Having access to mobile communications is useful and practical for any number of reasons. In fact, Canadians who don’t have a cell or smart phone are likely now the exception, rather than the rule. But, did you know that cellphone rates payable by Canadians are among the highest in the world? As such, having an employer provide a cellphone (and pay the associated costs) is consequently a valued employment benefit.
That being said, Canadians who enjoy such an employment benefit should be aware that, while they may not have to pay a monthly cell phone bill, there still can be a cost in the form of a taxable benefit, as with an employer-provided vehicle, which must be reported on the annual return.
The general rule set out by the Canada Revenue Agency (CRA) is that where an employer provides his or her employee with a cell phone to be used in the course of their employment duties, the business use of that phone is not a taxable benefit to the employee. Where part of the use of the phone is personal, however, the value of that personal use must be included in the employee’s income as a taxable employment benefit. The employer is required to calculate the amount of that taxable benefit, based on the fair market value of the service (basically, the employer’s cost, assuming that cost reflects current market value of the service), minus any amounts reimbursed to the employer by the employee.
While such an approach may be theoretically correct, it’s not particularly practical for every employer to make such a calculation for each and every employee to whom a cell phone is provided. The CRA’s assessing policy,therefore, is that an employee’s personal use of an employer-provided cell phone will not be a taxable benefit if all of the following apply:
- the plan’s cost is reasonable;
- the plan is a basic plan with a fixed cost; and
- the employee’s personal use of the service does not result in charges that are more than the basic plan cost.
When an employer wants to provide cell phone service as a benefit of employment, the alternative to providing the cell phone itself is to give the employee an allowance which he or she can then use to acquire a phone and plan. While that approach gives the employee more flexibility, it’s not a great option from a tax perspective. The CRA’s assessing policy with respect to that approach is that any such allowance provided by an employer must be included on the employee’s T4 for the year and taxed as income.
Based on the CRA’s assessing policies and criteria, it seems that the most tax-effective option for employees when it comes to employer-provided cell phones is for the employer to buy the fixed-cost plan which provides the most generous terms that can be reasonably justified by the employee’s business-related use of the phone, and for the employee to avoid running up any additional charges related to personal use (for example, for excess minutes, long distance or roaming charges) which will result in charges in excess of the basic monthly bill for that plan.
