Today’s governments are facing revenue challenges like never before. Most countries have raised personal income taxes as much as they can without facing open taxpayer revolt. And there is pressure to drop corporate taxes and repatriate money from Tax Havens like Ireland. Meanwhile, expense-side pressures from health care and infrastructure needs grow significantly every year. So, what is a government to do?
Well, most governments are scouring the bare cupboards looking for new sources of taxation. Jurisdictions throughout Europe and North America have been eyeing corporately-paid employee benefits as a lucrative new tool for raising money. Some of these are politically loaded, such as health benefits. And there are others which are easier targets, such as Smartphones used for business.
Our ever-growing dependence on Smartphones has proven an irresistible lure to revenue hungry governments. And in many instances, governments don’t have to wait for new legislation to begin tapping this new money stream. In fact, the Canada Revenue Agency (CRA) codes that allow for much more aggressive taxation of Smartphones already exist.
What are the CRA Rules Regarding Smartphone Usage?
- The CRA allows you to deduct smartphone expenses when it pays “an integral and essential part in the performance of the employment duties.”
- The cost of cellular minutes and data used for employment purposes is deductible provided the employee was required to supply and pay for the cellular minutes and data herself.
- There is an exception, however, where an employee can prove that they used their cellular phone exclusively for employment purposes (i.e., no personal use). If so, then you should be able to deduct the costs of a “basic service plan.”
- If, however, part of the use of the phone is personal, the employer is supposed to include the value of the personal use in your income as a taxable benefit. The value of this benefit is based on the fair market value of the service, less any amounts you reimburse your employer.
- The default number the CRA is using without proof for business/personal splits is 50/50
More than ever before, there is an onus on corporations and contractors to ensure they can account for what smartphone usage is business and what is personal. With many corporately paid smartphones, the majority of data usage is personal (as much as 70% in trials run by mobilityView). With this new government scrutiny, the companies that own the phones assume the tax burden for personal usage. Essentially, that personal usage becomes a taxable employee benefit. And the tax risk is only going to grow – according to Cisco, mobile data usage will grow by 700% by 2021 with most of this usage in non-business apps.
How to Protect Your Company from The Tax Man
The exploding cost of mobile telecom, plus the corresponding tax exposure, is causing many large Canadian corporations to change their strategy of providing corporately-owned smartphone fleets and download the costs of personal usage to employees. The current strategy amongst corporations is to introduce “Bring Your Own Devices” (BYOD). This requires employees to select the phone they want from a Telecom Provider, like Bell, Telus or Rogers. The company uses its buying power to get employees a better deal on airtime, often a special plan only available to companies called an Employee Purchase Plan (EPP). Employees assume all responsibility for airtime and submit any usage incurred on behalf of the company to the Finance Department for reimbursement. This not only has the benefit of huge tax savings for a company, but also significant reductions in the costs of airtime, the capital costs of smartphones and all the expenses involved in supporting a large telecom fleet.
What Else Do You Need to Do?
- Employees need to keep a log of business usage (Calls, SMS and Data); think of smartphone usage like car mileage for company cars; you need to keep a log
- Start to keep historical records – the CRA can ask to go back 5 years in an audit situation
- With the significant and growing portion of Smartphone expense coming from data, you need to find a way to indicate what usage is business vs personal. This can not be done manually and the telcos can't tell you - but this can now be done in an automated fashion through mobilityView’s MCM Platform
Most of these guidelines apply to contractors as well. Good luck and remember: an ounce of prevention can keep the Tax Man away.
About the Author
Bob Dameron is the SVP & Co-Founder of mobilityView, a Canadian company with a globally unique solution that helps businesses manage/reduce the exploding costs of smartphone consumption, including data. For help with your move to BYOD and/or managing the cost of your corporate Smartphone fleet, visit mobilityview.com.