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A friend of mine pays to rent housing from her employer. This housing is owned and managed by the employer and rented only to employees. They agreed upon a rent of $X per month when she moved in and after about 6 months, the employer is now claiming that the rent is significantly below market value and her pay stubs now list an additional $400 per month in employer paid benefits in the form of a housing subsidy. The employer claims that the market value of the rental unit has increased due to "increased nearby amenities".

Needless to say, my friend is extremely unhappy about this because the tax implications will result in her housing costs increasing by over $100 per month. The employer insists that their hands are tied on this matter and it's purely tax law at work and they don't have a choice but to declare this added paid benefit.

I'm not an accountant but my view on this is as follows: Anyone can rent a housing unit for any price, as long as its agreeable to both the tenant and landlord and all tenancy laws are followed. So with that in mind, it would appear that the employer is simply looking to write-off this supposed discrepancy between the current rent and the 'market value' to pay fewer taxes and those tax savings are coming at the expense of the tenants. It seems like an underhanded way to indirectly squeeze more rent from the tenants. It really does seem like a cash grab, as they are also claiming her parking spot at the residence is priced below market value and that is listed as a paid benefit too.

Is this view correct? If the employer wanted to do right by their employees, could they choose NOT to declare this supposed housing subsidy as a paid benefit? Or are their hands truly tied here by some tax law?

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    How do you figure that the employer declaring a higher value for the taxable benefit means more money in their pocket? I don't follow that part. – Chris W. Rea Feb 28 '14 at 5:08
  • @ChrisW.Rea If they're using this "expense" as a deduction, they will pay fewer taxes as a result. And some portion of those tax obligations will be shifted to the employee tenants. In other words, the government gets their money either way but the employer has used a subjective number (the market value) to get creative with their accounting and shift some of their tax burden to the employees. The net result is less money in the employees' pockets and more in the employer's. – stackunderflow Feb 28 '14 at 19:22
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    @stackunderflow this is incorrect. This is not an expense and they do not deduct it. In fact - they'll pay more taxes, since payroll taxes will apply to this benefit as well. – littleadv Feb 28 '14 at 19:25
  • @littleadv Can you explain this? According to this (cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/…) salaries and employer paid benefits are acceptable deductions. I accept your assertion that payroll taxes will apply to the benefit, but why wouldn't this benefit be considered an expense? – stackunderflow Feb 28 '14 at 19:59
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    @stackunderflow The specific benefit you've asked about, while it is a taxable-benefit, isn't employer-paid -- the employer owns the property. They aren't renting it. They may have maintenance costs, but those costs are mostly disconnected from the value they need to declare on the employee's T4 as a taxable benefit. AFAIK, a company can't claim a deduction for money they didn't spend. At the link you supplied, the kinds of employer-paid benefits that are listed are ones that actually require the employer to spend money. Hence, those costs, deductible. – Chris W. Rea Feb 28 '14 at 21:33
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Your view is correct when talking about unrelated persons.

However, in this case the renter and the landlord are related.

In most countries, and I'm sure so is Canada, any benefit above certain (very low) minimum that the employer provides to the employee is considered part of the payment for services provided by the employee (aka salary).

Thus, if the employee effectively receives a discount on housing, the tax principle says that such a discount is in fact an additional salary paid, and is taxed accordingly.

  • Thanks for your answer. The discrepancy between the rent and the market value they are claiming is approximately 17%, so it's not like there's a blatantly obvious subsidy occurring here like, say, 50%. It still seems to me that the employer could avoid doing this if they wanted to (as they have in the past) because the market value is a highly subjective number and the rent can be plausibly considered market value. (They did this in the past, as mentioned, using "lack of amenities" as a prior justification). Would you disagree with that assertion? – stackunderflow Feb 28 '14 at 0:40
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    Sure the employer COULD avoid this, but why would they? They have a right to claim the difference between fair market rent and rent charged as a taxable benefit. So the dispute is really about the AMOUNT of the taxable benefit, Based on the information you have provided (how does $400 relate to 17%?), we cannot comment on this. If your friend can find a cheaper place (after considering taxes) to live elsewhere, then move. – IT-RMT Feb 28 '14 at 3:00
  • @stackunderflow that would put them in jeopardy if the tax authority disagrees. Why would they? In fact, it is likely that the change came as a result of an audit, internal or external. – littleadv Feb 28 '14 at 3:02
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    @IT-RMT If an employer declares the benefit to the employee at $100, how would the employer then "save money" if they increased the declared value of the benefit to $200? I'm not following how that puts money in their pocket. The employee never paid any to the employer either way. Is there more than one step involved here? – Chris W. Rea Feb 28 '14 at 5:11
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    @brian the employer's tax deduction doesn't change because of the change in the employee's benefit taxation. Employer didn't spend any more money, and didn't incur any more liabilities. This is not the same as the examples cited on the page you referred to. The employer in fact loses money, since the taxable benefit is added to the payroll taxes. – littleadv Feb 28 '14 at 19:24

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