Businesses: A Guide to Holiday Gift Giving

Parties, gifts and awards can help provide a positive work environment for employees and help boost morale. But keep in mind there may be tax implications for your staff.

Employees generally are taxed on the value of these benefits, although there are exceptions.

Take holiday parties. The Canada Revenue Agency (CRA) has an administrative policy concerning the taxation of benefits from work-related social occasions. If you provide free parties or other social events that are open to all employees and the cost isn’t more than $100 per person, the benefit isn’t considered taxable to your employees.

Additional costs, however, such as transportation home, taxi fare and overnight accommodation, aren’t included in the limit. So if the added perks bring the value to more than $100 each, the entire amount, including the additional costs, will be a taxable benefit.

When the social event is work-related, such as a planning, education or networking session, the CRA considers your business to be the primary beneficiary, so the event isn’t taxable to employees. But if the event is to celebrate the completion of a project or task, or if it is a “thank you for a job well done,” the benefit must be included in employees’ taxable income.

Gifts and Awards

Non-cash gifts and awards given to arm’s-length employees aren’t taxable benefits provided that the aggregate fair market value (FMV) of each is less than $500 annually. (Arm’s-length employees are those who aren’t relatives, shareholders or people related to them.) There isn’t a limit on the number of them you can give, but the total value for each employee that exceeds the $500 limit will be a taxable.

Gifts must be given in recognition of a special occasion, such as a religious holiday, a birthday or a wedding.

As well, an award given for an employment-related accomplishment, such as outstanding service, is non-taxable. But awards for performance-related accomplishments, such as meeting sales targets, is considered a reward and is taxable.

Under the gifts and awards policy, it’s also possible to give a tax-free, long-term service award to an employee if it’s a non-cash award with a value that doesn’t exceed $500. The award also must be for a minimum of five years’ service and it can be given only once every five years.

Any value exceeding $500 is considered a taxable benefit. This value is separate from the value for gifts for special occasions and awards for employment-related accomplishments.

Cash and Equivalents

The tax-free policy for gifts and awards doesn’t apply to cash or near-cash gifts and awards. These are always a taxable benefit to the employee. Near-cash gifts are those that function as cash (such as a gift certificate or gift card), or can be easily converted to cash (such as gold nuggets, securities or stocks).

For example, if you give an employee a $100 gift card or gift certificate to a department store and the employee uses it, the CRA views the gift as additional remuneration because the card is used as if it were cash.

However tickets to a sporting event or a play on a specific date and time won’t be taxed because there’s no element of choice if the other rules for gifts and awards are met.

What about Prizes?

Prizes may be taxable. For example, if they’re given through a random draw, they’re a taxable benefit if:

• The draw is open only to employees,
• The company hosts the draw, and
• The business pays for the prizes.

Otherwise, the winnings aren’t taxable.

Use the fair market value (FMV) of each gift to calculate the total value of gifts and awards given in the year, not its cost to you. You have to include the value of the GST/HST.

In short, nearly everything you give to an employee is considered taxable by the CRA — unless your company is in Québec.

Gifts to your Customers

If you’re planning to show customers your appreciation for their business, here are six guidelines to consider:

1. Avoid alcohol, religious items and gifts that are too personal, such as jewelry, perfume or clothing. Good choices might be gourmet baskets with food, fruit or coffee; desk accessories such as pens, desk blotters, letter openers, clocks, business card holders or calculators; travel accessories such as travel alarm clocks or carrying cases; plants and flower arrangements, and tickets to sporting events or the theater. Or consider a gift certificate to a fine restaurant.
2. Check with personnel. If the gift is going to someone in another company, you might want to check with the personnel or human resources department first. Many organizations prohibit employees from accepting gifts or limit the value allowed.
3. Keep it appropriate. An overly extravagant gift might suggest you are attempting a bribe or may make the client feel uncomfortable. Gifts that are seen as inappropriate could damage a business relationship.
4. Avoid corporate logos. It’s generally best to leave logos for complimentary items given throughout the year.
5. Send a card expressing sincere holiday wishes rather than a gift if you’re involved in a bidding process.
6. Consider the person. Whenever possible, reflect the recipient’s unique interests and tastes, such as a gift related to the person’s job, hobby or other interest. For example, an avid reader might appreciate a nice set of bookends.

The key to giving effective gifts to customers: Choose items that show you value their business and want a strong relationship.

As you can see, the tax rules for gifts, rewards and tokens of appreciation can be complex. Consult with your tax advisor for the last word on whether they are taxable.