Written by: Steffen deGraaf

Group Benefits Consultant, AEC Benefits

Let’s be real—nobody likes overpaying taxes, and as a business owner in Canada, you’re likely always looking for ways to reduce your corporate tax burden while keeping your team happy.

One of the smartest (and most overlooked) strategies? Offering group benefits.

If you’re still handing out salary increases to retain employees, you could be throwing money away on payroll taxes. This guide will break down why group benefits are a tax-efficient way to compensate employees, what the CRA says about them, and how they compare to traditional salary hikes.

---

Table of Contents

1. Why Group Benefits Are a Smart Tax Move
2. The CRA Rules Business Owners Need to Know
3. Cost Comparison: Group Benefits vs. Salary Increases
4. Common Misconceptions About Benefits and Taxes
5. How to Structure a Tax-Efficient Benefits Plan
6. Conclusion

---

1. Why Group Benefits Are a Smart Tax Move

If you want to reward employees without getting hammered by payroll taxes, group benefits are the way to go. Here’s why:

✔ 100% Tax-Deductible for Employers – Unlike salary raises, which come with payroll taxes, CPP, and EI contributions, employer-paid premiums for health and dental benefits are considered a business expense and are fully tax-deductible.

✔ Tax-Free for Employees – Employees receive health, dental, and extended benefits tax-free, whereas a salary bump means they’ll pay income tax on every extra dollar they earn.

✔ Boosts Employee Satisfaction Without Increasing Payroll Costs – Instead of giving a 5% raise (which costs you more than employees actually take home), you can invest in a benefits plan that has higher perceived value for your team.

Example: The Real Cost of a Raise vs. Group Benefits

Let’s say you give an employee a $5,000 salary increase vs. putting $5,000 into a group benefits plan:

Compensation Type	Employer Cost	Employee Take-Home
Salary Increase	$5,500+ (with payroll taxes)	~$3,500 after income tax
Group Benefits	$5,000	$5,000 in value (tax-free)

Employees get way more bang for their buck with benefits, and you pay less overall as a business owner.

---

2. The CRA Rules Business Owners Need to Know

A. What Benefits Are Tax-Deductible?

The Canada Revenue Agency (CRA) allows businesses to deduct 100% of employer-paid premiums for:

• Health and dental insurance
• Disability and life insurance (for some plans)
• Employee Assistance Programs (EAPs)
• Health Spending Accounts (HSAs)

B. What About Employee Contributions?

If employees pay a portion of the premiums, their share isn’t tax-deductible for them, but they still get tax-free benefits. Bonus: This keeps claims costs down, which can stabilize premiums over time.

C. Are All Benefits Tax-Free?

Most health and dental benefits are 100% tax-free for employees, but some benefits (like life insurance) have taxable portions. This is where working with a group benefits consultant ensures you’re structuring things right.

---

3. Cost Comparison: Group Benefits vs. Salary Increases

A. Payroll Taxes Add Up

Every dollar you pay in salary comes with extra costs:

• CPP & EI contributions (employer and employee portions)
• Workers’ compensation premiums
• Provincial payroll taxes (depending on the province)

On the flip side, benefits come with none of these extra payroll costs.

B. Benefits Have a Higher Perceived Value

A comprehensive health and dental plan often feels more valuable to employees than a small salary bump. A $5,000 benefits package could cover:

• Dental work, vision care, and prescription drugs
• Paramedical services like massage, physiotherapy, and counseling
• Private hospital stays and emergency travel insurance

Meanwhile, a $5,000 raise gets whittled down to about $3,500 after taxes.

---

4. Common Misconceptions About Benefits and Taxes

Myth #1: “Group benefits are too expensive for small businesses.”

📌 Reality: Even a small business with 2-5 employees can afford a basic benefits package that provides big tax advantages while keeping employees happy.

Myth #2: “Employees prefer cash over benefits.”

📌 Reality: When given the choice, most employees prefer benefits over taxable salary increases, especially for healthcare needs like dental work and prescription coverage.

Myth #3: “It’s easier to just give raises.”

📌 Reality: Once you give a raise, you can’t take it back—but benefits can be adjusted annually to fit your budget and business goals.

---

5. How to Structure a Tax-Efficient Benefits Plan

A. Choose the Right Benefits Mix

• Health & Dental Insurance: Covers routine and unexpected medical costs.
• Health Spending Accounts (HSA): Great for tax-free, flexible employee healthcare spending.
• Wellness Spending Accounts (WSA): Allows employees to use funds for gym memberships, mental health, and more.

B. Optimize Cost-Sharing

To keep things cost-efficient, consider sharing premiums with employees or setting up a spending cap.

C. Work With a Benefits Consultant

Navigating tax rules and choosing the best plan structure isn’t a DIY project—partnering with an expert ensures maximum tax savings and employee value.

---

6. Conclusion: Smart Business Owners Use Group Benefits to Save on Taxes

If you’re giving out raises without considering the tax impact, you’re missing out on a major financial opportunity. Group benefits aren’t just about taking care of your team—they’re also about taking care of your bottom line.

With lower payroll costs, tax-free employee perks, and full business deductions, it’s a no-brainer for Canadian businesses looking to maximize tax efficiency.

📞 Want to structure a cost-effective, tax-smart benefits plan? Let’s chat!
✅ Book a Free Benefits Review Today