Employers who don’t want to seem like Scrooge and instead partake in a gift-giving spirit, might want to be aware of potential payroll tax implications. The law clearly taxes benefits provided by an employer to an employee in the context of their work relationship. However, that relationship may also be fertile ground for a friendship, and in those circumstances an employer may want to give the employee a gift for the holidays without it being considered part of their employment. CRA has developed a policy under which a gift or award can be exempted. Discerning whether or not it must be considered part of the payroll requires answering two questions: what is the nature of the gift or award, and what is the occasion or purpose of it?
First, a gift or an award given to an employee is always a taxable benefit if it comes in the form of cash or near-cash. Near-cash items are easily convertible into cash, or function as cash. So, a coffee chain gift card, air travel points, commemorative gold coin, spa voucher, or stocks will not be exempted. One trend in employer-employee holiday gifting involves a crisp $100 bill which comes with instructions to be kept to for as long as it takes to find the right moment to give it to a needy or worthy stranger. As positive as the effects of this new phenomenon might be, the company accountant likely still needs to put that money on the books as a taxable benefit to the employee.
Non-cash gifts, on the other hand, are not taxable benefits—at least up to a $500 yearly limit on the combined total of gifts and of awards that also qualify as exempt under the policy. Non-cash gifts are tangible gifts or services provided to an employee. They include vouchers exchangeable for a specific item up to a certain amount—the employee cannot spend the value on any other item. Likewise, tickets to a specific event at a particular location and particular date and time qualify as non-cash gifts. In contrast, a gift certificate for a movie theater chain can be spent without restriction of time or place (or even of a movie over abundant concession stand goodies) and is considered near cash.
Second, CRA’s policy will discern the tax status of the gift or award in the occasion, or trigger, of the giving. CRA’s policy defines that gifts fulfill a purpose of marking a special event; a religious or public holiday where gifts are traditionally given, or a personal event or milestone such as a birthday, a wedding, a birth or adoption of a child, or a retirement, are all examples of occasions. Perhaps next year your boss will spring for a tickets for a Christmastime Nutcracker performance, or give everyone a spa voucher to celebrate Mother’s Day. These non-cash gifts will not be taxable.
With specific regard to awards, non-cash awards would still be considered taxable benefits if they fall into the category of rewards. A reward is an award given to an employee essentially for doing their job well (or better than expected). CRA gives examples of performance-related reasons for rewarding an employee: exceeding production standards, completing a project ahead of schedule or under budget, putting in extra time to finish a project, covering for a sick manager/colleague.
The non-cash awards that employers make to mark an employee’s overall contribution to the workplace, as distinguished from individual job performance, will not fall under the classification of taxable benefit. CRA’s hallmarks for such awards from employers are: clearly defined criteria, a nomination and evaluation process, and a limited number of recipients. Examples of reasons CRA accepts include outstanding service, employees’ suggestions, and meeting or exceeding safety standards.
In summary, non-cash handovers from an employer to an employee that qualify as gifts and awards (not related to job performance) are exempted from taxable benefit status under from CRA’s policy.
The CRA also sets a limit to how many gifts and awards that are not considered taxable benefits that one employee can receive in a year. Any amount beyond the threshold of $500 will have to be included in the employee’s income.
Fortunately, non-cash award items of small or trivial value do not need to be counted the year’s total at all. Thus, plaques or trophies, no matter how much sentimental value they might enkindle in the recipient’s heart, are typically only of small or trivial value–unless, of course, they be made out something great value such as a gold coin or a trophy of sterling silver (which could be near-cash, even)! Other examples of what fall into the small or trivial value category: coffee or tea, t-shirts with the employer’s logos, and pens and mugs.
In summary, any cash or near-cash gifts or awards, and any non-cash items that cannot be defined as gifts or awards not related to job performance, will be considered taxable benefits.
Gifts given for any other reason than those under the policy must be assigned their fair market value and included in the income of the employee. CRA’s guide “Gifts and awards outside our policy” is available on the CRA website[1] . Also, non-arms-length employees do not fall under this policy.
More details on CRA’s gift and award policy, including long-service awards not covered here, and more examples, can be found at “Gifts, awards, and long service awards”[2], in a webcast of the same title here[3], and a podcast available here[4].
Finally, other helpful publications CRA provides on its website include: the T4130, Employers’ Guide—Taxable Benefits and Allowances[5] and the T4001, Employers’ Guide – Payroll Deductions and Remittances[6].
[1] www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/gifts-awards-social-events/gifts-awards-outside-policy.html.
[2] www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/gifts-awards-social-events/gifts-awards-long-service-awards.html#rlsgfts
[3] www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/gifts-awards-social-events.html,
[4] www.canada.ca/en/revenue-agency/news/cra-multimedia-library/podcasts.html#pyrll4
[5] https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130.html
[6] https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4001.html