Gift cards must now be reported in the employee’s income as a taxable benefit, but this seemingly harsh tax rule may soon be changing.
Gift cards must now be reported in the employee’s income as a taxable benefit, but this seemingly harsh tax rule may soon be changing..
Companies occasionally reward their employees with gifts on special occasions or to recognize certain workplace behaviours. But many managers don’t know that the value of such gift cards, even if only nominal, must currently be reported in the employee’s income as a taxable benefit. Fortunately, this seemingly harsh tax rule may soon be changing if the Canada Revenue Agency responds favourably to a February submission made by Tax Executives Institute Inc.
Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” There is no exception in the Tax Act for employer-provided gifts and awards, but the CRA has a long-standing administrative position that employers can give employees as many non-cash gifts and awards as they like and they won’t be taxable provided the total value of all the gifts and awards to that employee in the year is less than $500 — anything over that is taxable. In addition, items of immaterial or nominal value, such as coffee mugs or T-shirts with employer logos, are never considered to be a taxable benefit.
The main purpose of the CRA policy is to eliminate the administrative burden placed on employers of reporting small gifts and awards. The CRA has said, however, that cash or “near-cash” gifts such as securities or gift cards are not covered by the policy, which means the value of such gifts is always taxable.
In its submission, Tax Executives Institute argued that since the CRA last updated its policy on employer gifts in 2010, “gift cards have modernized the gift-giving landscape in Canada and have become an increasingly common way for employers to recognize employees in small but meaningful ways for employment-related accomplishments or to give gifts to their employees on special occasions.” TEI also stated that it sees “no significant difference” between an employer purchasing a gift or award for an employee or providing a gift card to that employee to purchase those same or similar items themselves.
As a result, TEI recommended the CRA amend its policy to also exclude gift cards and gift certificates from income, subject to three requirements: The cards are provided to employees for employment-related accomplishments and in recognition of an employee’s overall contribution to the workplace or as gifts for special occasions; The annual total amount of all gifts and awards provided to an employee does not exceed $500 including taxes, with any excess amount included in the employee’s income; The dollar amount per gift card/gift certificate be limited to $100 (or less.) As TEI wrote in its submission, “We believe that gift cards achieve the Policy’s objective to significantly reduce the administrative burden of reporting the numerous immaterial items given to employees in a year, provided they meet the requirements of the Policy.”