With COVID restrictions being lifted and capacity limits increasing at restaurants, bars and other food and drink establishments, many businesses may be reconsidering their holiday celebrations with staff this year.
But before you start planning, remember these four important business tax rules for holiday parties and gift giving in Ontario:
RULE 1: Cash is always a taxable benefit
If you give an employee a cash bonus or near cash gift, such as a gift card or gift certificate, it is always considered a taxable benefit. That means you will have to include the total amount on your employee’s T4 as a taxable benefit, and your employees will have to pay taxes on that income come tax season.
RULE 2: Non-cash gifts over $500 are taxable
Understanding that you want to reward your employees for hard work and milestones, the CRA has made an exception regarding non-cash gifts. These gifts are tangible items such as a bottle of wine, a book or a watch.
Under this rule, non-cash gifts will not be taxable in the hands of your employees so long as the total fair market value of the gift(s), in any given year, is less than $500. Any amount over and above this $500 maximum must be included as a taxable benefit on your employee’s T4.
It is important to remember that this $500 is an annual limit and not a per gift maximum.
RULE 3: Holiday parties must be for everyone
Parties are a wonderful way to celebrate the holidays and give your employees an opportunity to relax and mingle outside of the confines of work. But remember, if the party is only open to certain employees, the full cost per invitee will be seen as a taxable benefit.
RULE 4: Parties must cost less than $100 per person
The cost per employee must be less than $100, excluding transportation or overnight accommodations. If the cost exceeds $100 per person, the employee will incur a taxable benefit equal to the total cost per person, not just the cost that exceeds $100.
When calculating the cost per head, it is reasonable to assume that the cost per person is the cost of the event divided by those invited to attend.
A note on capital assets
Gifting capital assets, such as furniture, computers, tools and equipment, may not be a common way to say thank you … but it can be a great way to repurpose assets that may still be usable outside of your business.
If you give a capital asset to someone as a gift, the proceeds of disposition for bookkeeping purposes is zero dollars. But this isn’t how the transaction is treated for tax purposes by the CRA. This is because the CRA sees the gifting of assets as being sold for fair market value.
So if you give a capital asset, you must determine the capital gain or loss by calculating the difference between the purchase price plus expenses incurred to acquire it (known as the adjusted cost base) and the fair market value of the asset.
And remember, just like other non-cash gifts, any assets you gift to employees that are valued over $500 are a taxable benefit.
For more information about giving gifts to employees or for help with their bookkeeping and tax treatment, contact us today.
