Taxation of Gifts
It’s the most wonderful time of the year! It’s even a better time for the Government’s top line, as they assess more income tax on various forms of transactions which give rise to income during the holiday season, such as higher retail sales, employee bonuses, and gifts. First off, personal gifts exchanged between friends and family are not taxable. However, much to the surprise of many small business owners and their employees, an employee gift could give rise to taxation. It is therefore important to be cautious and plan ahead to avoid unpleasant surprises.
Cash bonuses are generally taxable and therefore subject to payroll withholdings. This one should be no surprise, as a cash bonus is the same as a bonus given in the form of a cheque. The form of payment does not change that. In addition to cash gifts, near cash gifts, which are not cash but can easily be converted to cash, are also treated the same way. For example. A gift card is a near cash gift, and is taxable and subject to payroll tax withholdings. Therefore, be sure to remit the payroll taxes where applicable and report the taxable amount on the employee’s T4 slip.
Non-cash gifts, which are not near-cash, are treated somewhat differently. A fragrance would be an example of a non-cash gift which is not considered near-cash. An employer can give each employee an unlimited number of non-cash gifts, with a total fair market value within $500 for one year, without triggering taxation for the employee. With some exceptions, fair value given in the form of gifts exceeding $500 is considered a taxable benefit, and is therefore subject to payroll taxes. A gift can also come in the form of a no-charge social event, which would also be a taxable benefit, with the exception of the first $150 spent on each person.
Where there is a taxable benefit, there is tax. The employee would report the amount on his or her personal tax return (through the T4 slip), while the employer would be required to withhold payroll source deductions. It is important to keep in mind that there are deadlines associated with payroll source deductions, and penalties for missing the deadlines can be severe.
Contact Us to find out how the rules apply to your particular situation and how you can minimize taxes for your business and for your employees.
Attaul Hamid
Reference:
“Gifts, awards and social events” (https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/gifts-awards-social-events.html)
Disclaimer:
The contents of this article are written and published to provide general information and are not intended to substitute advice. As individual circumstances, which may be applicable in a specific situation, have not been addressed in this article, readers seeking specific advice may find the information misleading. Such readers are encouraged to consult a professional to obtain complete and relevant advice related to their situation. We have made every effort to prepare the information with care. However, we do not accept responsibility for its use and any outcome arising out of its use. Where opinions are expressed, such opinions do not reflect the facts of the subject matter and should not be considered as advice or recommendation(s).