Transcript - Episode 4: Gifts and awards
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Host: Hello and welcome to the Canada Revenue Agency’s payroll podcast. On today’s show, we conclude our series on taxable benefits by taking an in-depth look at the CRA’s gifts and awards policy. Before we can delve into the nuances of the policy, there are a number of concepts we need to clearly define. I asked our subject matter expert, Kira Turner, how the CRA defines a gift.
Kira: A gift is a recognition of a personal event or a milestone in an employee’s life. For example, the employee gets married, the employee has a birthday, the employee retires, the employee gives birth to or adopts a child. Or a gift is a recognition of a significant public holiday where gift-giving is traditional, like Christmas, but probably not a civic holiday.
Host: Okay, so there has to be some kind of occasion for it to count as a gift.
Kira: Yes, within the parameters of the policy that we’ll be discussing in a few minutes, yes. For the purposes of CRA’s policy, an employer-provided gift would need to meet the definition of a gift for it to be possibly not taxable.
Host: There’s also an important distinction between an award and a reward. Could you talk a little bit about that? How do we define each one? What are the differences between the two and why do we make a distinction between them?
Kira: We make a distinction between them because the CRA does not wish to allow for disguised remuneration. An award, which may not be taxable within our policy in certain situations, is a recognition of an employment-related accomplishment or contribution to the overall well-being of the workplace. It’s not a recognition for performance. A reward is a recognition for performance or an incentive is a reward. If you meet your production targets, if you exceed your production targets by 30%, you’ll get this. If you exceed your production targets by 50%, you’ll get that. Or if you complete this project ahead of schedule, you get a TV. Those are rewards for performance and CRA’s view is that anything you are given to reward your performance is part of your pay, whether it’s a cash bonus or it’s a television. Nobody disputes that a cash bonus is something an employee has to pay tax on so you can’t choose not to give that cash bonus and give a TV instead and avoid the taxability by calling it an award. Essentially, the way I always like to put it is, employers hire employees expecting that they’re going to perform well in their position. They don’t look at the array of candidates and say, boy I bet you he’s going to be mediocre and pick him. They pick the person they think is going to be the best. Anything they pay them for doing well is just part of their regular salary and wages. So a valid award is something like an award of excellence, something where the employee has made an outstanding contribution to the workplace. A valid award under our policy, and this is the only situation where performance may play a role, is where there is clearly defined criteria, there’s a nomination process, a valuation process, and then one of, the best of the best of the best is picked. It’s not a situation where an employee who achieves, an employee who demonstrates behaviour A receives reward B. Or the nomination is merely a formality where if you’re nominated you’re going to get something. It’s not something like that. A valid award can be recognition for something like organizing, if your employer has a workplace charitable campaign, something like the United Way. An employee who takes time away from their duties and takes on that task as well could be recognized and that could be considered a valid award. An employee who comes up with a particularly innovative idea just on their own and suggests it to the appropriate area and the area studies it and says, you know something, this is a good idea and implements it, that could be a valid reason for an award, but not just you did well in your job or even you trained a new employee, here’s a reward, no. That’s something that’s expected in your normal workplace, that you would mentor new employees, that you might cover for an employee who’s on vacation or who’s away sick. Or you might cover for your manager when your manager is away on vacation. All of these are just part of your work, and anything you’re given for just doing your job is salary.
Host: Okay. It’s also important to understand the definition of a cash versus a non-cash gift or award. Could you touch a little bit on those concepts and how do we differentiate between the two?
Kira: Well cash is pretty much what it sounds like, right? So that’s your currency, cheques, negotiable instrument, that you can, it’s cash, so that’s fairly straightforward. Non-cash is anything else. However, within the gifts and awards policy, we have a concept and that is near-cash. Near-cash items are something like a gift card. A gift card isn’t actually cash but it behaves like cash. You spend it in a store or in a mall. There are some malls that you can get a gift card to the entire mall, acceptable in any store within the mall. Or some gift cards are good at multiple stores that are associated with each other like say, Homesense and The Bay, to put a Canadian business perspective on it. So a near-cash item is something that functions or behaves as cash or which can easily be converted to cash. In some of our older documentation, we mention things like gold bars or silver ingots because these are common items that are given by employers to employees.
Host: How would something like a voucher play into that, would that be considered near-cash as well?
Kira: We consider a voucher to be somewhat different from a gift certificate. So, a gift certificate is near-cash, it functions and behaves as cash. A voucher is essentially a token the employee can use to exchange for a very specific item. So, an example, the example I always use where a voucher is concerned is, for ease of administration or for various reasons, an employer might decide it’s easier to make an arrangement with a particular retailer that my employees are going to come in and exchange this token for this item rather than the employer buying a number of those items, transporting them all to the office and then handing them out at the office. A situation where this, and the situation, the example I always use is a turkey voucher. An employer may, as a Christmas gift to employees, give employees a voucher to redeem at a grocery store for a turkey. This makes much business sense because not all employees have the ability to accommodate 300 frozen turkeys in the office. So the employee gets this token, goes to the appointed grocery store and says here’s my token, I’m taking my turkey.
Host: So it sounds like one of the important factors when we differentiate between something that may be taxable compared to something that may not be taxable is, an important factor would be the element of choice for an employee. Is that something that is important to consider?
Kira: Yes, very often it comes down to some traditional concepts about the intent of gift-giving. Usually, what you give is not the choice of the recipient. You, the employer, are choosing to recognize and acknowledge the employee in a particular way and you’re doing so by offering a gift and it’s traditionally the gift-giver’s choice as to what is given. If it’s simply a matter of an employee opening a catalog and pointing to this, I want this, how is that different than giving the employee the cash to just go and buy that?
Host: Okay, so that’s why there’s a difference between something like a voucher for a turkey and a gift card where the employee could go out and buy whatever they want.
Kira: Exactly. A voucher does not function as cash. Turkeys are not currency in Canada. It’s basically just the employer, it’s just symbolically giving a turkey that the employee has to go and pick up somewhere else as opposed to giving the employee a gift card to a grocery store where they can go and buy whatever groceries they want.
Host: After the break, we’ll take a close look at how the concepts we’ve just defined fit within the CRA’s gifts and awards policy. Stay with us.
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Host: A gift or award that you give an employee is a taxable benefit from employment, whether it is cash, near-cash, or non-cash. However, the CRA has an administrative policy that exempts non-cash gifts and awards, in some cases. I asked Kira to help us understand what factors we need to consider when making this determination.
Kira: So CRA’s gifts and awards policy allows an employer to give, tax-free, an unlimited number of gifts and awards in a year with a combined maximum value of $500. If the value of valid gifts and awards under our policy exceeds $500, then that $500 is an exemption. So if the employee receives $800 worth of valid gifts and awards under our policy, then you take $800, subtract the $500 exemption and $300 has to be included in income. And I keep saying valid gifts and awards within our policy. It has to meet those definitions we just spoke of. A gift has to be recognition of a personal event or milestone, or a public or religious holiday where gift-giving is traditional. It can’t be good job, here’s a gift. And it has to be non-cash. It can’t be cash or near-cash, it has to be a non-cash item. So there is no exemption for a near-cash item or a cash item, even if it is a Christmas present. So it meets one criteria, it meets the definition of gift but because it’s cash or near-cash it doesn’t meet that. It has to be the right thing given for the right reason. So either the right thing given for the wrong reason, or the wrong thing given for the right reason, is taxable.
Host: Okay, and what about when we talk about the fair market value of a gift or award? Is there anything important that employers should know there?
Kira: Well, as we’ve mentioned on previous podcasts on taxable benefits, the fair market value is the highest price that can be obtained in an open market between two parties dealing at arm’s length. So, often the amount the employer pays, if the employer has to deal at arm’s length with a supplier, that could be a good indication of what the fair market value is although sometimes employers can obtain a discount by buying in bulk. It becomes, it’s not even particularly more complicated when the employer is providing their own good or service because if the employer is in the business of providing goods or services as part of their business, well then they know how much they charge in the open market for that good or service and how much people pay. So it’s not terribly difficult to determine fair market value for non-cash items.
Host: There are many separate policies when it comes to different types of awards that employees may receive. One I wanted to ask you about is when it comes to long-service awards. Could you explain what the CRA’s policy is on those kinds of awards?
Kira: Certainly. Now several years ago, the long-service awards were just part of the larger gifts and awards policy but for the 2010 tax year and subsequent, it was broken out to have its own policy. So the long-service awards policy allows an employer to recognize an employee’s service to the company as long as that service is for a minimum of five years and it’s been a minimum of five years since the employee has last received a long-service award. And what the employer can give is a non-cash long-service award valued at a maximum of $500 without incurring taxability. Much like the gifts and awards policy, this is an exemption so if the employer gives a $1,500 award you would take that $1,500 and subtract the $500 exemption from it and then you would include $1,000 in income. And as far as the five years, you can’t start at three, you can’t say you’ve given me three years of service, here’s an award. That award would be taxable. But you don’t have to start at five. You could do seven, twelve. Some employers might not start giving awards until year 15 or 20 or year 25. There’s no hard and fast rules it’s just that it must be a minimum of five years since the employee last received an award and it cannot be an award for service of less than five years.
Host: Thanks for listening to the CRA’s payroll podcast. Today’s episode was the final installment in our series on taxable benefits. If you have any questions about the show, if you’d like to provide feedback, or request a topic for a future episode, you can email us at email@example.com. We’d love to hear from you.
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