Follow the Canada Revenue Agency (CRA) gift-tax rules and give your employees gifts instead of cash bonuses, and both you and your employee will benefit on your Canadian income tax. Employers can use the total cost of the gift as a tax deduction, and employees don't have to declare the cost of the gift as part of their taxable income.
CRA Tax Rules for Employee Gifts
The general rule is that all gifts given to employees are considered to be taxable benefits by the CRA except for the following exemptions:
- Employees may receive up to $500 in fair market value of noncash gifts in a year.
- Employees may receive noncash gifts in recognition of long service valued at less than $500 once every five years.
- Employer-provided parties or social events where the cost is $100 per person or less.
- Meals or other hospitality services at work-related functions, such as meetings, training sessions, etc.
- Valueless items such as coffee/tea, snacks, mugs, t-shirts, hats, etc.
Annual and long-service cash gifts are considered to be separate and may be received in the same year. For example, an employee could receive up to $1,000 worth of noncash gifts in the same year if half was an annual gift and the other half was for the fifth anniversary.
Anything more than the $500 limit amount is considered to be a taxable benefit, and the employer may have to make source deductions.
Types of Gifts
There is no limit to how many gifts an employee can receive during any given year. The only limit is on the total cash value of all the gifts. Small gifts don't count. Mugs, chocolates, plaques, etc. are not included in the $500 limit.
There are certain restrictions, however. If you want to use your employee gifts as tax deductions in Canada you must be careful what you give as an employer. Items such as gift certificates or stocks that are easily converted into cash will be considered as taxable employee benefits by the CRA, as will performance-related awards and bonuses. This includes:
- Gift cards/certificates.
- Rewards that involve employer-provided meals or accommodation. For example, as a bonus, you send an employee and his family on a trip to Disneyland.
- Cash or noncash awards from manufacturers given to dealers that are passed on to employees.
- Points for travel, accommodation, and other rewards.
- Gifts given by manufacturers to employees of dealerships.
It's also important to be sure employee gifts are being given for the right reasons. The CRA's rules for gifts and awards says:
"A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child... If you give your employee a noncash gift or award for any other reason, this policy does not apply and you have to include the fair market value of the gift or award in the employee's income."
However, as long as you stay within the restrictions, this Canadian income tax policy on employee gifts could provide a nice tax deduction for your business.
Employer-provided Stock Options
It is fairly common for employers to provide stock options, stock purchase plans, or bonuses in the form of stock in the company to employees as a benefit. It is generally viewed as a win-win as employees are motivated to perform at the highest level when they have a direct financial interest in the enterprise. Options or share gifts/purchases enable employees to acquire stock in the company at less than fair market value with the goal of selling them in the future for a profit.
Company stock acquired in this fashion is considered a taxable benefit by the CRA. However, if the company is a Canadian Controlled Private Corporation, the benefit is not declared until the options are exercised or the stock or sold.
For example, as a bonus for superior performance, you give your best salesperson an option to buy 1,000 of the company's shares at $5 per share. A few years later the salesperson exercises the option to purchase the shares at $5 per share but the shares are now valued at $10 per share. In this case, the salesperson has earned $5,000 on the share appreciation and must declare the $5,000 as employment income. The employer will need to record the $5,000 as a taxable benefit for the year in which the option was exercised.
If shares are given to employees directly or discounted via a share purchase plan, the taxable benefit rules also apply. This can be deferred until the shares are sold. If the shares are held for at least two years, the employee can claim a 50% deduction on the benefit.
Employee Allowances and Reimbursements
You also provide employees with nontaxable allowances and reimbursements, such as for the business use of a vehicle, provided you follow the CRA's per-kilometer allowance guidelines. Nonreasonable per-kilometer rates will be considered a taxable benefit.
Payments for travel expenses, such as meals, for activities conducted on behalf of the business also are allowed. Employees must keep track of the expenses and submit an expense report, with receipts, to the employer. Employers may give employees an advance for expenses.