Understanding and following the CRA’s taxable benefit rules for gifts and awards can help payroll – and employees – avoid tax headaches
Who doesn’t like to receive a gift or an award? Unfortunately, the sweet taste of getting one from an employer can turn sour if the payroll department does not follow the Canada Revenue Agency’s (CRA’s) rules for giving gifts and awards.
If a CRA audit finds an employer did not properly assess a taxable benefit for a gift or award, the employee who received it may owe taxes and interest and the employer may face penalties and interest.
To avoid this, payroll practitioners should ensure they understand the rules for giving gifts and awards to employees.
Under the federal Income Tax Act, gifts and awards that employers give to employees are a taxable benefit to the employees. This applies whether the gift or award is given in cash, near-cash or non-cash. Despite this, the CRA has adopted an administrative policy that exempts non-cash gifts and awards from tax in certain circumstances. Revenu Québec has a similar policy.
The CRA’s administrative policy allows employers to give employees as many non-cash gifts and awards as they like without assessing a taxable benefit as long as the total value of all of the gifts and awards together is not more than $500 a year. By value, the CRA is referring to the fair market value of the items, not what it cost the employer to acquire them. Include the GST/HST/QST in the fair market value.
If the total is more than $500, the excess amount is a taxable benefit. For example, if an employer gives an employee non-cash gifts and awards totaling $800 this year, the employee will have a taxable benefit of $300 for them.
In addition, the gift must be for a special event, such as a birthday, a wedding, the birth of a child or a religious holiday for the policy to apply. If an employer gives a non-cash gift for any other reason, the gift will be a taxable benefit.
The CRA allows employers to exclude items with an immaterial or nominal value when calculating the $500 threshold. This includes items such as mugs, plaques, trophies and T-shirts with company logos. The CRA does not put a dollar value on what is considered immaterial. Instead, it looks at “the value, frequency and administrative practicability of accounting for nominal benefits.”
Awards covered under the policy are those that are given to recognize “an employee’s overall contribution to the workplace,” such as for providing exceptional service or exceeding safety standards. They have to be employment related, but cannot be for job performance, such as working overtime to finish an assignment. Awards given for job performance are a taxable benefit.
The administrative policy does not apply to cash and near-cash gifts and awards (such as gift cards, gold nuggets and stocks) or to gifts and awards given to employees who do not work at arm’s length from their employer (such as family members). They always result in a taxable benefit.
Other types of gifts and awards that are always taxable include points employees can redeem for rewards, employer reimbursements for gifts employees buy, hospitality rewards (such as team-building lunches), bonuses and gifts that manufacturers give directly to the employees of a dealer.
The CRA also has an administrative policy that exempts certain long-service or anniversary awards. Employers are allowed to give employees a long-service or anniversary award tax-free once every five years, as long as the award is non-cash and has a maximum value of $500.
To be eligible, the award must be for a minimum of five years’ service and it has to be at least five years since the employer last gave the employee a long-service or anniversary award. If the award is valued at more than $500, the amount over $500 will be a taxable benefit.
The $500 ceilings for gifts and awards and long-service awards are separate. Employers can give an employee non-cash gifts and awards valued up to $500 in the same year they give the employee a non-cash long-service award of up to $500 without triggering a taxable benefit.
Because the two are separate, though, employers cannot use the limit from one to offset the limit for the other. For example, if an employer gives an employee non-cash gifts totaling $800 in a year and a long-service award of $200, the employer cannot use the $300 that remains from the $500 long-service award limit to offset exceeding the $500 limit for the gifts. In this case, the employee would have a $300 taxable benefit for the excess amount of the gifts.
If a gift or award results in a taxable benefit, it will be subject to source deductions. For taxable gifts and awards in the form of cash, deduct C/QPP contributions, EI and QPIP (for Quebec) premiums and income tax. For non-cash or near-cash gifts and awards, C/QPP contributions and income tax deductions will apply, but not EI or QPIP premiums.
Remember to include taxable gifts and awards on the employee’s T4. Include the value of the benefit in box 14 and in the Other Information area, using code 40. Employers with Quebec payrolls must also report the taxable benefit in boxes A and L on an RL-1.
To help employers determine whether a gift or award is a taxable benefit, the CRA provides an online tool on its website. It also has information on how the CRA treats gifts and awards given through prize draws and social committees, loyalty and points programs, and social events and hospitality functions. (See www.cra-arc.gc.ca/gifts.)
For more details on Revenu Québec requirements, refers to its Taxable Benefits guide (IN-253-V).
Employers with questions about gifts and awards sometimes contact the CRA’s Income Tax Rulings Directorate for guidance. The directorate replies to them and provides the response as a CRA View to publishers of tax information, such as Carswell. Here is a look at three Views posted on Carswell’s Taxnet Pro online service.
It is important to note that in the following cases, the CRA has provided only its comments and not confirmation of actual tax implications. Readers are advised to submit an advance income tax ruling request to the CRA to learn for certain how it will treat an employer’s individual situation.
Scenario 1
An employer is giving away gift cards as door prizes at a company social event to all employees and their spouses who attend. The prizes are not related to employment performance. Are the gift cards a taxable benefit to the employees who receive them?
The CRA says yes. Because it considers a gift card to be a near-cash item, it is a taxable benefit to the employee regardless of its value. This applies even though the employer is giving out the gift cards at a company social event. The CRA does not generally assess a taxable benefit for employees going to an employer-provided social event, as long as all employees are invited and the cost per person does not exceed $100. However, it does not allow employers to include the value of gift cards in the cost.
“The costs to the employer for the social event would typically be the cost of the food, entertainment, hall rental, and other similar costs that were incurred by the employer to hold the event. The value of gifts or awards that an employer gives to an employee at the event is not included in the event costs.”
Scenario 2
An employer uses an award/reward system that lets employees accumulate points for performance-related achievements. Employees can use the points they amass to choose gifts from a catalogue. A committee of employees and managers awards the points for things like perfect attendance, milestones, volunteering, etc. Are the gifts a taxable benefit?
The CRA says yes. “The employer controls the point system. The points are awarded to employees primarily for performance-related and/or employment-related activities. Therefore, awards obtained through the point system are taxable.”
Scenario 3
An employer allows employees to select a birthday gift from a list of 15 specific items, each worth less than $500. The items are all non-cash. The employees work at arm’s-length from the employer. Would the gift be a taxable benefit?
The CRA says no, depending on the circumstances. If the employer gives gifts throughout the year and the birthday gift “pushes the total value of the gifts given to over $500,” the excess amount would be a taxable benefit.
