With the winter holidays around the corner and the New Year fast approaching, you might be considering giving gifts to your staff as a token of your appreciation for their amazing work. You might also be on the receiving end of gifts from partners, suppliers and service vendors you work with.
This might lead you to wonder if there are tax implications involved in these matters.
Well, we break down everything you need to know on the topic.
Giving Gifts to Your Staff
The CRA allows all business owners to give gifts to their staff as long as it is deemed a special occasion (ex. a holiday or a birthday) or as an award to employees.
If these gifts or awards are not cash and not ‘near cash’ (stocks, gold, gift cards), they are not taxed. For example: If you give your team member a mug for their birthday, the employee doesn’t have to pay tax on said item. However, if you give them cash or a gift card (which is near cash), you have to report this gift on your employee’s T-slip, and the employee would then have to pay taxes on it. However, this means you can write it off as a business expense.
The CRA does distinguish between ‘awards’ and ‘rewards.’ To be considered an award, it must only be available to a limited number of recipients, and your employee must have done something special to receive it.
A reward, in contrast, is typically tied to work performance and is taxable.
If you offer a new shirt or hat to your employee of the month, the CRA considers that a non-taxable award. However, if you give a cash bonus to an employee for completing a project ahead of schedule, that is a reward and would be taxed.
Accepting Gifts From Clients
The CRA allows small-business owners and self-employed individuals to receive gifts from clients, but to ensure the gift is not taxable, it cannot be given in exchange for work that is completed.
If you accept a gift that could be considered a payment for goods or services, you are responsible for declaring the gift as income on your taxes. Failure to do so could expose you to penalties and other serious implications.
Claiming the Cost of Gifts as Business Expenses
According to the CRA, you may deduct all reasonable business expenses from your business income on your tax return.
Entertainment and meals qualify as business expenses if they are incurred to establish/maintain client relations. For example, if you give a client a gift card to a restaurant or a pair of tickets to a hockey game, those gifts are considered to be meals and entertainment expenses. As a result, you may write off half of their value.
As a rule for best practice, always keep your receipts for your records and a few notes indicating how the expense was business related, in case of an audit. In some cases, you may also be able to claim 100% of the cost of client gifts as an advertising or promotional expense.
Employees do not have to pay tax on gifts and awards that are not cash and not near-cash. This can be written off as a business expense by the owner. Employees do, however, have to pay tax for rewards, or cash/near cash bonuses.
Gifts from clients are non-taxable as long as they are not given in exchange for goods or services.
Reasonable expenses used for establishing or maintaining clients may qualify as business expenses. Always keep your receipts and notes on how they were business-related, on hand.
Shift Accounting works with over 80 successful clinics across Canada. We go beyond basic book-keeping, providing a range of financial and administrative services, as well as consulting and CFO contracting. We are invested in your success. Contact us today for more information on how you can take the next step to grow your practice and build a more profitable business.