The taxation impact of business-related gifting (giving and receiving) has become quite confusing. To ensure you don’t wind up on the wrong side of the Canada Revenue Agency (CRA) when giving or receiving gifts, we put together this post to provide some clarity on the tax implications.
Accepting Gifts from Clients
The CRA allows small-business owners and self-employed individuals to receive gifts from clients. In order to ensure that the receiving of the gift is not taxable, however, it cannot be given in exchange for work completed.
Accepting a gift which could be seen as payment for goods or services would require you to declare the value of the gift as income in your tax return. Failure to do so could expose you to penalties, fines or even jail time, depending on the nature of the gift.
Giving Gifts to Clients
According to the CRA, you may deduct all reasonable business expenses from your business income on your tax return, and entertainment and meals qualify as business expenses if they are incurred in the pursuit of establishing or maintaining clients.
If you give a client a gift certificate to a restaurant or a pair of tickets to a hockey game, those gifts are considered to be meals and entertainment expenses, so you may write off half of their value.
Keep the receipts for your records and a few notes indicating how the expense was business related. In some cases, you may also be able to claim 100% of the cost of client gifts as an advertising or promotional expense.
Giving Gifts to Employees
In addition to giving gifts to clients, you may occasionally want to give gifts to your employees. The CRA allows business owners to give non-taxable gifts to employees as long as it is a special occasion, such as a holiday or a birthday, and it also allows business owners to give awards to employees.
If these gifts or awards are not cash and not near cash, they are not taxed. For example, if you give your employee a golf club for his birthday, your employee doesn’t have to pay tax on that item. However, if you give him cash or a gift certificate (which is near cash), you have to report the gift on your employee’s T-slip as a taxable benefit, and your employee has to pay taxes on it. As an employer, you can then write off that near cash gift as a business expense.
The CRA distinguishes between awards and rewards.
In most cases, 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 while a reward, in contrast, is typically tied to work performance and is a taxable benefit.
Employers are allowed to give employees an unlimited amount of non-cash gifts and awards, however, as soon as the fair-market value of those gifts go over $500, the difference must be booked as a taxable benefit on your employee’s T4.