Whether it has been a good or a bad year, all work and no appreciation make employees gloomy. The appreciation need not always be for performance. It could be a gift for a special occasion like a birthday or wedding, an award for being humble and kind, or a reward for an outstanding performance at work. Gift, reward, and award might look similar (a token of appreciation in cash or non-cash objects), but the Canada Revenue Agency (CRA) has different tax implications for each. The daunting task is to correctly categorize the items as taxable or not taxable in the hands of the employees.
This article will explain the basis of tax treatment of gifts, rewards, and awards for businesses and employees.
Basis of Tax Treatment of Gifts to Employees
The CRA determines the tax treatment of a gift based on inclusivity, intent, and mode.
- Inclusivity refers to whether the opportunity to receive the award or gift was open to everyone rather than select people.
- Intent shows whether the gift or award was to celebrate an occasion like a birthday, festival, or appreciation for their contribution (unrelated to job performance).
- Mode shows whether the gift or award was in cash or in kind (non-cash). If it is a gift item, the value of all such items given throughout the financial year does not exceed $500.
Taking these three conditions as the base, the CRA determines whether the gift is taxable or non-taxable in the hands of the employees. Let’s take two scenarios to understand why the CRA imposed this tax.
Scenario 1: Gift is Taxable for Employees
Jacob is an excellent salesman. He went on to open an electronics shop. He gives his sales executives generous non-cash rewards like a ski trip for completing sales targets. He even had an exclusive party for the sales team and the management, where all attendees were gifted a smartwatch.
The party was for a select group, breaching the inclusivity rule. The smartwatch was an expensive gift meant for a select group, and the intent of a ski trip was a performance reward. Jacob can deduct the amount spent on all three things (party, smartwatch, ski trip) as a business expense. However, employees receiving these gifts must show it as taxable income.
Scenario 2: Gift is Not Taxable for Employees
The CRA wants small business owners to give gifts to employees but impartially and within limits. Let’s take another scenario: Mary gives her employees gifts worth $100 on four occasions. Plus, she gives a $100 cash bonus to employees in December salary. The CRA allows small business owners to give up to $500 in non-cash gifts.
Mary’s total gift value was $400 for the year. As she did not cross the threshold and met the intent and inclusivity criteria, they are not taxable in the hands of the employees. However, the $100 cash bonus is taxable to employees. It is because of the way CRA treats cash and non-cash gifts.
Tax Treatment of Cash and Non-Cash Gifts to Employees
- Cash gifts: Small business owners should treat cash gifts, rewards, and awards as a part of an employee’s salary and deduct income tax, Canada Pension Plan (CPP) and Employee Insurance (EI) from that cash amount. Note that the above gift classification (inclusivity and intent) does not apply to cash gifts.
- The confusion comes in non-cash gifts, rewards, and awards. They have to be categorized as taxable and non-taxable. For the taxable gifts, the business owner has to deduct income tax, CPP, and GST (in some cases) and show it in the T4 slip. There is no need to deduct EI for non-cash items.
Tax Treatment for Employers
Irrespective of whether the gift is taxable or not for employees, small business owners can deduct the amount spent on all types of gifts as a business expense. However, if the gift falls under the meals and entertainment category, you can only claim 50% of the amount as a business expense.
It is just the tip of the gift tax ifs and buts. There are other situations and exceptions where the non-taxable gift becomes taxable. Like gifts, there are other business expenses which have complex tax treatment.
Contact Glenn Graydon Wright LLP in Halton Region to Help You with Tax Filing
A skilled accountant can help you categorize all expenses in the right segments so you don’t make mistakes with the T4 slips. At Glenn Graydon Wright LLP in Oakville, our tax advisors are updated about changes in tax treatments and can help you file your accounts and T4 slips accurately. To learn more about how Glenn Graydon Wright LLP can provide you with accounting and tax filing services, contact us online or by telephone at 905-845-6633.