Gifts, Awards, and Long Service Awards
This is a recording of a live webinar broadcast in March 2012. If you have any further questions, please consult our web site or call our business enquiries line at 1‑800‑959‑5525. We hope you enjoy this videocast.
I'm here today to talk to you about the CRA's gifts and awards policy and long service awards policy. These are two of my favorite policies to deal with, because there's such variation involved. They're never boring. And hopefully by the end of this presentation, you'll find these policies as interesting as I do.
Today, we're going to talk about the definitions and concepts you'll need to understand in order to apply the policy to the recognition you give your employees. And then after discussing those, we'll go over the policies themselves as well as several examples that will help you to apply the policy to the recognition you give your employees.
The first thing, as I said, we will be talking about, are the definitions and concepts.
In the context of the gifts and awards policy, there are a number of words that we use in a very specific manner. Understanding how we define these words is essential to being able to apply the policies correctly.
Moving on to slide number 4, the first thing we're going to talk about are gifts. What is a gift? A gift is a recognition of a personal event or milestone in an employee's life such as birthday, marriage, birth or adoption of a child, or retirement, or, alternatively, a gift may be the recognition of a public or religious holiday where gifts are traditionally exchanged.
An award, on the other hand, recognizes employment-specific accomplishments, such as innovation awards, where employees make suggestions based on their observations that may help you to improve your processes or your business, or an award of excellence or volunteering your time in a workplace charitable campaign. An award recognizes and encourages an employee's contribution to the overall well-being of the workplace, however; it is not a recognition of an employee's performance in their job. Recognition of job performance is a reward and is always taxable.
Awards that meet the criteria of our policy are often based on a formal nomination process where there are clearly established criteria that all people in the company are aware of. Managers and other employees may nominate particularly outstanding candidates for these awards and then these candidates are evaluated by a committee and the committee chooses one, or a small number of employees to receive the award. Truly, the winners of these awards are the best of the best and in this type of formal award process; the employee's performance in their job may play a role.
On the other hand, a reward or an incentive is a 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 almost always performance based and therefore they are always taxable.
Moving on to slide number 8, the fair market value is something that's very important to understand because fair market value is what we use, both for 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.
Consider for example, a trophy or a plaque, where the cost of the materials may be considerably more than the value of the trophy or plaque to anyone other than the recipient of that item.
In this case, the fair market value may be lower than the employer's cost. Alternatively, if an employer is able to purchase a large number of items at a significant discount because he's buying in bulk, then the fair market value would actually be higher than the employer's cost. These are some considerations that you'll have to keep in mind when determining what the fair market value of the items you give to your employee is.
A company logo on an item may have an impact on its fair market value. It may decrease the value, although not necessarily to zero, or in some situations it may increase the value. How that logo impacts the value of the item depends on how much it interferes with the employee's use and enjoyment of that item.
Consider a leather briefcase with the subtle logo engraved on the clasp. In this case, that logo does not really interfere with the employee's use and enjoyment. It's still a lovely bag. On the other hand, an embroidered logo on the back of a jacket, boldly and colorfully placed, may have a much more significant impact on its value because it is more likely to interfere with that employee's use and enjoyment. It is important to note that there are situations where a logo does increase the fair market value. People will pay a great deal of money to have particular logos on their purses, luggage or athletic gear.
Moving on to slide number 9, there are certain concepts you'll need to understand in order to apply the policy and these three things go hand in hand. We have cash, near cash and non-cash. Cash is fairly straightforward and something everyone understands. That is currency. Paper money, coins, cheques, it's something that you can take into any store or any bank and deposit or spend as you wish. A near cash item is something that can be easily converted to cash such as bonds or securities or precious metals, although in all honestly, I have not found many employers who give their employees gold nuggets or gold bars as recognition. Another type of near cash item are those that function as cash like gift certificates which you take into a particular store and spend as cash. Non-cash items are tangible goods and services that an employer gives an employee.
On slide 10 we'll talk a little more about gift certificates.
As I said, gift certificates function as cash. They have an assigned cash value and can be taken into a store or a chain of stores or even an entire mall and spent as if they were cash.
They also offer the bearer an element of choice that is not traditional where gifts or awards are concerned. Therefore, we consider gift certificates to be near cash and as an aside, gift certificates and gift cards are the same thing, it's just a matter of format. One is more paper based, one is more plastic based.
However, gift certificates are quite different than vouchers or event tickets. A voucher, although it might be a ticket itself or a certificate, is something that an employee can take to a particular store in exchange for a specific item at or up to a specific value.
Such vouchers are often given for practicality reasons where storage is of a concern. Consider an employer who wishes to give their employees turkeys as a Christmas gift. Rather than having to worry about storing dozens or hundreds of turkeys in the office or having their employees keeping turkeys at their desks all day, the employer can arrange with a local grocery store to exchange the voucher for a turkey of up to a certain value. The employee can't decide, I don't like turkey - I'd rather have ham for Christmas dinner, and get a ham instead. The only item that the employee can exchange that voucher for, is a turkey.
An event ticket is quite similar in the sense that the employee really has no choice in what that event ticket is used for. An event ticket is for a specific event at a specific place on a specific time. You can't decide that you don't like this particular concert on the Thursday night and would rather go to a different group that's playing on Saturday night. You have to go to the concert listed on the particular event ticket. This is quite different than a gift certificate, for example, to a movie theater where the employee can choose what show to see, what date to see it, what time to see it and may choose instead of actually using it for a movie, to use it at the concession stand, in-house restaurants or even the arcade. Gift certificates offer a much wider array of choice to the bearer.
Now that we understand some of these basic concepts, we're going to talk about the gifts and awards policy itself.
On slide 13, you'll see the basics of our policy. We allow the employer to give tax-free an unlimited number of noncash gifts and awards in the year with the combined total value of $500. The $500 is an exemption. What this means is that if the employer gives $800 worth of gifts and awards, then he can subtract the $500 exemption from that $800 for an income inclusion of $300.
For a gift or award to be tax free, it must meet both criteria of the policy in that it be non-cash and that it be given for a reason that meets our definition of gift or award which I outlined in slides four to six.
If it is a non-cash award but is given for a performance-based reason, it is taxable even though it's non-cash because it doesn't meet the definition of award. If it is a birthday gift but it's a gift certificate or cash, then it is also taxable because even though it meets the definition of gift, it's a non-cash or near cash award.
So ultimately, once you decide whether the item is cash, near cash or non-cash, the next question to ask yourself is why is it being given? The intent behind the giving of the gift, award or reward is a large factor in what determines whether or not it is taxable.
You cannot make an otherwise taxable item non-taxable by calling it a gift. In addition to what I've just outlined, the CRA recognizes that this policy can be burdensome and to relieve that administrative burden, the CRA does allow that items of nominal value given that meet the policy criteria don't have to be tracked, kept track of, in order to reach the exemption total.
So, for example, if an employer gives each and every one of their 1,000 employees a coffee mug valued at $10 as a Christmas gift, they don't have to keep that in mind when calculating whether or not a particular employee has met their exemption. However, if the number of these nominal gifts and awards starts to happen more and more frequently and starts to indicate a pattern of additional remuneration, the CRA may consider it to be taxable and require it to be included in the employee's income.
There are a number of things that are not part of the gifts and awards policy. They're often mistakenly included in the gifts and awards policy and they are listed on slide 14.
Some of these things have other policies that may make them non-taxable, ,for example, the social events policy. Employers often have an event such as a Christmas party for their employees and they wonder if it is non-taxable under the gifts and awards policy as a Christmas gift. A party is not part of the gifts and awards policy. However, the CRA does have a social events policy and if the criteria of that policy are met, then the event may not be a taxable benefit to employees. For more information on the social events and other taxable benefit policies, you can turn to the CRA's guide, the T4130, Employer's 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 birthday gift of a gift certificate. Although it meets the definition of gift, it's near cash so it is taxable and a reward for meeting a sales target, of a trip valued at $400. Although a trip is a good or a service and therefore, non-cash, it is taxable because it's a reward for performance. David also received four gifts and awards that do meet the policy criteria, that is, they are 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 to that the items that were outside the criteria of the policy which equaled $475, we have a total income inclusion for David of $725. I'd like you to keep David in mind because we're going to see him in a later example.
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 and that's a mug as a sustainable development campaign favor and again, as a nominal award, it does not have to be included when calculating the exempt amount. Linda also receives something that falls outside the policy and that is a reward for completing a project, of a desk clock.
She also receives two items that do meet the policy criteria. Again, that is, they are non-cash and they meet the definition of gift or award under the policy. These two items total $675 less the $500 exemption, we have $175 plus the $225 for the desk clock, leaves Linda to an income inclusion of $400.
Now we're going to turn to the long service awards policy, which, since January 2010 has been separate from the gifts and awards policy.
On slide 18 we talk about the basic premises of the long service awards policy. An employer may give an employee tax-free a non-cash, long service award valued at up to $500, provided it is for a minimum of five-year service and it has been a minimum of five years since the employee received their last long service award.
Like the gifts and awards policy, the $500 is an exemption so if the value is over the $500, only the amount in excess of $500 is included in income.
However, if the value is less than $500, you cannot use the remaining exemption amount and add it to the gifts and awards exemption to allow you to give more gifts and awards tax-free.
By the same token, in the year the employee is eligible for a long service award, you can't borrow exemption room from the gifts and awards policy to add to the long services awards. The two exemptions are completely separate.
One question I received quite often in connection with this policy is what happens if the employee doesn't realize they're eligible for a long service award until after that long service award should have been given? For example, the employee has worked -- was eligible for an award at 20 years but didn't realize it until year 22, and then they're eligible again for a long service award at 25 years. In this case, that second award at 25 years would be taxable because it has not been five years since the employee received a last award. Income is income in the year it is received in most circumstances.
So even though it was for year 20, the fact that it was received in year 22 means that the item received in year 25 must be taxable. To better understand, consider at the end of a tax year. You work at the end of the year and you receive your first pay in the new year, often some or even most of the days you work, for which you are receiving pay in that first pay in the new year, relate to work you performed in the previous year. However, despite this, the income is all taxable in the new year, not the previous year.
So, turning to some examples, on slide number 19, we meet David again. In the year, David also, in addition to the gifts and awards David received in the previous example, David also received a noncash award for 10 years of service. It has been five years since he received his last reward and the value of the award is $275. It meets all of the policy criteria, it is non-cash and it has been five years since he received his last award and it's for 10 years of service, which is greater than the minimum five years of service. So David under this particular policy, David does not have to have any amount included in income. However, the remaining exemption of $225 cannot be transferred to the gifts and awards to further reduce his income inclusion there to only $25.
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. And 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, that 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 five 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 for it's worth more than $500 so you subtract the exemption from the $840 for a total income inclusion of $340.
To recap, there are several points that you need to remember when applying the gifts and awards or long service awards policy. Cash and near cash gifts and awards, including gift certificates, are always included in income. No exemption amount applies to cash and near cash items. They are taxable from dollar one.
It's also very important to distinguish between an award and a reward. And I can tell you since I've been dealing with this policy for six years now, that is probably where most of my questions come from, whether a particular item is an award or whether it's a reward. So if you're having trouble making that distinction, you're not alone. Many, many people have that same problem.
Also, there is no exempt amount for taxable gifts and awards or rewards, so there's no $500 exemption if it's a performance based reward. It is entirely taxable. And the final point to keep in mind is that a long service award can only be given once tax-free, once every five years.
Moving on to our reference slide, slide number 23, the CRA offers a great deal of information on our website. There are our payroll web pages, Income Tax Technical News Number 40 which announced the gifts and awards policy when it changed in the late 2000s and the T4130 Employers' Guide - Taxable Benefits and Allowances. Our website also offers an interactive questionnaire that employers can use to help you to determine if the gifts and awards you give your employees are taxable.
So please visit our website at www.cra.gc.ca.
I'd like to take this opportunity to thank you for your attention. If you have any other questions on gifts and awards, or other taxable benefit policies, please consult our website or call our business enquiries line at 1‑800‑959‑5525. We hope you enjoyed this videocast.
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