It seems incompatible to talk about taxes in relation to seasonal holiday celebrations. And, while it’s true that there are no tax implications to most holiday events and traditions, unexpected tax consequences and costs can arise where gifts and celebrations take place in the context of an employment relationship.
Formulating and administering rules to govern the tax treatment of employer-provided gifts and awards, especially holiday-related gifts and celebrations, is something of a minefield for the revenue authorities. The amounts involved on an individual, or even a company level, are usually relatively small, and the variety of situations which the rules must address are virtually limitless, meaning that the effort and expense involved in drafting and administering those rules can outweigh any revenue gain which results from their enforcement. As well, enforcing the rules around holiday gifts and celebrations to the letter of the law can create a cost to the government in the form of taxpayer ill will and potential non-compliance that can similarly outweigh the benefit of any revenue gain. However, in the aggregate, the sums involved can be considerable and, in the absence of any rules, the potential exists for employers to provide their employees, on a tax-free basis, with “gifts” or “awards” which are simply disguised remuneration.
A few years ago, the Canada Revenue Agency (CRA) reviewed its policies with respect to employer gifts generally, including holiday gifts, and the simplified rules which resulted from that review remain in effect.
The general rule for 2014 (as well as 2013, 2012, 2011, and 2010) is that any gift (cash or non-cash) received by an employee from his or her employer is considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage, or the birth of a child.
In sum, the CRA’s policy is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable if the total value of all such gifts and awards to that employee is $500 or less annually. The total value over $500 annually will be taxable.
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 cost. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates, gift cards, or points which can be redeemed for air travel or other rewards.
This time of year, the tax treatment of the annual employee holiday party also needs to be considered. The CRA’s policy in this area has undergone a number of changes, but its current assessing position is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost is considered by the CRA to be $100 or less. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, or overnight accommodation. Where the total cost of the party itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100).
It may not seem entirely in the spirit of the season to consider tax benefits and costs when planning holiday gifts and parties; however, especially given that the taxable or non-taxable status of holiday gifts has been subject to change in recent years, it’s important to take those rules into account when planning any holiday gifts for employees. At the end of the day, an employer-provided gift that has a tax bill attached isn’t likely to generate the hoped-for goodwill or holiday spirit.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.