If you are planning to give a holiday gift to a cherished employee, or you are an employee hoping to receive a little something extra from the boss at Christmas, as always, there are tax rules to consider. Some gifts could be deemed a taxable employment benefit.
Under the Canada Revenue Agency's rules, employers may give two non-cash gifts per year on a tax-free basis to their employees for special occasions such as Christmas, Hanukkah, marriage, birthdays or other similar events, as long as the total cost of the two gifts is under $500 (including tax) per year.
But be careful, as the CRA has stated that cash or "near-cash" gifts such as securities, gold nuggets or gift cards are not covered by this policy, which means the value of such gifts is considered to be a taxable benefit to the employee.
The CRA is also wary of employers giving their employees gifts in lieu of a year-end bonus. The agency has added that its "non-taxable" gift policy does not apply to gifts that are essentially a form of "disguised remuneration."
As an employer, the types of gifts you are handing out to your customers or suppliers could also trigger tax consequences. Generally, the costs of such gifts are 100% tax deductible, but watch for the "50% rule," which restricts the tax deductibility of food, beverage and entertainment to half the amount paid.
In fact, in 2001, the CRA stated that the 50% rule would even apply to gifts of "frozen turkeys, fruit baskets, liquor and other such items," which are commonly given out as gifts to customers at Christmas time.
This issue found its way to the Federal Court of Appeal last year when Mark Stapley, a self-employed real estate agent, deducted between $14,000 and $20,000 of meals and entertainment expenses annually between 2000 and 2002.
The CRA assessed Mr. Stapley and allowed only 50% of the amounts he deducted. Mr. Stapley objected, arguing that he did not personally consume any food nor attend any events with his clients, but rather gave his clients vouchers or tickets to use as they wished.
The Federal Court of Appeal sided with the CRA. As a result, the 50% limitation applied.
However, the judge was sympathetic to Mr. Stapley's predicament: "In my respectful opinion, it seems unfair to cut [his] deductions in half. [He] could have purchased flowers or books for his clients and deducted 100% of their costs... Thus, in its current form, [the 50% rule] interferes with taxpayers' business decisions and in particular, how they allocate their marketing budgets."
The bottom line? Stay away from frozen turkeys.