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UNREASONABLE ALLOWANCES: Taxable fully or Partially?

UNREASONABLE ALLOWANCES: Taxable fully or Partially?

September 22, 2020 0

Ensure that allowances paid are reasonable. If they are determined unreasonable, the full allowance could be taxable


UNREASONABLE ALLOWANCESb Taxable fully or Partially?



In a May 15, 2020 Federal Court of Appeal case, the Court reviewed whether various allowances paid to employees of the taxpayer were subject to CPP and EI. This required determining whether the allowances were taxable. The Tax Court of Canada had previously ruled that some of the allowances were partially taxable, while others were either fully taxable or fully non-taxable. At issue in this case was whether an allowance could be partially taxable or whether being in excess of a “reasonable amount” resulted in the allowance being entirely taxable.

Taxpayer loses

After reviewing the exclusion of reasonable travel allowances from income rules, the Court concluded that the entire allowance is excluded from income if it is reasonable, or fully included in income if it is unreasonable. It cannot be partially taxable. As the allowances in question exceeded a reasonable amount, they were entirely taxable.

ACTION ITEM: It is extremely important to ensure that allowances paid are reasonable. If they are determined to be unreasonable, even if by the thinnest of margins, the full allowance could go from non-taxable to taxable. Consult with a specialist to ensure that they are comfortably reasonable.


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UNEMPLOYMENT BENEFIT (SUB): TEMPORARY LAY-OFFS

UNEMPLOYMENT BENEFIT (SUB): TEMPORARY LAY-OFFS

August 30, 2020 0

Consider setting up SUPPLEMENTAL UNEMPLOYMENT BENEFIT (SUB) plans as individuals transition to traditional EI


TEMPORARY LAY-OFFS: Supplemental Unemployment Benefit


The purpose of a SUB plan is to allow an employer to make supplemental payments to Employment Insurance (EI) benefits, without eroding those EI benefits. As payments under a registered SUB plan are not insurable earnings, EI premiums are not deducted.

In order to be eligible, SUB plans must be registered with Service Canada before their effective date. Plans must:

  • identify the group of employees covered and the duration of the plan;

  • cover a period of unemployment caused by one or a combination of the following:

    • temporary stoppage of work,

    • training,

    • illness, injury or quarantine;

  • require employees to apply for and be in receipt of EI benefits in order to receive payments under the plan;

  • require that the combined weekly payments from the plan and the portion of the EI weekly benefit rate does not exceed 95% of the employee’s normal weekly earnings;

  • require it be entirely financed by the employer;

  • require that on termination all remaining assets of the plan will revert to the employer or be used for payments under the plan or for its administrative costs;

  • require that written notice of any change to the plan be given to Service Canada within 30 days after the effective date of the change;

  • provide that the employees have no vested right to payments under the plan except during a period of unemployment specified in the plan; and

  • provide that payments in respect of guaranteed annual remuneration, deferred remuneration, or severance pay will not be reduced or increased by payments received under the plan.

A plan registered with Service Canada is not required to be a trust. It could be funded from general revenues.

Income tax treatment

For income tax purposes, a SUB plan is defined more restrictively, as it is required to be a trust to which the employer makes payments. Such plans can be registered with CRA, in which case any income earned within the SUB trust is non-taxable. Whether or not registered, receipts are taxable to the employee. Payments to a registered SUB plan are deductible to the employer if made no later than 30 days after year-end. Payments to SUB plans are not otherwise deductible, so a plan structured as a trust must be registered for employer contributions to be deductible.

A SUB plan which is not a trust would not be subject to the above rules. Deductibility of payments would follow the general rules for all expenses for income tax purposes.

Interaction with the Canada Emergency Response Benefit (CERB)

The provisions that exist under the EI system for employers to make additional payments to workers through SUB plans do not apply to employees who are receiving the CERB.

Amounts received by individuals from any employer in excess of the $1,000 threshold would create an obligation for the individuals to repay CERB they received for the same benefit period.

Employers that wish to do so may continue to submit a SUB plan to Service Canada. By registering a plan, employers can make payments to employees who are currently receiving EI regular or sickness benefits and will also be prepared should employees need EI benefits at a future time.

ACTION ITEM: As CERB is scheduled to end September 26, 2020, many individuals will now begin to rely on the EI system. The time may be right to consider setting up SUB plans as individuals transition to traditional EI.


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