Updated: Dec 2, 2022
This time of year, many employers want to show their staff some appreciation by giving them a holiday bonus. But what is the best way to do this? Does the gift need to be taxed? and if so, how do you do it?
The CRA has made changes to their policies on gifts, awards, and long service awards in January of 2022.
First, let's look at how they define each of these terms:
Gift - "For a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child."
Award - "For an employment-related accomplishment such as outstanding service, or employees' suggestions. It is recognition of an employee's overall contribution to the workplace, not recognition of job performance."
Reward - "Provided to your employees for performance-related reasons and is a taxable benefit for the employee."
If you give your employees a gift of cash or near-cash, the benefit is taxable.
These items include money, pre-paid credit cards or even allowing an employee to purchase an item and then reimbursing them for the price. It's worth noting that this also includes items easily converted into cash, such as bonds or precious metals and jewels.
Non-cash gifts are not taxable if they meet the following conditions.
A combined total of up to $500 annually, not including trivial items such as coffee, t-shirts or trophies, is given for a special occasion or to recognize an employee's contribution to the company. It cannot be given as a reward for job performance. If the total of the gifts exceeds the $500 limit, any amount over $500 is taxable.
A note about gift cards.
The CRA has introduced a new administrative policy regarding gift cards. You may provide staff with gift cards if ALL of the following standards are met:
It is pre-loaded with a set amount and can only be spent at a specific location, or group of retailers.
There are terms and conditions clearly stated on the gift card that any amounts on the card cannot be converted into cash.
A log is kept detailing who it was given to, when, and why as well as the type of card, the amount on it and the retailer it was purchased from.
If the gift card, certificate or electronic gift card meets all of these requirements it is considered non-cash and is not taxable.
This is a general overview of employee gifts, if you are unsure if your planned gift is taxable or not or have a special situation such as gifts provided to non-arm's length employees or items provided by manufacturers or other clients of your company to your employees, the best place to find your answers will be the CRA's website on taxable benefits to employees.
Now that you have a good idea of if your gift should be taxed or not, how do you withhold the deductions?
For Non-cash and near-cash gifts Income tax and CPP should be withheld, and GST can be remitted. For cash gifts withhold CPP, Income tax and EI and report the benefit on the T4 slip. For near cash and non-cash items, information should be reported on Employment Income, CPP/QPP pensionable earnings and other information (code 40). For cash gifts, report on all the same lines as well as Employment Income.
There are 2 ways that I have seen used that work equally well for this:
Option 1: If you want to give a gift worth $100 after taxes, you should back out the CPP, EI and tax withholdings to get the gross amount that would be equivalent to $100 net pay. This way your employee will get $100 cash, but their pay stub will show $130 less the deductions.
Option 2: If you really want to get into the spirit of giving you can consider taking the money out of the corporation as a bonus or dividend, pay the taxes on it yourself and just give your employees the net cash. This is essentially the same as above, except you are paying the taxes, not your employees.
It is also worth noting that most employee gifts and bonuses are considered a deductible expense - within reason.
Note: This is an update version of a blog we posted in 2018. There have been changes to the CRA's Administrative Policy since then regarding gifts considered cash or near-cash, non-cash gifts or awards, and gift cards.