Employee Gifts - What Are the Tax Implications of Giving Gifts to Staff?

“Let them eat cake! (but make sure they pay the appropriate taxes and source deductions)”
— Unattributed
 Photo courtesy of Sweet Impressions Bakery @sweetnutfree

Photo courtesy of Sweet Impressions Bakery @sweetnutfree

We have some amazing people working at Avalon Accounting and we want to show our appreciation for them and their great work.  There are lots of ways to do that, like telling them “great jorb!” or going out for an afternoon of drinks and games instead of filing those four more GST returns.  

How employee gifts are treated for tax purposes depends on the nature of the gift, and in some cases, the value of the gift.  Here are some common examples and their appropriate tax treatment.

Cash Gifts

Giving an employee a cash bonus, whether it’s for hard work or a Christmas gift, will result in a deductible expense for the business and a taxable benefit for the employee.  This means that the gift will be included in the employee’s income. In addition, the employer must determine the appropriate payroll tax withholdings to be deducted and remitted to the Receiver General just the same as the employee’s regular wages.

An important point to consider when giving a cash gift - If you want your employee to receive $200 as a gift, you will have to calculate the gross amount and then subtract payroll source deductions so you arrive at a net payment of $200 to the employee.  Try the CRA payroll deductions calculator for this.  That $200 gift might have cost the business $250 after paying source deductions.

  • Deduction for business: YES (Good)

  • Taxable for employee: YES (Bad)

  • Score: 50% Good

Gift Certificates

Well, how about gift certificates?  You know your employee has always wanted to go scuba diving so you decide to buy him a $200 gift certificate at the “Esteban’s School of Scuba.”  This gift certificate will actually be considered a “near cash” gift in the eyes of the CRA. Near cash gifts carry a tax treatment that is the same as cash.  The business will have a deductible expense, but you will again have to calculate the appropriate amount and type of payroll source deductions to remit to the Receiver General.  The $200 gift certificate suddenly cost you more than the $200 it took to purchase it.

It’s probably best that you don't go with that school of scuba anyway; I heard they have a shark problem.

  • Deduction for business: YES (Good)

  • Taxable for employee: YES (Bad)

  • Score: 50% Good

Non-Cash Gifts

The official line from CRA is that a gift or award that you give to an employee is a taxable benefit from employment, except there is an exemption for non-cash gifts and awards in some cases.  That doesn’t sound very charitable, but as Kurtis Blow would say, “clap your hands everybody if you got what it takes, ‘cause I’m Kurtis Blow and I want you to know that these are the breaks.”  

Ok, sorry I’m back now from finding that song on Youtube.  

The non-cash gift will be tax deductible for the business, but what are those some cases where it isn’t considered a taxable benefit to employees?  

First of all, to be considered for the exemption, the gift must be for a special occasion such as a religious holiday (I wonder if Festivus counts?), a birthday, a wedding, the birth of a child etc.  

Secondly, the gift or gifts can only qualify for the exemption if the fair market value is $500 or less.  You might be thinking you could get around this by purchasing multiple $499 gifts for your employees, but CRA is way ahead of you.  The rule is actually that the combined fair market value of all non-cash gifts given to an employee in a year cannot exceed $500.

If the fair market value of the non-cash gifts and awards you give to an employee in a year is greater than $500, then the taxable amount to be included in the employee’s income is calculated as the total fair market value less $500.  If you gave an employee $600 worth of gifts, then the taxable benefit would be $100 ($600 - $500).

One more bit of info is that items of “small or trivial” value don’t have to be included in the total fair market value calculation.  So if you have an employee who LOVES collecting coffee mugs and company t-shirts then you might be dealing with a hoarder, but at least they won’t have to include the value of those gifts in their income.

  • Deduction for business: YES (Good)

  • Taxable for employee: NO IF < $500 (Good)

  • Score: 100% Great!

Staff Parties

Staff parties can be a fun way of showing appreciation for your employees.  Generally, only 50% of meals and entertainment costs are deductible as business expenses.  However, there are some cases where the cost can be fully deducted.

The main requirement for an event to be 100% deductible is that it is open to all employees in the organization, not just a select group.  There can be up to 6 events like this per year that are considered 100% deductible.

These staff parties aren’t considered taxable benefits for the employees unless the cost of the event is greater than $150 per person.  If the cost of the event is greater than $150 per person, then the entire amount is considered a taxable benefit for the employee.  Clearly CRA’s take is “let’s have fun, but not THAT much fun.”

  • Deduction for business: YES 50% or 100% (Good-ish)

  • Taxable for employee: NO IF < $150 (Good-ish)

  • Score: 50-100% Grood (a combination of good and great)

Recommendation

After all of that, we recommend not to worry too much about all of that.  Show your employees that you appreciate their work in whatever way suits you and your business.  Recognition goes a long way to creating a positive work environment.

If you have any questions or want to chat about taxable benefits, calculating source deductions on cash gifts or 80s hip-hop just send us a message.