Employee Gifts – How it affects payroll.

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It is the time of year when many clients give a Christmas or annual bonus – Did you know it is taxable?  When are employee gifts taxable?  Do you need to deduct tax for that?

If you give your employees a Christmas bonus – it is a taxable benefit if it is paid in cash or cash equivalents (gift cards, near cash items…)

If you give your employees a non-cash gift it may be a taxable benefit –

Employee gifts are not a taxable benefit if:

  • It is non-cash
  • Less than $500 in fair market value
    • Less than $500 combined value – anything over $500 is a taxable benefit
  • Gifts only occur for the following reasons
    • Religious or other special event
    • Birth of a child
    • Wedding
    • Birthday
  • Long standing service award
    • Once every 5 years
    • The first $500 Tax free
    • Over $500 – taxable benefit
    • Separate $500 from the gift calculation
  • Awards – For employment related accomplishment these are allowed when
    • It has clearly defined criteria
    • A nomination and evaluation process
    • Limited number of recipients

When employee gift amounts become taxable benefits:

  • Reward – this is a taxable benefit
    • Given for performance related reasons
  • Any other reason – Taxable Benefit

Non – arms – length employees – there are special rules

  • Relatives
  • Shareholders

So how does this employee gift affect my payroll?

If you want to give a cash bonus to your employees – it must be through payroll and it must have taxes taken off.  If you want to give them a net amount then you will need to talk to your payroll expert so that the gross amount can be calculated for each employee.

The payroll department will need to know these amount early so that they can calculate your payroll and correctly attribute to your payroll account and employees.  Do not leave this to the last minute – if you are planning on doing a Christmas bonus discuss it with your payroll department at the beginning of December.  If you are giving gift certificates this is viewed by the CRA as cash – let them know before payroll.  Do not give all your employees gift certificates without telling payroll – it makes adjusting your payroll much harder than setting it up right in the first place.

Example of a near‑cash gift or award

You give your employee a $100 gift card or gift certificate to a department store. The employee can use this to purchase whatever merchandise or service the store offers. We consider the gift card or gift certificate to be an additional remuneration that is a taxable benefit for the employee because it functions in the same way as cash.

Example of a non-cash gift or award

You give your employee tickets to an event on a specific date and time. This may not be a taxable benefit for the employee since there is no element of choice, if the other rules for gifts and awards are met.

You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value of the gifts and awards you give your employee is greater than $500, the amount over $500 must be included in the employee’s income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650 – $500).

Items of small or trivial value do not have to be included when calculating the total value of gifts and awards given in the year for the purpose of the exemption. Examples of items of small or trivial value include:

  • coffee or tea;
  • T-shirts with employer’s logos;
  • mugs; or
  • plaques or trophies.

The CRA details are here if you want to look at the rules. 

Talk to your bookkeeper today to discuss options and costs of bonuses.