With Christmas right around the corner, it seems appropriate to take a quick look at the taxation of employee gifts. Nobody is ever going to confuse Canada Revenue Agency (CRA) with Santa Clause, but at least CRA does provide some small relief from taxes on gifts.
Gifts and awards to employees from their employer are considered income from employment and are taxable. However, Canada Revenue Agency has an administrative policy that exempts certain gifts and awards.
Under the policy, the first $500 of the combined value (including GST/HST) of all non-cash gifts and awards to an employee in a year is tax-free. Only the amount above $500 is taxable.
The following conditions must be met:
- A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child;
- An award has to be for an employment-related accomplishment such as outstanding service, employee suggestions, or meeting or exceeding safety standards. A performance-related award is a reward and is taxable;
- The gift must be non-cash. Cash or near-cash (items that can easily be converted to cash including gift cards, gift certificates, gold coins and securities) gifts and awards are always considered to be taxable.
Gifts and awards to non-arm’s length employees do not qualify under the exemption. If you are buying gifts for you and your spouse each year through your company, you are subject to tax on their full value.
In addition to the above gifts and awards, you can give your employees a non-cash long-service or anniversary award. The first $500 of the value of this award is tax-free subject to the following conditions:
- The award must be non-cash;
- The award must be for a minimum of 5 years of service;
- It must be at least 5 years since the last award.
The exemption for long-service awards does not impact the exemption for other gifts and awards. An employee can receive a $500 gift and a separate $500 long-service award tax-free. If the value of the long-service award is less than $500, the shortfall cannot be added to the gift and awards exemption.
Regardless of the cost or purpose, the following gifts and awards are considered a taxable employment benefit:
- Cash or near-cash gifts and awards such as Christmas or holiday bonuses and gift certificates;
- Points that can be redeemed for air travel or other rewards, or an internal points system where an employee earns points and can redeem them for items from a catalogue;
- Reimbursements from an employer to an employee for a gift or award that the employee selected, paid for and then provided a receipt to the employer for reimbursement;
- Disguised remuneration such as a bonus given as a gift or award.
While we’re at it, we should also look at the annual Christmas party and other staff functions.
Free parties or other social events provided to all employees are tax-free if the cost per person is $100 or less. Related costs including taxi fare and overnight accommodation are not included in the $100 limit. If the cost of the party is greater than $100 per person, the entire amount including the related costs is a taxable benefit.
CRA is willing to let you and your employees have a good time, but not too good.