The Tax of Gift Giving: Are Employee Gifts Tax Deductible?

It’s that time of year again – office secret santas and overdoses of Turtles and Ferrero Rocher as you anxiously count the days until the office holiday party. Yet, while you plough through department stores or stare incredulously at your Amazon shopping cart, you probably haven’t pondered whether or not that “World’s Number 1 Employee” mug should be recorded on a T4.

As you may expect, the CRA has some pretty strict rules when it comes to gift giving.

Their official policy: You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annual.

If you have a practice of giving your employees gifts throughout the year for various accomplishments and holidays, you may be running close to the $500 limit.  For example, being the generous employer that you are, let’s say you gave your employee:

  • The box set of “Breaking Bad” DVDs for her birthday (Retail value: $75)
  • A romantic getaway at the Sheraton for her engagement (Retail value: $349)
  • A pair of Book of Mormon tickets for her holiday bonus (Retail value: $400)

Total gifts for the year = $824With the shopping list above, the CRA would expect you to show $324 ($824-$500) of a taxable benefit on your employee’s T4. That means your employee will have to include $324 in her income and pay additional tax on it. If she’s in the highest tax bracket, those “Book of Mormon” tickets actually cost her $149 ($324 x 46%). Who said anything in life was free?

But wait – in case you thought that was all there is to it, there’s more:A gift or award that you give an employee is a taxable benefit from employment, whether it is cash or near-cash.

Not everybody is going to like those “Breaking Bad” DVDs (well almost everybody) and you want to give your employees some flexibility by purchasing them a gift card.By CRA standards however, a gift card is considered a near-cash item and is therefore taxable no matter what the amount.  If you give them a $250 Amazon gift card, the full amount must be included in their T4.

Assuming you follow the rules, it actually works out cheaper for your employees if you buy them the box DVD set yourself, rather than have them buy it using a gift card. Bah humbug.

So what can you do to steer clear of the CRA without being labeled a Scrooge?

If you know what your employees like, it’s always best to purchase non-cash items. Ipads and eReaders can be good ideas, and hey – you can always provide a gift receipt just in case (not to be confused with a gift certificate!).  

If you’re going to purchase a gift certificate, you may want to increase the amount slightly if you know it’s going to be taxable in the hands of your employees. If you choose not to include the gift certificates on your employees’ T4s, at the very least, it would be prudent to keep the gift amount less than $500.

Now, next time you look at that “World’s Number 1 Employee" mug, you can view it with a newfound appreciation given that you may have paid for it with some good tax dollars.