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Have you received a gift from your employer this holiday season? Depending on what you got, and its value, that gift may be tax free, or it could be considered a taxable employment benefit.
The tax rules surrounding gifts by employers were updated last year, so with the holidays approaching, what better time to review the guidelines, including the Canada Revenue Agency’s updated administrative positions.
For starters, the CRA distinguishes between gifts, awards and long-service awards. The value of gifts and awards are generally taxable to employees as employment income, but certain non-cash gifts and awards may not be taxable under the updated administrative policies.
What’s the difference between a gift and an award? A gift is something given to an employee for a special occasion such as a religious holiday, birthday, wedding or the birth of a child. Gifts given around this time of year will generally fall under this category.
An award is given for an employment-related accomplishment such as outstanding service, or an employee’s suggestion. It recognizes an employee’s “overall contribution to the workplace, not recognition of job performance.” A valid, potentially non-taxable award has clearly defined criteria, a nomination and evaluation process, and a limited number of recipients, according to the CRA.
Contrast this with a reward, which is provided to employees for performance-related reasons, such as meeting or exceeding sales targets, or completing a project. These rewards are considered to be taxable benefits to the employee, akin to a bonus or extra compensation.
Under the CRA’s administrative policy, employees can receive an unlimited number of tax-free non-cash gifts or awards each year, provided the combined total fair market value of those gifts and awards is less than $500 (including tax).
Excluded from this $500 limit are small items or items of a trivial value such as coffee or tea, T-shirts, mugs, plaques and trophies. If, however, the total of non-cash gifts and awards is more than $500 in a calendar year, the amount over $500 will be considered a taxable employment benefit.
Under the new CRA guidance issued for 2023, long-service awards have their own $500 limit, but the unused portion of the $500 limit for non-cash gifts and awards discussed above cannot be applied to long-service awards.
As of this year, a long-service award won’t be taxable if it’s a non-cash gift or award, it is given in recognition of five or more years of service with the employer, it has been at least five years since the last time the employer gave the employee a long-term service award and the fair market value of the award is $500 or less (including tax). Long-service awards that fail to meet all these conditions are considered to be a taxable employment benefit.
The CRA’s updated administrative policies on tax-free gifts and awards do not apply if the gift or award is considered cash or “near-cash.” In that case, the benefit is taxable. For this purpose, cash includes currency (or its equivalent) and cheques. It also includes reimbursements, where the employee gets to select their own gift, purchases it themselves and then submits a receipt to the employer, receiving a cash reimbursement in return.
Near-cash items, also excluded from the tax-free policy, include things easily converted to cash such as bonds, securities, precious metals/jewels, cryptocurrency or a prepaid credit card that can be used to pay for purchases.
What about gift cards? In the past, the CRA has considered them to be near-cash, and thus always taxable, but in 2022, the CRA changed its administrative policy and announced that gift cards, including gift certificates, chip cards and electronic gift cards, can be considered “non-cash” and thus potentially non-taxable provided the card meets certain conditions.
First, it comes with money already on it. Second, it can only be used to purchase goods or services from a single retailer or a group of retailers identified on the card. And, finally, the terms and conditions of the gift card clearly state that the amounts loaded to the card cannot be converted into cash.
In addition, the employer must keep a log to record the gift-card information including the name of the employee, the date the gift card was provided, the reason for providing the gift card (part of a social event, gift or award), the type of gift card, the amount of the gift card and the name of the retailer(s).
Here’s a simple example, adapted from the CRA’s website, that shows how these rules may apply for 2023. Let’s say that in the current year, Marc received two non-cash gifts from his employer: a $450 gift card in honour of Hanukkah to spend at an electronics chain, and a separate $250 gift card for the same electronics chain for his 60th birthday earlier this year. He also received a T-shirt with the company logo (with a value of $15) for participating in a charity run. And he received a long-service award worth $400, recognizing his four-year anniversary with the company.
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Applying the above rules, Marc received two non-cash gifts totalling $700 ($450 plus $250). The T-shirt is of nominal value and can be disregarded. Since the $500 maximum for non-cash gifts and awards in the year has been exceeded, the $200 excess is the value of the taxable employee benefit that will be included on Marc’s 2023 T4 slip.
As for the $400 long-service award, under the CRA’s guidelines, Marc’s “long” service isn’t quite long enough to qualify for the additional $500 exemption because under the CRA’s updated administrative policy, for a long-service award to be tax free, it must be in recognition of five or more years of service with an employer.
As a result, Marc’s 2023 T4 will show a taxable employment benefit totalling $600, being $200 for the non-cash gifts plus $400 for the long-service award.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected].
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