The Tax Implications Behind Gifting Capital Assets

As the holiday season rolls in, gifts become top of mind – for family, friends and even employees. As a business owner it is important to understand the rules governing gift giving so that you can optimize your after-tax position. 

As an employer, your employees can receive non-cash gifts up to a value of $500 without being taxed. This value should be inclusive of GST/HST and should be calculated using the fair market value and not it’s cost to you.

Non-cash gifts over this $500 threshold along with all cash gifts and gift cards, however, are a taxable benefit and must be included in their income.

Gifting Capital Assets

One gift that is not as common as gift cards or a bottle of wine is gifting capital assets, such as furniture, computers and equipment, that are being replaced by and/or are no longer needed by the business.

This process of gifting capital assets is known as transferring capital property and is a great alternative to simply disposing of assets that may still be usable outside of your business.

From a record keeping perspective, the gifting of an asset is very simple if the asset is fully depreciated:

1. Debit accumulated depreciation for the asset’s accumulated depreciation
2. Credit the asset account containing the asset for the cost of the asset

If the asset is not fully depreciated, the entry will be as follows:

1. Debit accumulated depreciation for the asset’s accumulated depreciation
2. Credit the asset account containing the asset for the cost of the asset
3. Debit the difference between the above two amounts as a loss on disposal

It is important to remember that the depreciation of the asset should be brought up to date before completing the entry.

When gifting capital property to an employee (or anyone else for that matter), the proceeds of disposition for bookkeeping purposes is recorded as zero dollars. This, however, is not how the transaction is treated for tax purposes by the Canada Revenue Agency (CRA). This is because, the CRA sees the gifting of assets as have being sold for fair market value.

As such, when gifting capital assets, you must determine the capital gain or loss by calculating the difference between the adjusted cost base (ACB) of the item (purchase price plus expenses incurred to acquire it) and the fair market value (FMV) of the asset.

• If the FMV = ACB, there is no capital loss or gain.
• If the FMV > ACB, there is a taxable gain, of which 50% is taxable.
• If the FMV < ACB, there is a capital loss, of which 50% is allowable for tax purposes and can be applied to a capital gain in the current year, past 3 years or any future year.

Once you have appropriately recorded the disposal of the asset for accounting and tax purposes, it is time to look at it from the perspective of being an employee gift. As mentioned above, employees can receive non-cash gifts with an FMV of up to $500 without being taxed on that amount.

As such, if the FMV of the gift is less than the $500 threshold, the employee will not have to pay tax on any portion of the gift. If however, the FMV is greater than $500 you will have to include the FMV less $500 in the employees income and tax it accordingly.

It is recommended, to ensure that the CRA does not make adjustments to your asset disposal or employee’s taxable benefits, that you have the capital asset professionally appraised.

For more information about giving gifts to employees or for help with their bookkeeping and tax treatment, contact us today.