Now that the Christmas season has arrived, one issue that many employers have is how to give those sought after yearend bonuses to their employees. No matter what type of Christmas bonus you give to your employee, there are tax consequences to either your company or to your employee. We will discuss some of these options and their tax implications as follows. Please note that you may be required to withhold CPP and(or) EI on some of the options below as well as report GST.
Use the CRA benefits chart to check whether you have to include the GST/HST in the calculation of the benefit, and whether you have to deduct CPP contributions and EI premiums. This can be found at the following link.

http://www.cra-arc.gc.ca/E/pub/tg/t4130/t4130-e.html#P1334_178946

Please note that this policy does not extend to Christmas parties and other special events. In general, no taxable benefit will have to be reported for social events that are made available to all employees provided the cost per employee is $100 or less.
The following is an excerpt from CRA’s guide to Employee Benefits:

Gifts, awards, and long-service awards

A gift or award that you give an employee is a taxable benefit from employment, whether it is cash, near cash, or non cash. However, we have an administrative policy that exempts non cash gifts and awards in some cases.

Cash and near cash gifts or awards are always a taxable benefit for the employee. A near cash item is one that can be easily converted to cash such as a gift certificate, gift card, gold nuggets, securities, or stocks.

Example 1
You give your employee a $100 gift card or gift certificate to a department store. The employee can use this to choose 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 there is an element of choice.

Example 2
You give your employee tickets to an event on a specific date and time. This is not a taxable benefit for the employee since there is no element of choice.

Rules for gifts and awards

A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child.

An award has to be for an employment-related accomplishment such as outstanding service, employees’ suggestions, or meeting or exceeding safety standards.

An award given to your employees for performance-related reasons (such as performing well in the job he or she were hired to do, exceeding production standards, completing a project ahead of schedule or under budget, putting in extra time to complete a project, covering for a sick manager/colleague) is considered a reward and is a taxable benefit for the employee.

If you give your employee a non-cash 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.

The gifts and awards policy does not apply to cash and near cash items or to gifts or awards given to non-arm’s length employees, such as your relatives, shareholders, or people related to them.

Value

Use the fair market value (FMV) of each gift to calculate the total value of gifts and awards given in the year, not its cost to you. You have to include the value of the GST/HST.
Policy for non-cash gifts and awards

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 FMV 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 will not be considered a taxable benefit. These items are not 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;
• plaques or trophies.

Long-service awards

As well as the gifts and awards in the policy stated above, you can, once every five years, give your employee a non-cash long-service or anniversary award valued at $500 or less, tax free. The award must be for a minimum of five years service, and it has to be at least five years since you gave the employee the last long-service or anniversary award. Any amount over the $500 is a taxable benefit.

If it has not been at least five years since the employee’s last long-service or anniversary award, then the award is considered to be a taxable benefit. For example, if the 15 year award was given at 17 years of service, and then the next award is given at 20 years of service, the 20 year award will be a taxable benefit, since five years will not have passed since the previous award.

The $500 exemption for long-service awards does not affect the $500 exemption for other gifts and awards in the year you give them. For example, you can give an employee a non-cash long-service award worth $500 in the same year you give him or her other non-cash gifts and awards worth $500. In this case, there is no taxable benefit for the employee.

Note

If the value of the long-service award is less than $500, you cannot add the shortfall to the annual $500 exemption for non cash gifts and awards.

You can answer a series of questions on our Web site to help you determine if there is a taxable benefit. Go to Gifts, awards and social events, select “Rules for gifts and awards”, then select the “Q&A” icon.
Awards from a manufacturer

If a manufacturer of goods gives cash awards or non-cash awards to the dealer of the goods, the manufacturer does not have to report the awards on an information slip.

However, if the dealer passes on cash awards to an employee, the dealer has to report the cash payment in box 14, “Employment income,” and in the “Other information” area under code 40 at the bottom of the employee’s T4 slip. If the dealer passes on non-cash awards to an employee, the dealer may not have to report the awards in the employee’s income if the other conditions of the awards policy are met.

If a manufacturer gives a cash award or a non-cash award directly to the employee of a dealer or other sales organization, the manufacturer has to report the value of the award as a benefit using code 154, “Cash award or prize from payer,” in the “Other information” area at the bottom of the T4A slip. This only applies if the value of the award is more than $500.

 

After reading the above let’s use an example.

If an employer wishes to buy an employee a gift or award of a $400 stereo system, the employer must give the actual stereo and not a gift certificate worth $400 at the local electronics store. The value of the gift certificate is considered a taxable employment benefit.

If a similar situation applies to you, your employee might appreciate it if you give them the actual gift of a stereo instead of a gift card to avoid paying tax on the benefit.

However, keep in mind the following:

Regardless of the cost, the following gifts and awards are considered a taxable employment benefit:

• cash or near-cash gifts and awards such as Christmas or holiday bonuses or near-cash gifts and awards such as gift certificates;
• points that can be redeemed for air travel or other rewards; or an internal points system where an employee earns points and can redeem them for items from a catalogue;
• reimbursements from an employer to an employee for a gift or an award that the employee selected, paid for and then provided a receipt to the employer for reimbursement;
• hospitality rewards such as employer-provided team building lunches and rewards in the nature of a thank you for doing a good job;
• gifts and awards given by closely held corporations to their shareholders or related persons;
• disguised remuneration such as a gift or award given as a bonus;
• manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer; for more information

Now let’s say that your the type of employer that doesn’t want any of the above to be included as part of that employee’s T4 for the year. This can be done. For you to do this you would need to take the hit personally, meaning you consider the gift to be a cash draw out of your company through your shareholder loan. Then as you will already know, your draw will need to be covered with either a salary or dividend to you the owner out of the company. The bottom line is that the near-cash gifts that wouldn’t qualify above will eventually be reported on someone’s T4 whether its your own or your employees.

If you require even further information than above than I would suggest you visit the following “Gifts, awards and social events” webpage that CRA provides which gives further interpretation

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/menu-eng.html

If you would like more information on the above we would gladly be able to assist you with your needs.