The subject of business-related gift giving and receiving can be rather confusing. To ensure you don’t accidentally give or receive a gift and ignore its tax implications, you need to move forward carefully.

Overview

  • 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.
  • Employees do not have to pay tax on gifts and awards that are not cash and not near-cash.

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 completed. If you accept a gift that could be construed as 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, fines or jail time, depending on the nature of the gift.

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Claiming the Cost of Gifts as Business Expenses

Giving Gifts to Clients

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 in the pursuit of establishing or maintaining clients. For example, 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. As a result, 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 percent 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 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, and your employee has to pay taxes on it. However, you can write it off 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.
  • A reward, in contrast, is typically tied to work performance and is taxable.
For example:
  • If you offer a new 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 is taxable.
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References & Resources