It seems incongruous, in the season of holiday gifts and celebrations, to consider the possible tax implications and consequences of those traditions. But, in some circumstances, the unwelcome specter of an income tax bill arising from such activities does intrude.
Fortunately, there are never any tax consequences to the exchange of gifts and holiday celebrations with family and friends. However, where gifts are given and/or holiday celebrations held where the gift giver or person or company sponsoring the holiday celebration is the employer of the recipient, unwanted tax consequences can arise.
It’s traditional for employers to provide employees with something a little “extra” at this time of year. Sometimes it’s a salary or wage bonus, or a gift, or a holiday celebration sponsored and hosted by the employer – and sometimes it’s all three. What employers certainly don’t want to do is to create a tax headache for their employees. Unfortunately, it’s also the case that a failure to properly structure such gifts or holiday parties can result in a tax cost to those employees.
Trying to formulate and administer the tax rules around holiday gifts and celebrations is something of a no-win situation for the CRA. On an individual or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill-will generated by imposing a tax cost on holiday gifts or parties. Nonetheless, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such situations don’t slip through the tax net.
The starting point for the Canada Revenue Agency’s rules is that any gift (cash or non-cash) received by an employee from their employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year.
The CRA does, however, make some administrative concessions in this area, allowing non-cash gifts (within a specified annual dollar limit) to be received tax-free by employees, as long as such gifts are given on significant dates or events, like religious holidays such as Christmas or Hanukkah, or on the occasion of a birthday, a marriage, or the birth of a child.
In sum, the CRA’s administrative policy is simply that such non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee and must be included on the employee’s T4 for the year, and on which income tax must be paid.
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 amount. For this purpose, the CRA considers both currency and cheques to be cash. As well, in situations in which an employee selects and purchases something, submits a receipt to the employer, and receives reimbursement for that purchase, that employee is considered to have received a cash gift in the amount of the purchase/reimbursement.
Other instances of gifts made to employees are not so clear cut, as even a gift or award which cannot be converted to cash can be considered by the CRA to be a near-cash gift. Drawing a firm line between cash/near-cash gifts and non-cash gifts can be difficult, and the CRA provides the following information to help clarify that difference.
Examples of a near-cash gift or award
- Something easily converted to cash, such as bonds, securities or precious metals;
- Gift cards (with the exception outlined below);
- A prepaid card issued by a financial institution that can be used to pay for purchases; and
- Digital currency which is electronic money (e.g. cryptocurrencies not issued by a government or central bank).
At one time, the CRA considered all gift cards to be near-cash gifts and fully taxable to the employee who received one, but the Agency now provides an exception to that policy. Under current rules, a gift card that meets all of the following criteria will be treated as a non-cash gift, and subject to the usual rules governing such non-cash gifts:
- the card comes with money already on it and can only be used to purchase goods or services from a single retailer or group of retailers identified on the card;
- the terms and conditions of the gift card clearly state that amounts loaded on the card cannot be converted into cash; and
- the employer keeps a log to record details of the gift card information including the date, the employee’s name, and the reason for providing the gift card, as well as the type and amount of the gift card and the name of the retailer.
It may seem nearly impossible to plan for employee holiday gifts without running afoul of one or more of the detailed rules and administrative policies surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if the following rules are kept in mind.
Cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, almost always create a taxable benefit to the employee. The sole exception to that rule is the exception carved out by the CRA which now treats gift certificates as non-cash gifts, but only where such gift certificates meet the criteria listed above.
Where non-cash special occasion gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.
When it comes to holiday parties and celebrations, the policy followed by the CRA in determining whether such events constitute a taxable benefit for employees has a long and frequently amended history. The general and long-standing rule is that a holiday social event does not create a taxable benefit to employees where the event is open to all employees and the per person cost of the event is below a specified threshold.
For 2024, an employer-sponsored social event will not create a taxable benefit for employees if the per person cost is less than $150. Ancillary costs such as transportation home, taxi fare, and overnight accommodation for attendees are not included in the total cost limit for the event.
Finally, employers should note that where the per employee dollar limits outlined above for holiday social events are exceeded, the entire per employee cost of the event is treated as a taxable benefit – not just the amount by which the per employee cost exceeds those prescribed dollar limits. And, finally, in order to benefit from those prescribed limits, employers are restricted to holding six or fewer employer-paid social events each year.
The range and variety of social events and employee gifts which can be provided by an employer to its employees is almost limitless, and where the government seeks to draft rules to govern the tax treatment of such a range of possibilities, complexity is inevitable. The best advice to be given to employers in the circumstances is to consider carefully the kinds of gifts which are given and to be mindful of the dollar amount limits imposed on non-cash gifts and employer-paid social gatherings. After all, at the end of the day, a gift which increases the employee’s income tax bill for the year is unlikely to engender much holiday spirit or goodwill on the part of the employee who receives it.
