How employment income is reported in Canada

Overview

Every resident must understand how employment income is reported in Canada. Employment income is one of the main types of income you must report on your personal tax return. As per the Income Tax Act (ITA), employment income includes all salary or wages received on a cash basis (Getting a cheque or direct deposit to your bank account is also considered as a cash basis) by an employee as a result of their employment. You may also receive bonuses, gratuities and tip which are also taxable per the Income Tax Act.

Employer issues a summary of employment income you earned in a calendar year which is also called T4 by end of February following the given calendar year. You should expect your T4 from your employer anytime between January to first week of March. If you don’t receive T4, you need to contact your employer as you will need your T4 to report employment income.

T4 generally includes summary of gross income you earned, Canada Pension Plan (CPP) and Employment Insurance (EI) deduction, income tax deduction and taxable benefits provided to you. Taxation year of personal tax return for individual is calendar year (January to December). If you are not sure about types of income to be reported under personal income tax return, please contact us.

What should be included in my employment income in Canada?

Not only are salary, wages, bonus and tips and gratuities are included in your personal income tax return but also taxable benefits and other payments (such as allowance and reimbursement) that you received from employer over and above your base salary and wages. CRA stand on determining if anything you receive from your employer other than your regular salary or wages is whether you received an economic advantage that can be measured in money (example: employer provided you free transit pass or parking). Whether your benefits are taxable or not taxable, see below for the summary table of most common benefits.

Employment related benefits and other payments in Canada

If you need help determining tax or non-taxable benefits and payment you received, please contact us. For full list of taxable benefits, please visit the CRA website.

Allowances

Allowance is amount paid by employer to employee without requiring them to substantiate the expenses, meaning you don’t have to provide receipts to employers. Generally, allowances are taxable benefit to you. However, there are some exceptions to this general rule motor vehicle and travel expenses other than motor vehicle.

• Motor vehicle allowance – Motor vehicle allowance is amount paid by your employer to cover expenses you incurred while using personal vehicle for employment purpose. Generally, CRA deems motor vehicle allowances are not reasonable therefore taxable. Tax implication on this allowance is based on reasonableness of the expenses. CRA considers it is reasonable if it is paid solely based on kilometer travel and within CRA limit. CRA limit – For 2025, for the first 5000KM $ 72¢ per KM and anything above 5000 KM rate is $ 66¢ per KM. However, if employer pays more that this rates, all allowance will be taxable and should be reported under T4. Allowance generally be considered as reasonable if it approximately equals amount spend by employee on travel, hotels or meals. You must keep record of kilometer drive for employment and personal purpose (Milage log) click here for sample of milage log. If allowance is not reasonable (above or below the CRA rate), it is included as taxable benefit. Since you included allowance as income, you can deduct motor vehicle related expenses. Your employer must allow you to expense for the employment purpose which should be supported by T2200. Ensure you have T2200 singed by employer before claiming these deduction as first thing CRA looks for this in case of an CRA audit. Deduction should be only related to employment not personal. Most common expenses are:
  • Fuel
  • Maintenance
  • Insurance
  • Registration fee paid
  • Lease payment
  • Interest paid on car loan
  • Parking
  • Toll charges
  • CCA (portion of cost of your car, in other word depreciation)

All these expenses are must be supported by receipts.

Calculation of allowable expense works as follows

Example: You’re an employee who uses your own vehicle to visit clients and your employer does not reimburse all your vehicle expenses. Your employer gives you T2200. You drove:

• 10,000 km total during the year (this should be from your milage log)
• 4,000 km were for work purposes (this should be from your milage log)

That’s 40% business use.

You paid the following for the year:

Total deductible expenses: $4,698

These expenses would be reported on Form T777 when filing your tax return.

Travel allowance other than motor vehicle

CRA considers it is taxable if allowances are unreasonably high or low. In this case employee can include all the allowance received from employer and deduct expenses. Most common expense that you can deduct including:

• Meals
• Lodging
• Transportation- public transit, flight tickets
• Baggage fees elated to employment work.

Automobile benefit

What happens if my employer provides me car to use for employment?

The Automobile Benefit is a taxable benefit in Canada when an employer provides an employee with a vehicle (owned or leased by the employer) that the employee can use for personal purpose as well, including commuting. There are two benefits associated with this benefit which are:

1. Stand by charge
2. Operating cost benefit

Taxable benefit to employee is the function of below

Standby charge + operating cost benefit – reimbursement(s) by employee

• Stand by charge – this is considered as benefit represent the value of having access to employer’s vehicle. It is still considered as benefit even if you do not drive often.

Calculation of benefit is as follow:

If owned by employer: Standby Charge = (2% × cost of car including HST × months available)

If leased by employer: Standby Charge = (2/3 × monthly lease cost × months available)

Stand by charge benefit will be reduced if used more than 50% for employment purpose, personal use kms are less than 20,004 (1,667 per month if available less than a year) and used employee is required to use automobile to perform employment duties. If these criteria are met, below factor is applied to reduce standby charge

Personal-use kilometers) / (1,667 × stand by charge benefit calculated above)

** months available – it is considered as available to employee if they have access to or control of the vehicle.

• Operating cost benefit: this is related to fuel, maintenance cost paid by employer for the vehicle provided to employees and also allows employees to use it personally.

Calculation of benefit is as follows:

• if use less than 50% for employment purpose – personal KM drive x Prescribed rate
• IF used more than 50% for employment purpose – lessor of
  • personal KM drive x Prescribed rate
  • 50% of standby charge calculated above

** Prescribed rate – $0.34/km for 2025

Note: Keep a logbook with each trip’s date, destination, purpose, and odometer reading in case of CRA audit.

Example of a standby charge benefit and operating cost benefit

You use a company car that cost $30,000, and it’s available to you for 12 months. You drove 6,000 km for personal use. Total KM used for employment is 5000 km.

1. Standby Charge: 2% × $30,000 × 12 = $7,200

. Operating Benefit: 6,000 km × $0.33 = $1,980

Total Automobile Benefit = $7,200 + $1,980 = $9,180

However, if employees owned vehicle used for employment purpose and employer pays operating cost (Fuel, insurance, maintenance etc.), operating cost is calculated as follows:

(Personal kilometers / total kilometers) × actual operating costs paid by the employer

Reimbursement – If you want to lower your standby and operating cost benefits, you can reimburse your employer by the end of year for standby charge and 45 days for December 31 for operating cost.

Employee loan

Employer may provide you a loan with an interest free or low interest. Employees are benefited from not having to pay interest or pay interest rate substantially lower than what would be charged by financial institution (such as bank) on the money you borrowed. Usually, this taxable benefit referred as imputed interest benefit and calculated quarterly.

Taxable benefit (imputed interest benefit) is calculated as follow:

(Prescribed rate of interest – interest paid by employee) x (number of days loan was outstanding in a quarter /365) x amount of loan outstanding.

*** The prescribed rate of interest is set by the Canada Revenue Agency (CRA) .

What happens if an employee’s loan is to purchase a new house or home reallocated?

Sometimes employer may provide you loan to purchase your new house or as a result of home reallocate due to employment reasons. CRA is lenient regarding new house and home relocation. In CRA view home reallocation is anytime during the year if you acquire home at least 40 KM closer to your new work location than old residence.

Rate used to calculate Imputed benefit in these situations is lower of prescribed rate in effect when loan was issued and prescribed rate for the quarter. Taxable benefit is calculated as follows

(Lesser of prescribed rate in effect when loan was made and prescribed for the quarter -interest rate paid on the loan) X (number of days loan was outstanding in a quarter /365) x outstanding loan amount.

Examples:

Scenario: Employee Home Loan Example

• Employee: John
• Employer: XYZ Ltd.
• Loan Amount: $100,000
• Purpose: To buy a house
• Loan Date: January 1, 2025
• Interest Charged to Employee: 2% annually
• CRA Prescribed Rate: 5% (for all of 2025 for this example)
• Loan Outstanding All Year: $100,000

Step 1: Calculate Interest at Prescribed Rate

Prescribed interest (CRA rate):

5%×100,000=$5,0005\% \times 100,000 = \$5,0005%×100,000=$5,000

Step 2: Calculate Interest Paid by Employee

Employee-paid interest:

2%×100,000=$2,0002\% \times 100,000 = \$2,0002%×100,000=$2,000

Step 3: Calculate the Taxable Benefit

Taxable benefit = Prescribed interest – Employee-paid interest:

$5,000−$2,000=$3,000\$5,000 – \$2,000 = \$3,000$5,000−$2,000=$3,000

This $3,000 is considered a taxable employment benefit and will be added to John’s T4 income under:

• Box 14 – Employment income
• Code 36 – Interest-free and low-interest loans

Optional: Home Relocation Loan Deduction

If John moved at least 40 km closer to his new work location and this loan was used to buy a new residence, he may deduct this $3,000 benefit under the home relocation loan deduction (up to a max of $25,000 over 5 years).

He would:

• Report the benefit as income from the T4
• Claim the deduction on Line 24800 of his personal tax return (T1)

Please contact us if you need more information or help with determining your taxable benefit related to imputed interest benefit.

Stock option provided by employer

Some company may provide its employees stock option. Employee stock option is the right to purchase employer share at fixed price (the exercise price) at some time in the future. If price of share goes up above exercise price, there is a taxable benefit as you can buy these shares at discounted price.

At the grant date of stock option, there is no tax consequences. Taxable benefit arises when stock options are exercised. Tax consequences depends on type of your employer whether it is Canadian Control Private Corporation (CCPC) or public corporation.

Stock option provided by is the Canadian Control Private Corporation (CCPC)

Taxable benefits arises when shares are sold after exercise if at the option grant date fair market value was less than exercise price. If fair market value of share was more than option exercise price, you are considered as in the money therefore taxed at the date of exercise instead of when the share is eventually sold. However, if you are in the money and hold shares for 2 years, no tax consequences arise at the time of exercise.

Impact of employee stock option

• Employee benefit – this included in employment income if you were in the money at the grant date and shares are not held for 2 years.

This benefit is difference between fair market value of share at the grant date and value of share at the exercise date.

• Capital gain/loss – this portion represents gain you made from the exercise date until you sold it. Since this is considered as capital gain/loss, only one gain/loss is taxable.
• Division C deduction – Division C deduction is used to arrive at taxable income for individuals. One half of income included under employment income may be deducted under division C if fair market value of the share on the grant date is equal or less than exercise price (usually called option not in the money) or Fair market value of share is higher than exercise prices of option (in the money) but held this share for at least 2 years.

Stock option provided by a public corporation

Taxable benefit arises when shares are exercised regardless of fair value of the shares at the grant date. However, division C deduction is available (one half of amount included under employment income as benefit) if fair value of the share equal or less than the exercise price of option.

If need more information and tax treatment regarding stock options, MJ Professionals is always here to assist you in this regard. You can reach us via phone, email or text.