It seems not entirely in the spirit of the upcoming holidays to be talking about potential tax liability arising from holiday gifts. And it should be noted that, in the vast majority of cases, there are no tax consequences to such gifts. Where, however, gifts are provided by an employer to employees, unintended (and unwelcome) employee tax liability can be the result.
The holiday season is the time when many employees can expect to receive something “extra” from their employer, whether by way of a cash bonus, a non-monetary gift or even an annual holiday party. And, it’s certainly possible to structure such extras in a way that doesn’t attract the unwanted attention of the taxman. To do so, however, a little advance planning is required.
The tax treatment of employer-provided gifts and awards has always been something of a headache for the revenue authorities, for a few reasons. The amounts involved on an individual, or even a company level, are usually relatively small, and the variety of situations which the rules must address are virtually limitless, meaning that the cost required to draft and administer those rules can outweigh any revenue gained from their enforcement. As well, on occasion, the enforcement of those rules—as in the now infamous case in which the Canada Revenue Agency (CRA) taxed an employee Christmas party—can create a cost to the government in ill will and potential non-compliance that can similarly outweigh the benefit of any revenue raised. However, in the aggregate, the sums involved can be considerable and, in the absence of any rules, the potential exists for employers to provide their employees, on a tax-free basis, with “gifts” or “awards” which are simply disguised remuneration. And, at the end of the day, it’s the CRA’s job to make sure that doesn’t happen.
To meet that responsibility, the CRA has formulated a detailed set of rules which outline the tax consequences of gifts and awards provided by an employer to his or her employees, both during the holiday season and at other times of the year. Those rules are subject to frequent revision; however, the current set of rules governing the tax status of such gifts and awards, which are outlined below, have been in effect since 2010.
The starting point of the rules for taxation years starting in 2010 is that any gift (cash or non-cash) received by an employee from his or her employer is considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage or the birth of a child.
In sum, the CRA’s policy is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable if the total fair market value of all such gifts and awards to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, which must be included on the T4 for the year, and on which income tax (and Canada Pension Plan contributions) must be paid.
It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost or fair market value. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates, gift cards, or points which can be redeemed for air travel or other rewards. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the words of the CRA, it “allows the employee a wide selection of choice in the item they receive”. So, a pre-paid credit card would likely be considered a “near-cash” gift, and taxable as such.
This time of year, the tax treatment of the annual employee holiday party also needs to be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost is considered by the CRA to be $100 or less per person. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare or overnight accommodation. Where the total cost of the party itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100).
It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules surrounding the taxability of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.
• Any cash or near-cash gifts should be avoided, as they will create a taxable benefit to the employee, no matter how large or small the amount. Although gift certificates are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA as taxable income of the employee.
• Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.
• If the employer is planning to hold a holiday party, dinner, or other social event, it’s imperative that the event be open to all employees. Restricting attendance in any way will mean that the CRA’s rules on the non-taxable status of such events do not apply. The cost of the event must, as well, be kept below $100 per person. While the CRA’s policy doesn’t specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which can’t be accurately predicted in advance. It’s important to remember, as well, that the employer can provide transportation home, taxi fare, or overnight accommodation without the need to include such costs in the $100 per person amount.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.