Gifts, Awards, and Long Service Awards
Hello, thank you for joining us for this webinar about gifts, awards, and long service awards.
Today’s webinar is the last in the four-part series about taxable benefits. My name is Ivan and I am your presenter today. Also, I would like to mention that today’s webinar will be recorded and posted on the Canada Revenue Agency (CRA) website at a later date.
During today’s webinar, we will discuss the concepts and definitions you need to understand to apply the gifts and awards policy and the long service awards policy to various types of recognitions you offer to your employees. By the end of this presentation, you’ll understand what types of employee recognitions are taxable, and what to include in your employees’ income.
The first thing we’ll discuss is definitions and concepts.
Within the context of the policy, we use certain words in a specific way, and understanding how we define certain terms is essential for correctly applying the policy.
Gifts are generally tangible and are given for birthdays, marriages, birth or adoption of a child, retirement, public or religious holidays.
Awards can recognize and encourage employees who make a contribution to the overall well-being of the work place, however, they are not recognition for performing well in the job an employee is hired to do.
Recognition is received for performance and is REWARD and is taxable.
Awards that meet the criteria of our policy are often obtained through:
- a formal nomination process
- eligibility requirements
- selection criteria
- an employment related accomplishment or achievement
With awards such as these, one or a select few among all nominees are chosen. Truly, this is an award for the best of the best. Merely being nominated should not guarantee receipt of an award.
When an employer gives an award through a formal process as described here, job performance may play a role.
On the other hand, a reward or an incentive is recognition of an employee's performance in their job. It is for things like meeting or exceeding sales targets, completing a project on time or ahead of schedule or under budget, mentoring new employees, filling in for absent or vacationing colleagues, filling in for your manager when he or she is away. These are things that in the course of our job, we're all expected to do and any recognition we receive for that is part of our overall pay package, and is therefore taxable. A phrase I hear a lot is instant awards. “Instant awards” are a common way for employers to reward employees and boost morale and engagement in the workplace.
However, an “instant award” is almost always performance-based, therefore, taxable.
An otherwise taxable reward cannot be made non-taxable by simply calling it a “gift.”
The fair market value is something that's very important to understand because fair market value is what we use, both to determining what has to be included in income, and whether or not the exemption, which you will hear about later, has been met.
The fair market value is the highest price that can be obtained in an open market between two parties dealing at arm's length.
And it is you, the employer, who is responsible for determining the fair market value. Often the fair market value is about the same as the amount the employer pays for the item although this may not always be the case.
A trophy or a plaque where the cost of the materials may be more than the value of the plaque or the trophy; alternatively an employer may get a significant discount off the retail price for buying a specific item in bulk.
A company logo can impact the FMV of an item, however, it cannot be assumed that the value is automatically decreased to $0. Any decrease in the value depends on how much the logo negatively impacts the use and enjoyment of the item. For example, a leather briefcase with a subtle logo engraved on the clasp may be viewed differently than a winter coat with a large embroidered logo on the back.
It must also be noted that some company logos may enhance the value. For example, people pay a premium to have particular logos on their luggage, purses, and athletic gear.
There are certain concepts you'll need to understand to correctly apply the policy, and these three things go hand in hand.
We have cash, near cash, and non-cash.
Cash is fairly straightforward and is something everyone understands, that is, currency. Paper money, coins, and cheques and you can take into any store or bank and deposit or spend as you wish.
A near cash item is easily converted to cash, such as bonds, securities, or precious metals. Another type of near cash item is one that functions like cash such as gift certificates that you take into a particular store and spend as cash.
Non-cash items are tangible goods and services an employer gives an employee.
Gift certificates and gift cards are always taxable as they’re considered near cash.
Gift certificates behave as cash - the bearer can spend them at a specified store, or chain of stores, or even an entire mall, as if they were cash.
This is true whether they are “declining balance” cards, where unused amounts remain credited on the card to be used at another time, or whether the bearer receives cash change from his or her purchase when the price of the item bought is less than the amount of the gift certificate.
Gift certificates are a form of additional remuneration and are always taxable.
Next I want to talk about vouchers and event tickets. A voucher, although it might be a ticket itself or a certificate, it is something that an employee can take to a particular store in exchange for a specific item up to a specific value. For example, an employer may give employees a turkey as a Christmas gift. Rather than bringing many turkeys to the office, raising concerns of refrigeration and storage, an employer may arrange for employees to go to a particular grocery store and exchange a voucher for a turkey valued at up to a certain amount. The employees cannot buy other grocery items with the voucher – they can only get a turkey.
Similarly, an event ticket is for an event at a particular location at a particular date and time. The employee cannot choose to attend a different event at the same time, the same venue on a different night.
A gift card or gift certificate to a movie theatre is not considered an event ticket. With a gift card or gift certificate to a movie theatre, an employee can choose which movie to see and when to see it, or use it at the arcade or concession stand.
Vouchers and event tickets are considered non-cash items.
Now that we have explored the definitions and concepts, we turn to the policies to see how they apply.
As long as the gifts and awards are given for a reason that is valid under the policy, there is no limit on the number of gifts and awards you can give your employee in the year. We do, however, limit the total combined value of the gifts and awards to $500. If the combined value exceeds $500, only the amount over the $500 is included in income. For example, if an employee is given $800 of valid gifts and awards in a year, you subtract the $500 exemption from the total, leaving $300 worth of gifts and awards that must be included in the employee’s income.
For a gift or award to be tax free, it must meet the definitions of gifts and awards explained earlier. After determining whether the item is cash, near-cash, or non-cash, why the item is given is the next thing to consider. A non-cash item given for a performance-related reason is taxable. A cash or near-cash item given for a reason that meets the policy definitions is also taxable. It is the intent behind the recognition that determines its taxability: what is that the employer is recognizing? A “gift” for the employee with the highest production in a given month is a taxable reward, whether it is called a “gift,” an “award,” or a “reward.”
To relieve the administrative burden of tracking the value of small, insignificant items, the policy allows items of nominal value such as mugs, pens, etc., to be excluded when calculating the value of gifts and awards in the year. For example, if you give a coffee mug valued at $10 to each of your 1,000 employees, the CRA would not require you to include it when determining if a particular employee exceeds the $500 exemption in the year. We do not provide a threshold amount for what is considered to be nominal value. It is the employer’s responsibility to demonstrate that the nominal value of the item is reasonable.
Also, when gifts and awards of nominal value are given frequently or show a pattern suggesting additional remuneration, the CRA may consider such items to be taxable and require that they be included in the employee’s income.
The gifts and awards policy is meant to address specific types of recognition provided by employers to arm’s length employees. Often, other types of recognition are incorrectly classified as gifts or awards. Any of the items listed here are NOT part of the gifts and awards policy.
In some cases, the CRA may have another policy that exempts the benefit from taxation. For example, the CRA has a separate social events policy, meaning that while a Christmas party hosted by the employer does not fall under the gifts and awards policy, if the criteria of the social events policy are met, it may not be a taxable benefit to employees. For more information on other taxable benefit and policies, see the T4130, Employers’ Guide – Taxable Benefits and Allowances.
Now we'll look at some examples.
The first example is David. David receives a gift of nominal value in the year, a $15 t-shirt. Because it's a nominal value, the employer does not have to keep track of it when considering the exemption. David also receives two items that fall outside of the policy, a gift certificate for his birthday (although it meets the definition of gift, its near cash so it is taxable) and a trip valued at $400 as a reward for meeting a sales target. Although a trip is a good or a service and, therefore, non-cash, it’s taxable because it's a reward for performance. David also received four gifts and awards that do meet the policy criteria, that is, they’re non-cash and they meet the definitions described earlier in today's presentation. These gifts total $750. From that $750, you subtract the $500 exemption, for a total of $250. Adding that to the items that were outside the criteria of the policy, which equaled $475, we have a total income inclusion for David of $725.
Please remember that David had included the $250 in his income for the value of gifts and awards exceeding the $500. David will feature in another example later.
In our second example for the gifts and awards policy, we have Linda. Linda also receives an award of a nominal value in the year, a mug as a sustainable development campaign favor. Again, as a nominal award, it does not have to be included when calculating the exempt amount. Linda also receives a desk clock as a reward for completing a project, which falls outside the policy.
She also receives two items that do meet the policy criteria, that is to say, they’re non-cash and they meet the definition of gift or award under the policy. These two items total $675 less the $500 exemption, so we have $175 plus the $225 for the desk clock, which leaves Linda with an income inclusion of $400.
Finally, we turn to the long service award policy, which has been separate from the gifts and awards policy since January 2010.
One question that comes up frequently is, “What happens if the employee receives a long service award late?” For example, the employee is eligible for an award at 20 years of service, and again at 25 years of service, but for some reason, the employee does not receive the 20 year award until year 22. In this situation, the 25-year award is taxable because it has been less than 5 years since the employee received the last award. Generally, income is taxable in the year it is received. Consider the end of the calendar year: usually some of an employee’s wages received in the first pay period in the New Year relate to work performed in the previous year. However, the wages are income and are taxable in the New Year.
The exemption cannot be broken down to allow more than one tax-free long service award within a 5-year period.
Let’s look back at some examples. You’ll recall that David had $250 included in income from the value of gifts and awards that exceeded his gifts and awards exemption for the year. In the year, in addition to the gifts and awards he received in the previous example, David also received a non-cash award for 10 years of service. The value of the award is $275. It meets all of the policy criteria: it is non-cash; it has been five years since he received his last award; and it's for more than the minimum 5 years of service. So, under this particular policy, David does not have to include this amount in his income. However, the remaining exemption of $225 cannot be transferred to the gifts and awards to reduce his income inclusion there to only $25.
The policies are separate, and the exemptions are non-transferrable.
Our second example is Sandra. Sandra receives a non-cash award for seven years of service and she last received an award at five years of service. The value of this award is $400. Since it has been only two years since Sandra received her last award, this award is taxable in its entirety. Even if Sandra has exemption room under the gifts and awards policy, it cannot be used to exempt this long service award.
And finally, we have Patrick. Patrick receives a non-cash award for 25 years of service. It's been 5 years since his last anniversary award and the value of the award is $840. As you can see, it does meet the criteria of the long service awards policy except that it's worth more than the $500. You have to subtract the $500 exemption from the $840, for a total income inclusion of $340.
Here are a few points to keep in mind when recognizing your employees.
Gift certificates, regardless of the amount or why they were given to the employee, are ALWAYS taxable.
Performance-based awards are taxable, including instant awards, incentive awards, and recognition awards, such as “employee of the month.”
The value of gifts and awards that are valid under CRA’s policy are totaled to determine whether or not the $500 exemption is exceeded. Taxable gifts, awards, or rewards have no exemption, and the entire value of each and every taxable award must be included in the employee’s income for the year.
A long service award may only be given once every 5 years and has a $500 exemption.
If you are looking to expand your knowledge on any of the items covered in today’s webinar, there are resources available to help you on the CRA website. Go to cra.gc.ca and visit our web pages for businesses.
The CRA offers a number of references that may help you understand this and other taxable benefit policies as well as other payroll obligations.
They can be found on our website on the payroll web pages. A particularly useful guide for taxable benefits is the T4130 Employers' Guide - Taxable Benefits and Allowances.
There is also a video series about payroll and recorded webinars for businesses that you can view on the website.
This is all the time we have. I would like to thank you for joining me today. I hope that this webinar provided you with a better understanding of the gifts, awards and long service awards policy.
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