Generally, when an employee receives a gift or an award from the employer it is a taxable benefit from employment, whether it is in cash, near-cash or non-cash. However in certain cases, the CRA has an administrative policy that exempts non-cash gifts and awards.
From an employee’s perspective, cash and near-cash gifts or awards will always be a taxable benefit. From an employer’s perspective, the CRA has a series of questions that an employer may review to confirm whether the gift or benefit given to the employee is taxable or not.
What is near-cash?
Near-cash is an item that has the same functionality as cash. They can include gift cards, gift certificates or any other such item which is easily convertible into cash. It is taxable as it functions in the same way as cash.
What is non-cash?
When an employer gives a specific ticket or voucher to an employee where they do not have an element of choice it may be a non-cash gift or award. For example if an employer gives his employee tickets to a specific event to be held on a specific date and time, that is a non-cash gift and this may not be a taxable benefit for the employee.
Giving Gifts to Employees
The CRA allows employers to give gifts to employees and they are non-taxable as long as they are given on a special occasion like a holiday or a birthday, or another similar occasion. The Canada Revenue Agency also allows business-owners to give gifts to their employees.
Generally if the gifts given to employees are not-cash they will not be taxable. For example if an employer gives a lamp shade to their employee on their birthday, the employee does not have to pay any tax on that item. However, if the employee had received a gift certificate, that gift certificate needs to be reported on the employee’s income slip for the year as a taxable benefit and the employee has to pay taxes on it. For the employer, that near cash gift item can be written off as a business expense.
Difference between Rewards and Awards
The CRA differentiates between gifts and rewards.
An award, in most cases, must be available only to a set number of recipients, and the employees receiving must have accomplished something to be worthy of the award.
A reward is mostly based on the work performance of an employee and is a taxable benefit.
The CRA’s rules for gifts and awards state that a gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child. If you give your employee a noncash gift or award for any other reason, this policy does not apply and you have to include the fair market value of the gift or award in the employee’s income.
Employers can give an unlimited number of non-cash gifts and awards to the employees; however if the fair-market value of these exceeds $500, the difference will then be written as a taxable benefit on the employee’s T4.
Small gifts that are not included in the $500 limit do not count, such as mugs, chocolates, plaques, flowers etc.
If the CRA gift-tax rules are followed and the employers give out gifts instead of cash to their employees, both the employer and the employee can benefit from it in their Income Tax. The employers can write the total cost of the gift as a tax deduction and the employees will not have to declare the cost of the gift as a part of their taxable income.
Employer-provided Stock Options
Sometimes the employers provide stock options, stock purchase plans, or bonuses in the form of stock as a benefit. Through this the employees feel motivated to give their best performance as now they have a direct financial stake in the company. Stock options gifted to the employees enables them to acquire these at less than the market value with the aim of selling them in the future at a profit.
Such company stock acquired is considered a Canadian Controlled Private Corporation, the benefit is not declared until the stock option is exercised or the stock is sold.
For example, as a bonus for excellent performance, you give one of your employees an option to buy 1,000 shares of the company at $5 per share. The employee does not exercise it at that time but somewhere in the future, after a couple of years he wants to buy those shares which are now valued at $10 per share. In such a scenario, the employee has earned $5,000 on the share appreciation and must declare it as employment income. The employer will be required to 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 given at a discounted price through a hare purchase plan, the taxable benefit rules also apply. However this may be deferred to the time the shares are sold. And if the shares are held for a minimum period of two years, the employee can claim a 50% deduction on the benefit.
Employee Allowances and Reimbursements
Employers also provide employees with non-taxable allowances and reimbursements such as for the business use of a vehicle; however, reasonable per kilometer rates will be considered a taxable benefit.
Travel expenses, or expenses for any activities conducted on behalf of the business are also allowed, where the employees are required to keep a track of the expenses and provide an expense report along with the receipts.
Exemptions by CRA:
Following are the exemptions by CRA in the gifts given to employees:
- Non-cash gifts in a year can be received by the employees up to a fair value of $500
- In recognition of their long term service, the employees may receive non-cash gifts values at less than $500 once every five years
- Any party or other social event arranged by the employer, where the cost is $100 per person or less
- Meals or other hospitality services provided by the employer at any work related event
- Any valueless items such as coffee/tea, snacks, mugs or t-shirts etc.
Reporting the benefit
The benefit needs to be reported for current employees as well as any that may be on leave in box 14 “Employment income” and in the “Other information” area under code 40 at the bottom of the employee’s T4 slip.
SRJ Chartered Professional Accountants can help you with filing your personal income tax as well as your corporate taxes. Generally, you need to fill out a T4 slip if you are an employer and you paid your employees employment income, commissions, taxable allowance and benefits, or any other remuneration. SRJ Chartered Professional Accountants can do all that and much more for you, where you do not have to worry about filing all the forms and slips. Schedule an appointment here.