In most cases, gifts or awards that employees receive from their employer – whether it’s in the form of cash, Gift Tax, near-cash or non-cash – are considered taxable benefits from employment. However, there are instances where the Canada Revenue Agency (CRA) has an administrative policy that exempts non-cash gifts and awards from taxation.
For employees, it’s important to note that cash and near-cash gifts or awards are always subject to taxation. Employers, on the other hand, can consult a set of questions provided by the CRA to determine whether the gift or benefit given to an employee is taxable or not.
What is considered near-cash?
Near-cash items are those that can be easily converted into cash and have the same functionality as cash. Examples include gift cards, gift certificates, or any other item that can be readily exchanged for cash. These items are taxable, as they function similarly to cash.
What is a non-cash gift or award?
If an employer provides an employee with a specific ticket or voucher without any element of choice, it may be considered a non-cash gift or award. For instance, if an employer gives their employee tickets to a particular event on a specific date and time, it may not be a taxable benefit for the employee.
Gifts for Employees:
Employers are allowed by the CRA to give gifts to employees on special occasions, such as holidays or birthdays, without them being subject to tax. Business owners are also permitted to give gifts to their employees.
Generally, non-cash gifts provided to employees are non-taxable. For instance, if an employer gives an employee a lampshade as a birthday gift, the employee won’t need to pay any taxes on it. However, if the employee receives a gift certificate, it needs to be reported on their income slip for the year as a taxable benefit, and the employee is required to pay taxes on it. The employer can write off the near-cash gift item as a business expense.
Distinguishing Rewards from Awards:
The CRA distinguishes between gifts, rewards, and awards.
An award typically must be available to only a limited number of recipients, and those who receive it must have accomplished something worthy of recognition.
A reward is typically given to an employee based on their work performance, and is considered a taxable benefit.
The CRA’s rules for gifts and awards stipulate that gifts must be given for special occasions, such as religious holidays, birthdays, weddings, or the birth of a child. If an employer gives a non-cash gift or award for any other reason, this policy does not apply, and the fair market value of the gift or award must be included in the employee’s income.
Employers can give an unlimited number of non-cash gifts and awards to employees, but if the fair-market value of these exceeds $500, the difference will be recorded as a taxable benefit on the employee’s T4 form.
Small gifts that do not exceed the $500 limit, such as mugs, chocolates, plaques, and flowers, are not included in the calculation.
By adhering to the CRA’s gift-tax rules and giving gifts rather than cash to their employees, both the employer and employee can benefit in their income tax. Employers can claim the total cost of the gift as a tax deduction, while employees are not required to report the cost of the gift as part of their taxable income.
Employer-Provided Stock Options and Their Tax Implications
Employers often provide stock options, stock purchase plans, or bonuses in the form of company stock as a benefit to motivate employees to perform better. With stock options, employees can acquire company stock at a discounted price and sell it in the future for a profit.
When the acquired company stock is a Canadian Controlled Private Corporation, the benefit is not taxed until the stock option is exercised or the stock is sold. For example, if an employee is given the option to buy 1,000 shares of the company at $5 per share as a performance bonus, and they exercise the option when the shares are worth $10 per share, they have earned a $5,000 benefit that must be declared as employment income. The employer must record $5,000 as a taxable benefit for the year in which the option was exercised.
If the shares are directly given to the employees or sold at a discounted price through a stock purchase plan, the taxable benefit rules still apply, but they may be deferred until the shares are sold. Additionally, if the shares are held for at least two years, the employee can claim a 50% deduction on the benefit.
Employers often provide their employees with non-taxable allowances and reimbursements, such as those for the business use of a vehicle. However, if employers offer a per kilometer rate that is higher than a reasonable rate, it will be considered a taxable benefit.
For travel expenses or expenses related to any other business activity, employees are required to keep a record of their expenses and provide an expense report along with receipts.
The CRA provides certain exemptions for gifts given to employees. For example, non-cash gifts up to a fair value of $500 per year are non-taxable. Additionally, employees may receive non-cash gifts valued at less than $500 once every five years in recognition of their long-term service. Other exemptions include employer-hosted parties or social events with a cost of $100 per person or less, as well as meals or other hospitality services provided by the employer at work-related events. Valueless items such as coffee/tea, snacks, mugs, or t-shirts are also exempt.
The advantages of Gift Tax
To report the benefit, it should be included in box 14 of the employee’s T4 slip as employment income and also in the “Other information” area under code 40.
If you are an employer and have paid your employees employment income, commissions, taxable allowances and benefits, or any other remuneration, you need to fill out a T4 slip. SRJ Chartered Professional Accountants can assist you with filing both your personal income tax and corporate taxes, taking care of all the necessary forms and slips so you don’t have to worry. Schedule an appointment with them for more information.