Did you receive a Christmas or Hanukkah gift from your employer this week? If
so, be forewarned -- you may be in for a nasty present from the tax man when you
file your 2005 tax return next April if your employer hasn't followed the rules.
Four years ago, the Canada Revenue Agency released its updated policy on
whether or not employer-provided gifts are considered to be a taxable benefit
Under these new rules, employers are able to give two non-cash gifts a year
on a tax-free basis to their employees for special occasions such as Christmas,
Hanukkah, marriage, birthdays or other similar events where the total cost of
the two gifts is less than $500 (including tax) a year.
Note, however, that cash or "near-cash" gifts are not covered by this policy
and the value of such gifts is considered to be a taxable benefit to the
employee. The CRA considers "near-cash" gifts to mean "any items that can
readily be converted to cash, or are essentially equivalent to cash, such as
securities, gold nuggets, or gift [cards or] certificates."
In October, the CRA was specifically asked about the application of this rule
to gift certificates. An employer inquired as to whether gift certificates,
which are not redeemable for cash, and are limited by an expiry date, if given
to employees at Christmas to buy groceries, would be considered to be a taxable
benefit to the recipient employees if they are less than $500.
The CRA confirmed that the fair market value of the certificates would indeed
constitute a taxable benefit, notwithstanding the expiry date thereon.
Thinking of asking your employer for an iPod as a "Christmas gift" in lieu of
a $500 pay-raise or year-end bonus this year? Sorry --it won't fly as the CRA
has stated that its "non-taxable" gifts policy won't apply where the gift
represents a form of "disguised remuneration."
What if you are the employer -- can you deduct the full cost of employee
gifts? While generally the answer is yes, you may wish to tread cautiously, at
least for now, if you are giving gifts of food or beverages to employees.
That's because in 2001, the CRA stated the general 50% limitation on the
deductibility of meals and entertainment would also apply to gifts of "frozen
turkeys, fruit baskets, liquor, and other such items" that are given out as
gifts to customers at Christmas time. The CRA confirmed that "indeed the
restriction of 50% deductibility applies to any amount paid for any of the items
above since they are paid 'in respect of the human consumption of food or
A recent tax case decided earlier this year, however, may put a wrench in the
CRA's plans to restrict full deductibility of these types of gifts.
Mark Stapley, a self-employed real estate agent, deducted more than $15,000
worth of meals and entertainment expenses annually. Mr. Stapley did not
personally consume any food nor attend any entertainment with his clients but
rather gave his clients vouchers or tickets, which the clients could use as they
Mr. Stapley claimed the full cost of these vouchers and tickets on his tax
returns as fully deductible business expenses that were incurred both to thank
his current clients who bought and sold homes through him, as well as to
encourage his clients to send him more business.
The CRA reassessed him, only allowing 50% of the amounts he deducted, citing
its published administrative position on restaurant gift certificates based on
the broad interpretation of the phrase "in respect of" meals and entertainment.
The Judge, however, disagreed with the CRA's interpretation and concluded Mr.
Stapley's purchases "were for the purpose of, or in respect of, earning income
from his business and not consumption or entertainment" and thus allowed 100% of
the costs to be deducted.
The CRA has appealed this decision and the appeal is scheduled to be heard in
Toronto on Jan. 11, 2006. Stay tuned!
GRAPHIC: Black & White
Photo: Employers can give two non-cash gifts a year on a tax-free basis to their
employees for special occasions. The value can't exceed $500.; Black & White