Employee gifts and rewards: impact on taxation

As a general rule, any gift or reward that an employer gives to its employees is a taxable benefit and its value must be added to their income. Fortunately, there are situations where these gifts or rewards are not taxable. However, these expenses remain deductible for the employer.

Gift or reward: what's the difference?

Before determining whether a benefit is taxable, what is a gift or reward?

A gift is given for a personal occasion (e.g. a birthday), while a reward underlines a professional achievement (e.g. loyalty).

If an employee receives something in return for achieving an objective or performance, this is recognition, which is always taxable, regardless of the nature of the prize. It cannot be considered a gift or reward.

Taxable benefits

Gifts and rewards in cash (e.g., cash, expense reimbursement) and in near cash (e.g., certain gift cards that do not meet the conditions to be considered non-cash property, prepaid card) are taxable benefits. These gifts and rewards do not qualify for the CRA's exceptions.

The CRA considers a gift card to be property other than cash (e.g. objects, tickets, subscriptions) if it :

• has a fixed monetary value;

• is usable at a single merchant;

• cannot be exchanged for cash;

• is tracked in a register kept by the employer.

Tax-free benefits

The CRA allows employers to offer non-monetary gifts or rewards of up to $500 annually (taxes included) without it being added to the employee's income.

This limit does not include small items of negligible value (e.g. coffee, T-shirts, mugs, trophies) or service awards, which have their own annual limit of $500 if the following conditions are met:

• The employee has at least 5 years of service;

• It has been at least 5 years since the last award of the same type.

The unused portion of this limit cannot be applied to non-cash gifts and rewards.

If the total value of the gifts and rewards given to the employee exceeds the permitted limits, the excess becomes taxable.

Distinction from Revenu Québec

Revenu Québec distinguishes between gifts and rewards when applying tax limits.

A limit of $500 per year (taxes included) applies to non-monetary gifts, and another limit of $500 applies to non-monetary rewards. These limits are independent.

For example, if an employer offers a spa package for $250, tickets to a show for $300 and a promotional item for $20, the CRA considers that the total value exceeds the $500 non-taxable limit, so $50 is taxable.

On the other hand, Revenu Québec applies a separate limit of $500 for gifts and another for rewards, which means that nothing is included in provincial taxable income.

Offer rewards to your employees without tax risk

Understanding the tax rules on gifts and awards helps avoid costly mistakes. Our next article discusses the CRA's position on the use of gift cards in recognition policies.

Need some guidance? Contact our team of corporate tax specialists today to secure your tax obligations.