appraisal and more money is coming your way. Now comes the really important part: negotiating the compensation you deserve.

Your work-life balance is a concern, but so is your taxable income. Perhaps your new salary puts you into a higher tax bracket, and 40 per cent of your raise will be going to the government. Is the promotion worth it? It is important to weigh the benefits; for example, would an additional week of vacation be worth more to you than that five per cent increase?

Employers cannot compensate employees with gifts or perks to avoid income tax, so if your company provides a benefit it will probably be taxable. The Canada Revenue Agency considers it a taxable benefit if an employer pays or provides something to an employee that is personal in nature. This could include a reimbursement of personal expenses, an allowance, or free use of property, goods or services owned by the company.

In most cases, you'd pay less tax if you took the vacation time, and most Canadians know it. A survey by Leger for H&R Block Canada showed 64 per cent knew the extra week of vacation would mean they paid less tax than if they took a raise. But we're not so knowledgeable about the tax impact of other benefits, and sometimes they pop up on our T4 slips at the end of the year -- or worse, we discover we have to pay for them because the payroll department calculated the additional tax to withhold.

Do you know which employee benefits are considered taxable?

  • My company has a box for an NHL hockey team and raffles off the tickets to head-office employees.
  • I'm on an employer-paid business trip and I add a couple of personal vacation days to check out San Francisco.
  • I won a beautiful leather jacket in the company raffle.

If you answered yes to all of the above, then you would be correct. Even if you win the hockey tickets in a raffle, it is considered a taxable benefit and will show up on Box 40 on your T4 slip.

Company cars also fall into the category of taxable benefits and many employed Canadians aren't aware of the rules governing this area. Your personal-use portion of a company vehicle is a taxable benefit -- your personal mileage, standby charges (the time after business hours and on weekends when the car is available to the employee) and operating expenses should all be included on your T4. Even your commute to work is considered personal mileage. But 32 per cent of respondents believe it's not a taxable benefit because the company is claiming the expenses, while 28 per cent correctly answered that they are personally responsible for the tax implications. The CRA views having a car available to you for personal trips as a benefit, and wants you to pay tax on it accordingly.

So it is important to pay attention to your taxable benefits. If your employer is giving out tickets to a show you have no interest in seeing, turn them down. Remember, a Canadian executive successfully argued that he hated playing golf so the golf club membership his company purchased for him as a "perk" was not a taxable benefit because he didn't enjoy the game.

When weighing salary against benefits in the quest for work-life balance, it may be worth asking about the tax implications. You should also make sure you connect with your payroll department to ensure it is taking all your benefits into account when calculating your tax withholdings. It will help avoid an unexpected tax bill when you file your return. Unfortunately, you cannot legally avoid paying income tax but understanding what will be taxable can help you negotiate a tax-smart employment contract.