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Introduction to GST/HST for Payroll Professionals

GST HST Payroll: A Guide for Canadian Payroll Professionals - Featured

Understanding GST/HST in Payroll: What Every Canadian Payroll Professional Needs to Know

If you’re new to payroll administration in Canada or transitioning from another role, there’s one aspect of payroll that often catches professionals off guard: GST/HST on employee benefits. While most people understand that goods and services tax applies to purchases at the store, many don’t realize that the cost of benefits or non-cash compensation provided to an employee, commonly referred to as fringe or employee taxable benefits, may be subject to the GST/HST.

This isn’t intuitive. After all, salaries, wages, commissions, and other cash remuneration (including gratuities) made to employees are not subject to GST/HST. So why would some employee benefits be different? Understanding this distinction is critical for payroll professionals who need to calculate, report, and remit taxes accurately while ensuring compliance with Canada Revenue Agency regulations.

This comprehensive guide will walk you through everything you need to know about GST/HST in the payroll context, from the basic concepts to practical calculations and reporting requirements. Whether you’re processing payroll for a small business with ten employees or a large corporation with thousands, mastering this aspect of payroll administration is essential to your success.

What Are GST and HST?

Before diving into how these taxes affect payroll, let’s establish the basics. The Goods and Services Tax is a federal tax that applies to most goods and services sold or provided in Canada. The current GST rate is 5%. This tax was introduced in 1991 and replaced the old federal sales tax system with a more comprehensive value-added tax structure.

The Harmonized Sales Tax takes this concept further by combining the federal GST with provincial sales tax into a single tax. The HST applies in provinces that have harmonized their provincial sales tax with the GST, including Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The HST rate varies by province because it includes the five percent federal GST plus a provincial portion that differs depending on the province. For example, Ontario’s HST is 13 percent, while Nova Scotia’s is 15 percent.

In provinces that haven’t harmonized their taxes, businesses and consumers pay both GST and a separate provincial sales tax. British Columbia, for instance, charges five percent GST plus seven percent PST. Understanding which tax regime applies in your province is crucial for accurate payroll calculations, especially when your organization has employees working in different provinces across Canada.

When Does GST/HST Apply to Payroll?

This is where things get interesting for payroll professionals. The general rule is straightforward: regular compensation doesn’t attract GST/HST. Your employees’ base salaries, hourly wages, commissions, bonuses, and tips are all exempt from these consumption taxes. The complexity arises when you provide benefits beyond cash compensation.

Generally, if an employee benefit is taxable for income tax purposes, you are also considered to have made a supply of the property or service to your employee. If GST/HST applies to that property or service, you are considered to have collected the GST/HST on the benefit. Think of it this way: when your company provides an employee with a taxable benefit like personal use of a company vehicle or membership to a fitness club, the CRA treats this as if the company sold that benefit to the employee. If the company would have charged GST/HST on that good or service to an external customer, it must also account for GST/HST when providing it as an employee benefit.

The calculation starts with determining whether a benefit is taxable for income tax purposes. HST and GST might need to be included when calculating taxable benefits as well, and it is also important to keep in mind that HST and/or GST is calculated on the gross amount of the benefit. This means you first determine the fair market value of the benefit, then calculate what GST/HST would apply to that amount, and include both in the taxable benefit reported on the employee’s T4 slip.

Understanding Taxable Benefits

Taxable benefits are measurable, monetary advantages or benefits employees receive in addition to their regular wage. These go beyond the paycheque and represent additional value that employees receive from their employment relationship. Common examples include company cars available for personal use, parking spots in downtown cores where parking is expensive, gifts and awards beyond certain thresholds, employer-paid premiums for certain types of insurance, and subsidised meals beyond what’s considered reasonable.

Not every benefit is taxable, which adds another layer of complexity. Health and dental insurance premiums paid by employers are generally not taxable benefits. Life insurance premiums up to certain amounts are also non-taxable. The CRA provides detailed guidance on which benefits are taxable and which are not, and payroll professionals need to stay current with these rules because they change periodically.

The value of a taxable benefit is generally its fair market value—what the employee would have had to pay for the same benefit in the open market if there was no employer-employee relationship. The cost to you for the particular property, good, or service may be used if it reflects the fair market value of the item or service. This valuation forms the basis for both income tax withholding and GST/HST calculations.

When GST/HST Does NOT Apply to Benefits

Just because a benefit is taxable for income tax purposes doesn’t automatically mean GST/HST applies. There are situations where you will not be considered to have collected the GST/HST on a taxable employee benefit. Understanding these exceptions is just as important as knowing when the tax applies.

The first major exception involves benefits that are GST/HST exempt or zero-rated. If the underlying good or service wouldn’t attract GST/HST when sold to a regular customer, it won’t attract it when provided as an employee benefit either. Health care services are a prime example—since medical and dental services are GST/HST exempt, employer-paid health insurance premiums don’t trigger GST/HST obligations even though they might be considered taxable benefits in some circumstances.

Another important exception relates to input tax credits. You are restricted from claiming an input tax credit in the situations described in ITC restrictions for the GST/HST paid or payable on the property and services that give rise to the taxable benefit. If your company bought property or services for which it couldn’t claim an input tax credit because they were acquired exclusively for an employee’s personal use, you don’t have to remit GST/HST on that benefit. For instance, if the company pays for an employee’s gym membership and couldn’t claim an ITC on that purchase because it was solely for personal use, no GST/HST needs to be remitted on that taxable benefit.

Benefits provided outside Canada also escape GST/HST. If you, as an employer who is a GST/HST registrant, would like to reward an employee for outstanding performance, and have agreed to pay for hotel accommodations and three meals a day for one week in London, England, an amount will be included in the income of the employee as a taxable benefit. However, you will not be considered to have collected tax in respect of the benefit provided to the employee, since the supplies were made outside of Canada.

Allowances that fall under paragraph 6(1)(b) of the Income Tax Act are another exception. These are cash allowances included in the employee’s income but don’t trigger GST/HST obligations because they’re cash payments rather than supplies of goods or services.

Calculating GST/HST on Employee Benefits

Once you’ve determined that a benefit is taxable and that GST/HST applies, you need to calculate the correct amount. The calculation method depends on whether you’re dealing with automobile operating expenses or other types of benefits.

For most benefits that aren’t automobile-related, the GST and QST that employers must remit for taxable benefits that are unrelated to automobile operating costs are equal to 4/104 (for GST purposes) of the total value of the benefits. This fraction essentially extracts the GST component from an amount that already includes the tax. The numerator (four) represents the GST rate of five percent expressed differently, and the denominator (104) represents 100 plus the four percent.

For automobile operating expense benefits, different rates apply. If the taxable benefits are related to automobile operating costs, the employer must remit GST and QST on the total value at the prescribed percentages of 3% GST. The CRA uses prescribed rates for automobile benefits because the actual operating costs and the portion attributable to personal use can be complex to calculate precisely.

The province where your employee works matters significantly for these calculations. Location (the last establishment of the registrant at which the employee ordinarily worked, or which the employee generally reported in the tax year; or, where the shareholder resides at the end of the tax year) determines which rate applies. An employee working in Ontario will have HST calculated at Ontario’s combined rate, while an employee in Alberta will have only the federal GST component.

Let me provide a practical example. Suppose a business provides a company car for an employee’s personal use. The value of the benefit includes the fair market value of the car’s use plus any GST/HST that would apply. If the fair market value is $10,000 and the applicable HST rate is 13%, the taxable benefit would include the HST amount, making the total benefit value $11,300. This entire amount gets reported on the T4 slip, and the employer must remit the GST/HST component to the CRA.

When to Remit GST/HST on Employee Benefits

Timing matters in tax remittance, and GST/HST on employee benefits follows specific rules. You are considered to have collected the GST/HST on those taxable benefits on February 28 (or February 29 in a leap year) of the year following the year the benefits were provided. This aligns with the deadline for calculating and reporting employee benefits for income tax purposes and issuing T4 slips.

As a rule, the GST and QST calculated on taxable employee benefits are due once a year, on the last day of February. This is the deadline for calculating employee benefits for income tax purposes and for issuing T4 and RL-1 slips. Even though you calculate and report the benefit value each pay period throughout the year for income tax withholding purposes, the GST/HST component is only considered collected and remitted annually.

You have to report the GST/HST for those taxable benefits on your GST/HST return for the reporting period that includes the last day of February, using line 105 (or line 103 if you are filing by paper). If your company files GST/HST returns monthly, you include all the GST/HST on employee benefits for the entire previous year on your February return. If you file quarterly, it goes on the return covering January through March.

This annual reporting cycle means you need to track taxable benefits throughout the year, calculate the GST/HST component for each, and then aggregate everything for the year-end remittance. Good record-keeping throughout the year makes this process much smoother when February arrives.

Practical Examples for Payroll Professionals

Understanding theory is one thing; applying it in real situations is another. Let’s walk through some common scenarios payroll professionals encounter.

Consider a cell phone benefit. An employee works a lot from home or on the road. The employee already owns the cell phone and uses it to perform their employment duties. They also use the phone 60% of the time for personal use. The employer reimburses the employee for their monthly phone service plan. The employee’s service plan is $80 per month and includes extra features not required for their employment duties (cost for the service plan is not considered reasonable in the circumstances). The amount reimbursed by the employer for the personal use portion of the cell phone plan is a taxable benefit because the cost of the plan is not considered reasonable and the amount reimbursed includes personal use. The taxable benefit is calculated as follows: $576 (($80 x 12 months = $960) x 60%) is the amount reimbursed for the personal use of the cell phone service plan. On top of this base amount, you’d need to calculate and add the applicable GST/HST.

Automobile benefits represent one of the most common and complex situations. When you provide an employee with a company car for personal use, you need to calculate both a standby charge (for having the vehicle available) and an operating expense benefit (for personal kilometres driven). Each has different GST/HST calculation rules. The standby charge portion uses one formula, while operating expenses use the prescribed percentage method mentioned earlier.

Gift cards and near-cash benefits also require attention. If you give an employee a $100 gift card to a specific retailer, this is generally considered a near-cash benefit. The taxable benefit is $100, and if the gift card is for a retailer that charges GST/HST, you need to calculate the tax component. This gets reported on the T4 and the GST/HST gets remitted with your February return.

Parking benefits in downtown cores can be substantial. If you provide free parking to an employee in a location where parking normally costs $300 per month, that’s a $3,600 annual taxable benefit before considering GST/HST. You’d calculate the applicable tax on that amount and include it in your year-end remittance.

Common Pitfalls and How to Avoid Them

Even experienced payroll professionals sometimes stumble with GST/HST on benefits. One common mistake is forgetting to include GST/HST in the taxable benefit value reported on T4 slips. The total value of the benefits reported on an employee’s T4 and RL-1 slips includes the GST and QST applicable to the taxable benefits received. If you only report the pre-tax value, you’re underreporting the employee’s income and will need to issue amended slips.

Another frequent error involves misunderstanding when GST/HST doesn’t apply. Payroll administrators sometimes assume that all taxable benefits trigger GST/HST obligations, but as we’ve discussed, several exceptions exist. Failing to recognise these exceptions means either over-remitting taxes (which creates reconciliation headaches later) or incorrectly reporting benefit values.

Timing errors also occur regularly. Some payroll professionals try to remit GST/HST on benefits monthly or quarterly as they process payroll, but the CRA’s rules require annual remittance aligned with T4 reporting. This can create confusion if you’re also remitting regular GST/HST monthly or quarterly for your business operations.

Provincial variations trip up multi-province employers. An employee working primarily in Ontario has different rates applied than one in British Columbia or Quebec. If employees move between provinces during the year or if your company restructures and employees report to different locations, you need to track these changes and apply the correct rates. Location (the last establishment of the registrant at which the employee ordinarily worked, or which the employee generally reported in the tax year) determines the applicable rate.

Record Keeping and Documentation

Proper documentation is essential for GST/HST compliance on employee benefits. You need to maintain records that show how you calculated each benefit’s value, which employees received which benefits, what GST/HST rates applied, and how you arrived at your year-end remittance figure.

For each employee receiving taxable benefits, maintain a running record throughout the year. Document the type of benefit provided, when it was provided, the fair market value, whether GST/HST applies, what rate was used, and the calculated tax amount. This detailed tracking makes year-end calculations straightforward and provides the documentation you’ll need if the CRA audits your payroll practices.

Keep copies of all source documents that support benefit valuations. If you’re calculating automobile benefits, retain logs showing personal versus business use. For benefits like parking or gym memberships, keep invoices showing what you paid and confirmation of the GST/HST component. If you provided gifts or awards, maintain receipts and records of what was given to whom.

Your GST/HST return working papers should clearly show how employee benefits factor into your total remittance. Create a separate schedule that lists each employee, their total taxable benefits for the year, and the GST/HST calculated on those benefits. This schedule should reconcile to the amount you reported on line 103 or 105 of your GST/HST return and to the totals on all T4 slips issued.

The CRA can request payroll records going back several years, so maintain organised archives. Using payroll software that automatically tracks and calculates GST/HST on benefits can significantly reduce your administrative burden and improve accuracy.

Staying Current with Changing Rules

Tax regulations evolve, and payroll professionals need to stay informed about changes that affect GST/HST on employee benefits. The CRA periodically updates guidance documents, adjusts prescribed rates for automobile benefits, and clarifies how new types of benefits should be treated.

Subscribe to the CRA’s email updates for employers to receive notifications when relevant guidelines change. The CRA publishes technical bulletins, interpretation bulletins, and information circulars that provide detailed guidance on specific issues. These documents are freely available on the Canada.ca website and represent authoritative interpretations of how tax law applies.

Professional associations for payroll administrators also provide valuable resources. The Canadian Payroll Association offers courses, webinars, and publications that help members stay current with payroll tax requirements including GST/HST on benefits. Many provinces have their own payroll associations that provide region-specific guidance.

Consider setting aside time each quarter to review any new CRA guidance or court decisions affecting payroll taxation. Tax law can be complex, and subtle changes can have significant implications for how you process payroll and calculate remittances.

Frequently Asked Questions

  1. Do all taxable employee benefits require GST/HST to be remitted?

    No, several important exceptions exist. Benefits that are GST/HST exempt or zero-rated don’t require remittance. Benefits where the employer couldn’t claim an input tax credit because the property or service was acquired exclusively for personal use are also excluded. Additionally, benefits provided outside Canada and certain allowances under the Income Tax Act don’t trigger GST/HST obligations. Always consult the CRA’s benefits and allowances chart to determine whether GST/HST applies to a specific benefit type.

  2. How do I calculate GST/HST on benefits if an employee works in multiple provinces during the year?

    The applicable GST/HST rate is determined by the employee’s primary work location—the last establishment where they ordinarily worked or to which they generally reported during the tax year. If an employee transferred between provinces, use the location where they worked at year-end. For employees who work remotely or travel extensively, the location of the establishment they report to determines the rate. Document the rationale for your determination in case of audit.

  3. What happens if I forget to include GST/HST on employee benefits?

    If you discover an error, you should correct it as soon as possible. This means issuing amended T4 slips to affected employees and filing an adjusted GST/HST return to remit the taxes owed. The CRA may assess interest and penalties on late remittances, so prompt correction is important. If the CRA discovers the error during an audit, the consequences can be more severe. Implementing proper controls and review procedures helps prevent these situations.

  4. Can employees claim the GST/HST paid on their taxable benefits?

    No, employees cannot claim input tax credits or rebates for GST/HST included in their taxable employment benefits. The GST/HST is simply part of the benefit’s value that gets reported as income on their T4 slip. Employees may be able to claim certain employment expenses on their personal tax returns, but that’s a separate consideration from the GST/HST on benefits their employer provides.

  5. Where can I get formal training in payroll administration including GST/HST compliance?

    Many colleges and professional organizations offer comprehensive payroll training programs. If you’re in British Columbia, Granville College in Vancouver and Surrey offers an Accounting and Payroll Administration Diploma program that covers all aspects of Canadian payroll including GST/HST on employee benefits, statutory deductions, remittance requirements, and year-end reporting. The program provides hands-on training with industry-standard software and prepares graduates for professional payroll designation exams. With flexible delivery options and lifetime career support, it’s designed for those entering the field or professionals upgrading their skills.

  6. What’s the difference between taxable benefits and allowances when it comes to GST/HST?

    Taxable benefits are goods or services provided to employees, and GST/HST generally applies if the benefit is taxable for income tax purposes and the good or service would normally be taxable. Allowances are cash payments that may or may not be taxable depending on their purpose and whether they’re reasonable. Cash allowances that are taxable for income tax purposes generally don’t attract GST/HST because they’re cash payments, not supplies of goods or services. However, if an allowance reimburses specific purchases, the treatment can be different. This is a nuanced area where the CRA’s detailed guidance is particularly helpful.

  7. How do large businesses handle GST/HST on employee benefits differently?

    Large businesses subject to the recapture of input tax credits for the provincial portion of HST face additional complexity. Different calculation rates may apply depending on their status and the recapture percentage that applied when they acquired vehicles or other property used to provide benefits. These businesses need to track not just whether benefits are taxable, but also their large business status and what recapture rules applied to the underlying property. The CRA’s Technical Information Bulletins provide detailed guidance for these situations.

  8. What records do I need to keep regarding GST/HST on employee benefits?

    You should maintain detailed records showing the type and value of each benefit provided, calculations demonstrating how you determined fair market value, documentation of which employees received benefits and when, records showing which GST/HST rates applied based on employee work locations, working papers supporting your year-end GST/HST remittance calculation, and copies of all T4 slips showing the total benefit values including GST/HST. Keep these records for at least six years from the end of the tax year to which they relate, as the CRA can audit payroll practices for previous years.

The Bottom Line for Payroll Professionals

Understanding GST/HST as it applies to employee benefits is a critical competency for payroll professionals in Canada. While the rules can seem complex at first, they follow logical principles once you grasp the fundamental concept: taxable benefits are treated as if the employer sold the benefit to the employee, and if that sale would normally attract GST/HST, then tax must be accounted for on the benefit.

Success in this area requires attention to detail, good record-keeping, and staying current with CRA guidance. The consequences of errors can be significant—incorrect T4 slips, under-remitted taxes, interest charges, and penalties. But with proper training and systematic processes, managing GST/HST on benefits becomes a routine part of payroll administration.

For those entering the payroll profession or looking to strengthen their skills, formal education provides the foundation needed to handle these responsibilities with confidence. Understanding not just the mechanics of calculation but the underlying principles and policy reasons behind the rules makes you a more effective and valuable payroll professional.

The payroll field offers excellent career prospects in Canada, with strong demand for knowledgeable professionals who can ensure compliance with increasingly complex tax and regulatory requirements. Whether you’re processing payroll for a small business or managing payroll operations for a large corporation, mastering GST/HST on employee benefits is an essential component of professional competence in this field.

Build Your Career in Payroll Administration

If you’re considering a career in payroll or looking to advance your existing skills, comprehensive training makes all the difference. Payroll administration combines technical knowledge of tax regulations with practical skills in software systems, attention to detail, and deadline management.

Granville College’s Accounting and Payroll Administration Diploma provides career-focused training in all aspects of Canadian payroll including GST/HST on benefits, income tax withholding, CPP and EI calculations, year-end reporting and T4 preparation, payroll software systems, compliance and regulatory requirements, and financial reporting fundamentals.

The 43-week program offers hands-on experience with industry-standard tools and prepares graduates for professional certification exams from the Canadian Payroll Association. With campuses in Vancouver and Surrey and flexible delivery options including in-class, distance, and blended learning, the program accommodates working professionals and those transitioning careers.

Career opportunities for payroll graduates include payroll administrator, payroll clerk, accounting assistant, bookkeeper, and payroll specialist. With lifetime career support including job placement assistance, resume reviews, and ongoing professional development, Granville College helps graduates launch and sustain successful careers in this stable, in-demand field.

Ready to start your payroll career? Visit www.granvillecollege.ca to learn more about the Accounting and Payroll Administration program and take the first step towards a rewarding profession.

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