Gifts: A Taxing Business
But A New CRA Policy Will Make It Easier To Give Them To Employees
If you reward employees with non-cash gifts or awards, the administrative burden of determining whether such gifts or awards are taxable will be getting lighter next year with the introduction of a new, simpler gifts and awards policy developed by the Canada Revenue Agency.
The CRA introduced its formal "gifts and awards" policy in 2001 in an effort to alleviate the burden of determining the fair market value of small gifts and awards for the purposes of taxing employees on the value of such items. The policy, as it currently stands, specifies that you can give an employee up to two tax-free, non-cash gifts annually, as long as the total cost is $500 or less. You can also give employees up to two non-cash awards for work-related achievements each year, such as long-service awards, provided the total value is below $500. Note that CRA interprets "cash" to include "near-cash" gifts and awards, like gift certificates.
When the CRA first launched its gifts and awards rules, it said the policy would "be closely monitored and adjusted if abuse or undue revenue loss is identified." In the eight years since, the CRA has received submissions stating that the policy hasn't materially reduced the administrative burden in situations in which "numerous immaterial items" are given to an employee in one year.
In addition to administrative issues, the CRA has been concerned that some employers introduced gift and award policies primarily for the purpose of providing tax-free remuneration to their employees. As a result, this past spring, the CRA announced several changes to its gift and award policy, which will be effective starting in 2010. Under the new rules, the number of non-cash, non-taxable gifts and awards you can give an employee is no longer limited to two annually, provided the total value of the gifts or awards given to that employee in a year is less than $500. Any amount above $500 will be taxable. In addition, you can reward an employee's long service by giving a separate non-cash gift as long as the value is $500 or less (with excess above $500 being taxable). To qualify, however, the anniversary award must be for a minimum of five years of service and can't be given more frequently than five years after the previous long-service award.
Thinking of making annual gifts to your spouse or kids who are also employees of your business? Not so fast. The CRA has stated that these gift and award policies don't apply to non-arm's length employees, such as relatives of the business owner.