Rules for Gifts to Employees

It is possible for an employer to be generous to employees without the employee having to pay tax on the gift.

To mark special occasions, employers are now allowed to give their employees two non-cash gifts per year on a tax-free basis where the total aggregate of the cost to the employer is $500 or less a year. In addition, employers can give their employees two non-cash awards up to $500 per year on a tax-free basis in recognition of employment achievements. This does not include rewards for performance.

The employer will be able to deduct the cost of these gifts and awards when calculating business income but the employee does not have to include the cost of the gifts or awards in their taxable income.

Where the cost of the gifts or awards exceeds the $500 threshold, then the full fair market value of the gift or award will be included in the employee’s employment income. If a gift exceeds $500, or the combination of two gifts includes $500, the full gift that exceeds the threshold is taxable and must be included on the employee’s T4. There is no provision to only tax the amount in excess of $500.

Cash gifts are still taxable on the employee’s T4 and CPP and EI must be withheld. Similary, generic Gift Certificates that could be used to acquire almost anything, or converted to cash (for example, Canadian Tire or Department store gift certificates that allow you to receive cash) are considered by CCRA to be the same as cash and ARE taxable to the employee.

Gift certificates to a specific narrow purpose organization, such as a Spa, Theatre, specific restaurant or specialty store, and that can only be used for that company’s product or service would qualify as non-taxable benefits provided the maximum of two gifts totalling under $500 for gifts and $500 for awards has not been met for the year.

More specific examples and details can be found at:

http://www.ccra-adrc.gc.ca/tax/business/payroll/gifts/examples-e.html

CORPORATE GIFTS AND AWARDS

Gifts to shareholders of a closely-held corporation are an exception to the above policy. Canada Revenue Agency will treat such Gifts as a taxable benefit to the Shareholder. More details about this policy are at:

http://www.cra-arc.gc.ca/tax/business/topics/payroll/benefits/gifts/awards/menu-e.html