As the holiday season approaches, and plans are made for seasonal celebrations and gift-giving, the idea that such activities could have tax consequences isn’t one that occurs to most Canadians. And, in most situations, there is no need to consider that unwelcome possibility, as our tax system has no application where gifts are given and parties held between and among friends and family members. However, where the gift giver or person or company sponsoring the holiday celebration is the employer of the recipient employee, there can be unintended (and unwanted) income tax consequences for that employee.
It’s traditional for employers to provide employees with a little something “extra” at this time of year. Sometimes it’s a salary or wage bonus, or a gift, or a holiday celebration sponsored and hosted by the employer – and sometimes it’s all three. What employers certainly don’t want to do is to create a tax headache for their employees. Unfortunately, it’s also the case that a failure to properly structure such gifts or other extras like holiday parties can result in a tax cost to those employees when it comes time to file the tax return for the year next spring.
Trying to formulate and administer the tax rules around holiday gifts and celebrations is something of a no-win situation for the CRA. On an individual, or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill-will generated by imposing tax consequences on holiday gifts or parties. Nonetheless, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such situations don’t slip through the tax net.
The starting point for the Canada Revenue Agency’s rules is that any gift (cash or non-cash) received by an employee from their employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year.
The CRA does, however, carve out some administrative concessions in this area, allowing non-cash gifts (as defined by the Agency, and within a specified annual dollar limit) to be received tax-free by employees, where such gifts are given on significant dates or events, like religious holidays such as Christmas or Hanukkah, or on the occasion of a birthday, a marriage, or the birth of a child.
In sum, the CRA’s administrative policy is that non-cash gifts to an arm’s length employee (meaning, generally, someone who is not related to the employer), regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee and must be included on the employee’s T4 for the year, and on which income tax must be paid.
It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers both currency and cheques to be cash. As well, in situations in which an employee selects and purchases something, submits a receipt to the employer, and receives reimbursement for that purchase, that employee is considered to have received a cash gift, in the amount of the purchase/reimbursement.
Other instances of gifts made to employees are not so clear cut, as even a gift or award which cannot be converted to cash can be considered by the CRA to be a near-cash gift. Drawing a firm line between cash/near-cash gifts and non-cash gifts can be difficult, and the CRA provides the following information to help illustrate that difference.
Examples of a near-cash gift or award
- Something easily converted to cash, such as bonds, securities, or precious metals;
- Gift cards (with the exception outlined below);
- A prepaid card issued by a financial institution (for example, Master Card, Visa, and American Express) that can be used to pay for purchases; and
- Digital currency which is electronic money (i.e., cryptocurrencies not issued by a government or central bank).
At one time, the CRA considered all gift cards to be near-cash gifts and fully taxable to the employee who received one, but, since 2022, the Agency has provided an administrative concession in that area. Specifically, a gift card that meets all of the following criteria will be treated as a non-cash gift, and subject to the usual rules governing such non-cash gifts:
- the card comes with money already on it and can only be used to purchase goods or services from a single retailer or group of retailers identified on the card;
- the terms and conditions of the gift card clearly state that amounts on the card cannot be converted into cash; and
- the employer keeps a log to record details of the gift card information including the date, the employee’s name, and the reason for providing the gift card, as well as the type and amount of the gift card and the name of the retailer.
While the rules around holiday gifts and celebrations are not particularly difficult to understand, they are very detailed, and it may seem nearly impossible to plan for employee holiday gifts without running afoul of one or more of the CRA’s rules and administrative policies in this area. However, designing a tax-effective plan is possible, if the following rules are kept in mind.
- Cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, almost always create a taxable benefit to the employee. The sole exception to that rule is the exception carved out by the CRA which now treats gift certificates as non-cash gifts, but only where such gift certificates meet the criteria listed above.
- Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.
When it comes to holiday parties and celebrations, the rules imposed by the CRA in determining whether such events create a taxable benefit for employees have a long and tortuous history. The current rule is that a holiday social event does not create a taxable benefit to employees where the event is open to all employees (for instance, not just management level employees) and the per person (including spouses or common-law partners of employees) cost of the event is below a specified threshold.
For the 2025 tax year, an employer-sponsored social event will not create a taxable benefit for employees if the per person cost is $150 or less (including taxes). Ancillary costs such as transportation home, taxi fare, and overnight accommodation for attendees are not included in the total cost limit for the event.
Finally, employers should note that where the per person dollar limits outlined above for holiday events are exceeded, the entire per person cost of the event (including ancillary costs) is treated as a taxable benefit – not just the amount by which the per person cost exceeds those prescribed dollar limits. And, finally, in order to benefit from those prescribed limits, employers are restricted to holding six or fewer employer-paid social events each year.
The range and variety of social events and employee gifts which can be provided by an employer to its employees is almost limitless, and where the government seeks to draft rules to govern the tax treatment of such a range of possibilities, some degree of complexity is inevitable. The best advice to be given to employers in the circumstances is to consider carefully the kinds of gifts which are given (avoiding cash and near-cash gifts) and to be mindful of the dollar amount limits imposed on non-cash gifts and employer-paid social gatherings. No matter how enjoyable the social occasion may be, or how much the gift is appreciated, any kind of party or gift which increases the employee’s income tax bill for the year is likely to leave the employer looking less like Santa and more like Scrooge.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
