Help clients report all their taxable benefits

The T4 and T4A aren’t perfect.

While taxpayers rely on these slips, and expect them to contain a straightforward listing of salary, benefits and related withholdings, sometimes employers make mistakes.

While all taxable benefits are supposed to be reported on the T4 (or a T4A for a former employee who still receives benefits after retirement), there can be times when some of them don’t make it onto the slip. That creates problems.

“By and large, you rely on the T4 and everything’s great – or should be great,” says Cynthia Kett, a principal at Stewart & Kett Financial Advisors in Toronto. “But we’ve come across many situations where sometimes what’s reported on the T4 is incorrect, and those mistakes could be related to all kinds of taxable benefits.”

While most mistakes stem from lower-cost benefits like medical and long-term disability (LTD) insurance, sometimes more serious errors happen – like when an employer fails to include stock option benefits on the T4.

A high-cost object lesson

Stock option benefits are reported in Box 38 of the T4 and are supposed to be added into Box 14, which totals up employment income. But employers sometimes miss that step. Kett says errors are more common among small, private companies, as well as foreign employers that have Canadian subsidiaries.

“When somebody does their tax return, they’re going to just report whatever is in Box 14 and be done with it,” she says. “It’s when somebody goes back and finds out, ‘Oh, that Box 14 amount should have included this whole other big number’ that the problems arise. I had that happen to someone who became my client because CRA was going to reassess five prior years of returns. It was really, really problematic.

“One might think they would have noticed, but sometimes when these numbers are really big and they have no idea what goes into Box 14, it gets missed.”

In the case of Kett’s client, the error was caught when CRA audited the employer. The mistake affected a lot of employees and, she notes, the penalties were hefty. “It’s not unusual,” she says. “It happens more frequently than you’d think.”

Part of the problem, she notes, is that a lot of higher-income people don’t invest in good tax advice. They see the net amount hit their bank accounts and don’t think about the gross.

“People who have various taxable benefits that might be included on a T4 should really understand the breakdown of what goes on that T4,” says Kett.

Other reportable benefits

Most examples of T4 errors are more mundane, and involve issues like the reporting of private medical and LTD insurance premiums.

It’s important to remind clients to watch for this at tax time; particularly older clients because some companies continue providing coverage after employees retire – and those benefits remain taxable.

Clients need to get the tax reporting right, Kett says, because most people who have LTD insurance pay the premiums out of their own pocket. And, when a person pays directly, the benefits are tax-free. That’s by design, because LTD benefits pay someone who becomes disabled about two-thirds of his or her annual salary – in other words, a sum more or less equal to that person’s income after taxes.

If an employer pays that premium on behalf of the employee, it’s important that the LTD premium payment be reported as a taxable benefit on the T4. Otherwise, LTD benefits will be taxable when received.

Plus, she notes, medical insurance that’s reported as a taxable benefit can be claimed as part of medical expenses on the tax return.

“It’s such a small point but it really matters,” says Kett. “If you can catch it, and do something about it, then that would be better.”

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Philip Porado is a veteran Toronto-based journalist who specializes in financial and business topics. Prior to immigrating to Canada in 2004, he covered brokerage compliance, real estate, housing policy, architecture and technology for several U.S. publications.