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Employee Gifts - Tax Implications of Giving Gifts to Staff

Paul Sharpe, CPA, CA
/
November 21, 2023

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Boost Workplace Morale with employee gifts and bonuses and learn all about their tax implications for your business.

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Let them eat cake! (but make sure they pay the appropriate taxes and source deductions)
Photo courtesy of Sweet Impressions Bakery @sweetnutfree

In this article we explain the tax implications of employee gifts and bonuses. We鈥檒l look at the different kinds of gifts and their tax treatment for both the employer and employee.

Gifts Can Improve Employee Morale

The team here at 香港金光佛论坛 have all filled out a survey to show what their appreciation language is.

Some people prefer words of affirmation so we try to always say 鈥溾 when we鈥檙e appreciating their work.

For other workers, though, the language of gifts is more up their alley.听听

For this reason, we鈥檝e implemented an 香港金光佛论坛ian gift giving program where we cover the cost for team members to send gifts to each other to show their appreciation.

It鈥檚 just a small thing but it鈥檚 lots of fun for team members to get a surprise pumpkin spiced latte at their door on a random Tuesday.

The point I鈥檓 getting to is that gift giving, whether around the holidays or not, is a great way to improve the team鈥檚 morale and create employee satisfaction.

If you鈥檙e giving gifts to your team around the holidays, it鈥檚 important to understand the tax implications and any steps you might need to take to make sure you stay compliant.聽

Cash Gifts聽

We鈥檒l start with cash gifts because that鈥檚 a common one around the holidays and usually the most popular type of gift for employees to receive!

Tax Treatment For the Business

Giving an employee a cash bonus, whether it鈥檚 a performance-based bonus or a Christmas gift, will result in a deduction for the business.

Tax Treatment For the Employee

It will also be a taxable benefit for the employee. This means that the gift will be included in the employee鈥檚 income in the year that it was received.聽

Payroll Obligations

The employer will also need to calculate the payroll tax withholdings on this taxable benefit.聽

These payroll deductions are then remitted to the CRA in exactly the same way that they do with the employee鈥檚 regular wages.

So, it鈥檚 important to understand that you鈥檙e actually giving your employee a dollar amount that is net of payroll deductions.

For example if you want your employee to receive $200 as a gift, you would have to calculate the gross amount and then subtract the appropriate amount of payroll deductions so you arrive at a net payment of $200.听听

You can use your payroll software or the to make this calculation.聽

The gross amount of the gift and employee source deductions both get included on the employee鈥檚 T4 at the end of the year.

From this we can see that the $200 gift might actually cost more like $300 for the business so it鈥檚 good to keep this in mind when giving out cash gifts or bonuses.

Cash Gifts Summary

  • For the Business - Cash gifts are a tax deduction for the business.
  • For the Employee - The gross amount of the gift is taxable for the employee.
  • Payroll Remittances - Payroll remittances (CPP, EI and Income Tax) must be calculated on the gross amount of the gift and remitted to the Receiver General.
  • Employee T4 - You鈥檒l need to include the gross amount of the gift and source deductions withheld on the employee鈥檚 annual T4.

Non-Cash Gifts

Next up we鈥檒l look at non-cash gifts, or 鈥渟tuff鈥 as I like to call it.

For the Business

When giving stuff to employees, the business will get a tax deduction for the cost of the gifts that were purchased.听听

If that 鈥渟tuff鈥 falls under the category of 鈥meals and entertainment鈥 then it鈥檚 only 50% tax deductible for the business.

For the Employee

What about for employees?聽 Is a non-cash gift a taxable benefit?

The official line from CRA on stuff is that a gift or award given to an employee is a taxable benefit from employment鈥

鈥xcept for an exemption for non-cash gifts and awards in some cases.听听

So what are those 鈥some cases鈥 CRA is talking about where the gift is not a taxable benefit?聽聽

  1. First, to be considered for the exemption, the gift must be for a special occasion such as a religious holiday, a birthday, a wedding, the birth of a child, etc.听听
  2. Secondly, the gift can only qualify for the exemption if the fair market value of the gift is $500 or less.听听

You might be thinking you could get around this by buying multiple $499 gifts for your employees, but CRA has already thought of that.听听

The rule is actually that the combined fair market value of all non-cash gifts given to an employee in a given year can鈥檛 exceed $500 for the gift not to be considered a taxable benefit.

If the fair market value of the non-cash gifts given to an employee in a year is greater than $500, then the taxable benefit is calculated as the total fair market value minus $500.听听

So if you gave an employee $600 worth of gifts, then the taxable benefit would be $100 ($600 - $500).

Payroll Obligations

This taxable benefit also has to go on the employee鈥檚 T4, but you only need to withhold and remit CPP and income tax.聽 No EI deductions for non-cash gifts.

Small or Trivial Amounts

One last thing on non-cash gifts.

Items of 鈥渟mall or trivial鈥 value don鈥檛 have to be included in the total fair market value calculation.听听

If you have an employee who loves collecting coffee mugs and company t-shirts then you might be dealing with a hoarder, but at least they won鈥檛 have to include the value of those gifts as taxable income.

Non-Cash Gifts Summary

  • For the Business - They鈥檙e deductible for the business but only 50% deductible if the gift is classified as 鈥渕eals and entertainment鈥
  • For the Employee Less Than $500 - They鈥檙e not taxable for employees if the total value received in a year is less than $500.听听
  • For the Employee Greater Than $500 - Once you鈥檝e hit $500 of gifts in a year, non-cash gifts are taxable income for employees. Only the amounts over $500 are included as taxable benefits.
  • Payroll Remittances - In the case where there is a taxable benefit for the employee, the business has to remit CPP and income tax, but not EI.
  • Employee T4 - Any amounts that are taxable benefits must be included on the employee鈥檚 T4 for the year. The source deductions withheld and remitted also must be included.

Bet you didn鈥檛 realize gift giving was so complicated!

Gift Certificates聽

Ok well if cash gifts sound like a bit more work than expected, what about gift certificates?聽 And we鈥檒l use 鈥済ift certificates鈥 and 鈥済ift cards鈥 to mean the same thing here.

As of January 1, 2022, gift certificates as employee gifts are a bit more complicated.聽

There are two common scenarios for gift certificates:

  1. Gift certificates considered 鈥渘on cash鈥
  2. Gift certificates considered 鈥渘ear cash鈥

The tax treatment of non-cash gift certificates is the same as for non-cash gifts.

The tax treatment of 鈥渘ear cash鈥 gift certificates is the same as for cash gifts.

So then, how do you tell the difference between non-cash and near cash?

Non Cash Gift Certificates

A gift certificate is considered 鈥渘on cash鈥 when all of the following apply:

  • It comes with money already on it and can only be used to purchase goods or services from a single retailer or a group of retailers identified on the card
  • The terms and conditions of the gift card clearly state that amounts loaded to the card cannot be converted into cash
  • A log is kept to record gift card information containing the name of the employee, date the gift card was provided to the employee, reason for the gift, type of gift card amount of gift card and name of the retailer.

For example, 香港金光佛论坛 Accounting buys its employee a gift certificate for for less than $500 that can only be used to purchase goods or services and can鈥檛 be converted to cash.

The gift certificate can be treated as a non-cash gift provided they keep a log containing the information noted above.聽

Near Cash Gift Certificates

If a gift certificate does not meet all of the non-cash criteria, then it is treated the same way as cash.

For example, 香港金光佛论坛 Accounting buys its employee a prepaid mastercard for the amount of $250. The Mastercard can be used at any retailer that accepts credit cards.

Because the gift certificate can be used at multiple retailers, it does not meet all of the non-cash criteria and must be treated the same as a cash gift.

Gift Certificates Summary

  • Non-cash Gift Certificates - If they meet all of the non-cash criteria noted above, gift certificates are treated the same as non-cash gifts.
  • Near-cash Gift Certificates - If they do not meet all of the criteria noted above, the gift certificates are treated the same as cash gifts.

Staff Parties

The last topic that we鈥檒l look at is staff parties.

Staff get-togethers can be a fun way of showing appreciation for your employees and a great way to do some team building.聽

For the Business

Staff parties fall under the tax treatment of 鈥渕eals and entertainment鈥.聽 In general, only 50% of meals and entertainment costs are deductible as a business.听听

However, there are some cases where the cost can be fully deducted. The main requirement for the staff event to be fully deductible is that it is open to all employees in the organization.听听

If the event was just open to some of the group, like a management retreat for example, it would only be 50% deductible.

There can be up to 6 events per year that are considered 100% deductible.

For Employees

The staff parties are not considered to be taxable benefits for employees unless the cost of the event is greater than $150 per person. If the cost of the event is greater than $150 per person, then the entire amount is considered a taxable benefit for the employee.听听

For virtual events, the per-employee threshold goes down to $50.

Clearly CRA鈥檚 take is 鈥渓et鈥檚 have fun, but not THAT much fun.鈥

Payroll Obligations

Any taxable benefit (when the per person cost is over $150 or over $50 for virtual events) gets included on the employee鈥檚 T4. You鈥檒l also have to remit CPP and income tax but not EI.

Staff Parties Summary

  • For the Business (General) - In general, meals and entertainment costs are 50% deductible for the business.
  • For the Business (All Staff) - If the entire staff is invited, you can deduct 100% of the costs.聽 You can do that up to 6 times per year.
  • For the Employee - It鈥檚 not a taxable benefit to your employees unless the per-person cost is over $150 for an in-person gathering or over $50 for a virtual gathering.
  • Payroll Remittances - If there is a taxable benefit to employees, then CPP and income tax need to be remitted for employee taxable benefits but not EI.
  • Employee T4 - If you go over the cost threshold, then the full per-person cost needs to be added to your employee鈥檚 taxable income and T4.

Recommendation

After all of that, we recommend not to worry too much about all of that. Show your employees that you appreciate their work in whatever way suits them or your business. Recognition goes a long way to creating a positive work environment.

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Article by
Paul Sharpe, CPA, CA
.
Originally published
November 21, 2023
.
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