Taxing Employee Gifts and Awards

By Yosie Saint-Cyr, Editor at HRinfodesk---Canadian Payroll and Employment Law, November-December 2004

As the holiday - and holiday bonus - season approaches, we would like to remind employers about how gifts and awards given to employees are dealt with under the federal Income Tax Act. A policy change that came into effect in 2001 made it easier for employers to administer their gifts and awards programs because it removed the burden of determining the fair market value of small gifts and awards. Revenu Quebec modified its gifts and awards legislation to incorporate the same policy, retroactive to January 1, 2001.

Gifts for Special Occasions

To mark special occasions such as Christmas, Hanukkah, birthdays, or a marriage, employers can give their employees two non-cash gifts per year on a tax-free basis.

The total cost to the employer, including taxes, of the two gifts cannot exceed $500 per year.

Employers can deduct the total cost of the gifts from their income.

Employees do not have to declare the cost of the gifts as part of their taxable income.

Awards to Recognize Achievements

To honour employment achievements such as years of service or meeting safety standards, employers can give their employees two non-cash awards per year on a tax-free basis.

The total cost to the employer, including taxes, of the two awards cannot exceed $500 per year.

Employers can deduct the total cost of the awards from their income.

Employees do not have to declare the cost of the awards as part of their taxable income.

Gifts or Awards whose Value Exceed $500

If the cost of each gift or award is over the $500 limit, the employer must include the full fair-market value of the gift(s) or award(s) in the employee's income.

If an employer gives two or more gifts - or two or more awards - in a single year and their total cost is over the $500 limit, the employer may have to include the fair-market value of one or more of the gifts or awards in the employee's income. This would be determined by the cost of each gift or award, and also by the number of gifts or awards given in a single year.

Cash or Near-Cash Gifts and Awards

The policy does not apply to cash or near-cash gifts and awards such as gift certificates, gold nuggets, or other items that can easily be converted into cash. The value of this type of gift or award is considered a taxable employment benefit and must be included in the employee’s income.

In addition, the Canada Revenue Agency (CRA) policy does not apply where gifts or awards, as the case may be, represent a form of disguised remuneration. For example, where a gift or award is given in lieu of extra wages or benefits, it will be treated as a taxable employment benefit. Likewise, the policy does not apply where an employee foregoes salary, wages, or other taxable benefits in favour of receiving a gift or an award. For example, where an employee is entitled to a bonus of $2,000, but asks the employer for a $500 stereo as a Christmas gift, and the employer agrees to reduce the bonus to $1,500, the value of the stereo is considered to be a taxable employment benefit.

Bonuses

According to the Canadian Payroll Association (CPA), a signing bonus is considered employment income. It is defined in the Income Tax Act, under Regulation 100(1) Interpretation "remuneration" (m) "in respect of an amount that can reasonably be regarded as having been received, in whole or in part, as consideration or partial consideration for entering into a contract of service, where the service is to be performed in Canada, or for an undertaking not to enter into such a contract with another party."

When an employee receives a periodic payment such as a bonus, although it is still considered employment income, another method of calculating the tax is used instead of the regular taxing method. This method is referred to as the "bonus method" and has different variations, depending on the type of payment being paid to the employee. These payments whether paid as part of the regular pay or paid separately (to current and/or former employees), are tax reported on the T4 and or on the RL-1.

If you pay bonuses to your employees that are based on company productivity, performance etc, these bonuses are subject to vacation pay accrual. Discretionary bonuses such as a cash payment given to employees as a Christmas gift are not subject to vacation pay accrual. Such legislative provisions are applicable in all employment and labour standards jurisdictions across Canada.

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By Yosie Saint-Cyr, Editor at HRinfodesk

Published on HRinfodesk---Canadian Payroll and Employment Law

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