T’is the Season of Giving… but is it Taxable?
With the Christmas season fast approaching, many of us are starting our shopping lists and checking them twice. Our thoughts turn to family, friends and those we want to thank and show our appreciation for. For many small business owners, employees top the list of people to thank for their efforts and contributions over the past year.
If employees are on your list this year, the decision between a Christmas gift and Christmas bonus should be considered and the tax consequences understood. The rules and list of taxable benefits that an employer can provide to an employee is extensive. Everything from automobile allowances, board and lodging, child care, education, meals, loans, RRSP’s, group benefits and the list goes on! In many cases the value of the benefit and the taxable portion thereof depends on the circumstance.\
The focus here is specifically on Canada Revenue Agency’s (CRA) policy for non-cash gifts and awards. CRA considers all gifts to be a taxable benefit unless a specific exemption under their policy for non-cash gifts and awards applies. Gifts must be in recognition of a special occasion such as a religious holiday, birthday, wedding or birth of a child. A gift without an occasion is likely a reward and will be a taxable benefit.
An award is defined as employment related, whereas a reward is related to job performance. To compare the two an award could be given for exceeding safety standards, whereas a reward is tied to job performance, such as a reward for completing a project under budget or ahead of schedule. Awards typically have a limited number of recipients, a defined criteria and an evaluation/ nomination process.
To be a non-taxable gift or award the item must not be cash or near- cash. Items such as gift certificates, precious metals, securities and stock options which are easily converted to cash are near-cash equivalents and are taxable benefits.
An employee may receive an unlimited number of gifts and awards with a combined total value of $500 annually. The value is determined at fair market value of the item including tax and not the cost to the employer. Any amount over $500 is a taxable benefit, and must be included in employee’s T4. Payroll deductions must be made on taxable benefits. If a benefit is taxable, it is also pensionable and both employer and employee CPP contributions must be made. For purposes of EI premiums, a benefit is only insurable if it cash. EI premiums are not paid on non-cash or near-cash benefits.
Rewards like bonuses, are considered remuneration, and regardless of form (cash or non-cash) are taxable benefits that are outside of the CRA’s gift and award policy. There is no minimum allowance on bonuses and reward and every dollar or fair market value equivalent is a taxable benefit.
Awards may also be given for long service. Long service awards; also have $500 fair market value maximum. The long service awards may be given to employees for service of at least five years and cannot be given within five years of the last service award. For example, if an employee was given a long service award after seven years, the next non-taxable service award could not be given until year 12. Service awards are considered separate from the annual gift and award amount and can therefore be received in the same year, however the amount is not transferrable from one to the other. For example, if a service award was given with a fair market value of $400 the $100 shortfall cannot be added to the annual gift and award balance.
Trivial items such as coffee, chocolates, mugs, plaques or trophies do not have to be included in accounting for the $500 annual value.
An important note is that the non-cash gift and award policy does not apply to non-arm’s length employees, such as shareholders or related persons. This is especially important, as gifts to shareholders and related parties can result in double taxation, as the business expense can be disallowed and the fair market value of the item added to the shareholder’s taxable income.
For more information please consult with your professional tax advisor.