Understanding Tax Rules for Employee Gifts and Awards: What You Need to Know

Recent updates from the Canada Revenue Agency (CRA) have brought essential changes to how non-cash gifts and awards from employers are taxed. As your trusted tax professionals, we want to ensure you fully understand these updates and their implications for both employers and employees.

Types of Employee Rewards

Gifts
Gifts are items given to employees to mark special occasions, such as holidays, birthdays, or weddings. These are considered gestures of goodwill and appreciation rather than performance-based rewards.

Awards
Awards, on the other hand, recognize an employee’s work-related accomplishments that go beyond their regular job duties. Examples include recognition for outstanding service, safety milestones, or years of service achievements.

Tax Treatment of Gifts and Awards

Understanding how different types of gifts and awards are taxed is crucial for compliance with CRA regulations.

Cash and Cash-Like Items

• Any gifts or awards given in the form of cash or cash equivalents (such as cheques, direct deposits, or e-transfers) are fully taxable and considered part of employment income.
• Gift cards that are redeemable for cash also fall into this category and are subject to taxation.

Non-Cash Items

• If the fair market value of non-cash gifts and awards remains under $500 annually, they are not taxable.
• Once the combined value exceeds $500, the excess amount is considered taxable income.
• The $500 limit applies per employee per year, meaning multiple small gifts and awards throughout the year could contribute to a taxable amount.

Important Exemptions to Consider

Limited-Recipients Awards

Awards given through an evaluation process with a restricted number of recipients (e.g., a company-wide excellence award) are not taxable, regardless of value.

Years of Service Awards

A notable update affects years of service awards, which now have specific conditions for tax exemption:

• The award must recognize at least five years of service.
• Employees cannot receive another service award from the same employer within the previous five years.
• The value of these awards is treated separately from other gifts and awards.

Trivial Benefits

Certain low-value items, known as trivial benefits, are not included in the $500 annual limit calculation. These include:

• Coffee, mugs, or water bottles
• T-shirts, pens, or similar small promotional items

New Guidelines for Gift Cards

The CRA has introduced specific criteria for gift cards to qualify as “non-cash” gifts and remain non-taxable:

• The card must be pre-loaded with funds.
• It must be usable only at a single retailer or a defined group of retailers.
• The terms and conditions must explicitly state that the card value cannot be converted to cash.

This update provides much-needed clarity for employers who wish to provide gift cards while maintaining their non-taxable status.

For more detailed information about these guidelines, please visit the Canada Revenue Agency.