The time of year is approaching when many Canadian employees look forward to something “extra” from their employer such as a Christmas or Hanukkah gift, a year-end bonus, or an invitation to the annual employer-sponsored holiday party. While it doesn’t necessarily fit well with the holiday spirit, it’s a fact that many such gifts (even, sometimes, attendance at the annual employee holiday party) may have tax consequences, sometimes in unexpected ways.
For multiple reasons, the tax treatment of employer-provided gifts and awards has always been something of a headache for the revenue authorities. The amounts involved on an individual, or even a company level, are usually relatively small, and the variety of situations which the rules must address are virtually limitless, meaning that the cost required to draft and administer those rules can outweigh any revenue gain which results from their enforcement. As well, on occasion, the enforcement of those rules (as in the infamous case in which the Canada Revenue Agency taxed an employee Christmas party) can create a cost to the government in ill-will and potential non-compliance that can similarly outweigh the benefit of any revenue raised. However, in the aggregate, the sums involved can be considerable and, in the absence of any rules, the potential exists for employers to provide their employees, on a tax-free basis, with “gifts” or “awards” which are simply disguised remuneration.
A few years ago, the CRA reviewed its policies with respect to employer gifts generally, including holiday gifts, and the simplified rules which resulted are in effect for the 2010 and subsequent tax years.
The general rule for 2013 is that any gift (cash or non-cash) received by an employee from his or her employer is considered to constitute a taxable benefit to be included in the employee’s income in the year the gift is received. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received by employees, tax-free, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage, or the birth of a child.
In sum, the CRA’s policy is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable to the extent that the total value of all such gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.
It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates gift cards, or securities.
This time of year, the tax treatment of the annual employee holiday party also needs to be considered. The CRA’s policy in this area has undergone a number of changes, but its current assessing position is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost is considered by the CRA to be $100 or less. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, or overnight accommodation. Where the total cost of the party itself exceeds the $100 per person threshold, the CRA may assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100).
It may not seem entirely in the spirit of the season to consider tax benefits and costs when planning holiday gifts and parties. However, especially given that the taxable or non-taxable status of holiday gifts has been subject to change in recent years, it’s important to take those rules into account when planning any holiday gifts for employees. At the end of the day, an employer gift that results in an increased tax bill for the employee isn’t likely to generate much goodwill or holiday spirit.
