Potential tax consequences of holiday gifts and celebrations

During the month of December, it’s customary for employers to provide something “extra” for their employees, whether it’s a compensation bonus, a gift, or an employer-sponsored social event – or all three. And, given the current labour shortages in many sectors, employers may be particularly motivated this year to provide such extras in order to retain current employees, or attract new ones. What employers definitely aren’t trying to do is create a tax headache or liability for their employees: unfortunately, it’s also the case that a failure to properly structure employee gifts or even employee social events can result in unintended and unwelcome tax consequences 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 tax authorities. 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 tax consequences 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 Canada Revenue Agency to ensure that such situations don’t slip through the tax net.

The determination of whether employer gifts constitute a taxable benefit which must be reported on a T4 or T4A slip and on which tax must be paid is based on administrative policy formulated and followed by the Canada Revenue Agency (the Agency). In 2023, the starting point of that administrative policy is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute such 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 (as defined by the Agency, and 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 Agency’s current administrative policy is simply that such non-cash gifts to an 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 Agency, as the $500 per year administrative concession does not apply to what the Agency 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 Agency 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 Agency 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 (i.e., cryptocurrencies not issued by a government or central bank).

At one time, the Agency considered all gift cards to be near-cash gifts and fully taxable to the employee who received one, but in 2022 the Agency carved out an exception to that policy. Specifically, effective for 2022 and subsequent tax years, 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 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 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 name of the retailer and the type and amount of the gift card.

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 Agency which now treats gift certificates as non-cash gifts, but only where such gift certificates meet the criteria listed above.
• Where non-cash holiday 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.

The tax treatment of employer-sponsored holiday social events comes with its own set of rules, which have been subject to frequent change by the Agency. During the pandemic, it was necessary to formulate rules which would address the tax treatment of holiday events which were held virtually. While holiday gatherings in 2023 are now far more likely to be in-person gatherings, the administrative policies formulated during the pandemic nonetheless remain in place.

For 2023, the general rule is that a holiday social event (whether in-person or a combination of in-person and virtual) 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. Specifically, such an event will not create a taxable benefit for employees if the per person (including spouses and common-law partners) 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. As well, where gift cards are provided to employees who are attending “virtually”, such gift cards must meet the criteria listed above which allows the characterization of such gift cards as a non-cash gift.

It’s important for employers to remember that, where the per employee dollar limit outlined above is exceeded, the entire per employee cost of the event (including ancillary costs and the cost of attendance by a spouse or common-law partner) is treated as a taxable benefit to the employee – not just the amount by which those total costs exceed the prescribed $150 limit. And, finally, in order to benefit from that prescribed limit, 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, no matter how much a gift from one’s employer is appreciated, or how enjoyable an employer-sponsored social event may be, neither is likely to engender much goodwill if it comes with an unexpected tax bill to the employee.