Employee Gifts: Understanding the Canadian and Quebec Tax Rules

Offering gifts to employees is a thoughtful way of recognizing their hard work and dedication. However, to ensure tax compliance, it’s essential to understand the rules surrounding these gifts. Here’s a handy guide to help HR professionals navigate the Canadian and Quebec tax rules regarding employee gifts.

Please note that an accounting firm has validated this article to ensure accuracy. However, given the complexity of tax regulations, it’s always best to consult an expert to ensure you follow all the rules.

Let’s start by clearly defining the terms that will be used throughout this article so that we understand the distinctions:

What is a gift?

A gift is something you give to an employee on a special occasion such as a birthday, wedding, childbirth, or religious holiday.

What is an award?

An award is given in recognition of employment-related achievements, such as reaching a certain number of years of service or providing outstanding service. It is intended to recognize an employee’s overall contribution to the company, rather than his or her performance.

What is a reward?

According to the CRA, a reward is given for reasons related to an employee’s performance.

What is a gift or award in kind?

A gift in kind, according to the governments of Quebec and Canada, refers to any benefit, reward or present offered to an employee in a form other than monetary. This can include goods or services, such as tickets to shows, electronic items, hotel stays, etc. These gifts are often given to mark years of service or to celebrate special events.

What is a near-cash gift or award?

According to Canadian tax regulations, this refers to items that, although not money, can be easily converted into cash. This includes gift certificates, vouchers, gift cards that don’t meet all the conditions, prepaid cards issued by a financial institution to certain payment networks (e.g., Mastercard, Visa, etc.), and digital currency (e.g., cryptocurrency).

The tax rate on these rewards varies according to the nature and context in which they are offered. For example, a voucher that can be easily converted into goods or services, in the same way as cash, will be taxable. But gift cards that respect the right conditions and context, as we’ll see later, will be non-taxable.

Tax Rules for Gifts and Awards in Canada

Understanding tax rules is crucial to ensure employee gifts comply with legal requirements. Here are the main tax rules concerning gifts and rewards in Canada:

1. Gifts in kind up to a total value of $500 per year are not taxable. If the total value exceeds $500, the excess is taxable. For example, if an employee receives a gift in kind of $600, $100 will be taxable.
2. Any gift or award in cash is always taxable, regardless of value. For example, a $50 cheque is fully taxable.
3. Service awards offered every five years are tax-free, up to a value of $500. If the amount exceeds $500, the excess is taxable. For example, a 10-year service award worth $700 means that $200 is taxable.
4. Limits on gifts and awards: The $500 limit for gifts in kind or cash equivalents, when specific conditions are met, is separate from the limit for awards. As a result, an employee may receive up to $1,000 tax-free in gifts each year, provided the specific criteria for each category are met.

Certain items may be excluded from your $500 limit, including

• Low-value items such as coffee, tea, mugs, plaques, trophies, etc.
• Gifts and awards provided through prize draw
• Gifts and awards provided through lotteries
• Loyalty and other points programs.
• Social events and hospitality functions

5. Any gift or award in kind associated with an employee’s work performance or output is a taxable benefit.
6. At the Federal level, gift cards are non-taxable if they’re considered non-cash, provided they meet certain conditions

• Gift cards must have a cash balance that can only be used at a single retailer (or group of identified retailers).
• They must not be convertible to cash.
• The employer must keep a register containing certain information, including the employee’s name, the date of issue, the reason, type, and amount of the card, and the name of the retailer(s).

If all these conditions are met, the card is a non-monetary gift; if not, it is considered a near-cash benefit and must be treated as such.

By understanding and correctly applying these tax rules, employers can offer gifts and awards thoughtfully while complying with legal requirements. This helps maintain a positive relationship with employees while ensuring tax compliance.

Concrete examples of employee gifts in Canada

Gifts and awards for years of service

Scenario A: An employee celebrates 10 years of service with your company and, as an award, you give him a $1,000 gift card to his favourite restaurant. Although this card is considered a non-monetary gift according to the established criteria, the amount exceeds the $500 limit allowed for awards. As a result, $500 will be taxable to the employee, based on his tax rate.

Note: To find out an employee’s tax rate, you need to consult his or her tax information, generally available on the pay slip or tax returns. The tax rate depends on several factors, such as total annual income and province of residence.

Scenario B: An employee celebrates 5 years of service with your company. To mark this special occasion, you give her a $200 gift card, to a local bookstore. Since the gift card is for a special occasion, is not convertible to cash and its total value does not exceed $500, it is not taxable to the employee.

Gifts for an Employee Life Event

Scenario A: To celebrate your golf enthusiast employee’s birthday, you give him a box of golf balls valued at $50. Since this gift is in kind and well below the $500 limit, it will be entirely tax-free.

Scenario B: One of your employees has just given birth to her first child. To congratulate her, you present her with a gift package filled with products for both baby and mom, valued at $700. Since this amount exceeds the $500 limit, the employee will have to pay taxes on the $200 excess.

Employee Contribution Rewards

Scenario A: An employee receives a spa and massage package for two, valued at $1,000, in recognition of outstanding annual sales performance. Under CRA regulations, this amount is fully taxable.

Scenario B: A manager chooses to reward one of his employees for her contribution to the company during the year with a coffee machine valued at $150. Since this reward is not directly linked to performance and its value is below the authorized threshold, it will be non-taxable for the employee.

Tax Rules for Gifts and Awards in Quebec

Every province in Canada has its own tax rules regarding employee gifts and awards. Quebec’s rules are similar to those of the Federal Government. Here’s an overview.

Side Note: The Quebec Government website prefers the term “Rewards” over “Awards” when referring to gifts related to work contributions and performance. To keep this article concise, we will continue to use “Awards” for work-related contributions and “Rewards” for gifts tied to performance.

1. Tax-free gifts and awards: The total value for tax-free gifts and awards is $500, taxes included, per calendar year. If the total amount exceeds $500, the excess is taxable.
2. Gifts and awards in cash: Gifts and rewards in cash (such as prepaid credit cards) are always taxable.
3. Service awards: Service awards are tax-free up to a value of $500 if offered at intervals of at least five years. As in the rest of Canada, if the value exceeds $500, the excess is taxable.
4. The maximum tax-free amount granted for gifts and awards to an employee may not exceed $1,000 per year, divided into $500 for gifts and $500 for awards.
5. Rewards of work performance: providing rewards for outstanding performance is fully taxable.
6. Gift vouchers, gift certificates, and gift cards: When used to purchase goods or services from one or more merchants, these items are not considered gifts or awards that can easily be converted into cash and are therefore not taxable. As we saw earlier, the gift card must also meet certain specific conditions to be non-taxable. On the contrary, if the gift card, gift certificate, or gift voucher can be easily exchanged for cash, then it is considered fully taxable.
7. In Quebec, as in Canada, the cost of gifts and rewards is fully deductible from the employer’s income, provided it is reasonable, even though such gifts or awards are tax-exempt for employees up to a certain threshold. Employees, however, must report any amounts that exceed the thresholds as part of their income.
8. GST and QST on gifts and awards must be included in the employee’s tax calculation.

Concrete examples of employee gifts in Quebec

Gifts and awards for years of service

Scenario A: As part of your recognition program that celebrates employees every five years, you award an employee a complete camping kit for her 10 years of service, valued at $900. This gift will be partially taxable, as the first $500 of a years-of-service award is non-taxable, while the remaining $400 is subject to tax.

Scenario B: An employee receives a commemorative trophy personalized with his name and the company logo in recognition of years of service. Since the trophy is a memento of symbolic value, it is not considered a taxable benefit.

Employee Contribution Rewards

Scenario A: To celebrate the outstanding sales performance of one of your employees, you offer her a tour and tasting at her favourite vineyard, valued at $600. Since the reward is given to highlight exceptional work performance, the entire $600 is taxable to the employee.

Scenario B: You’ve just completed a long-term project with exceptional results. To reward your team, you offer them a $100 Amazon gift card. Since this recognition is directly linked to work performance, the entire gift card is taxable to your employees, even if it’s below the $500 threshold for non-taxable rewards.

Gifts for Employee Life Events

Scenario A: To celebrate an employee’s birthday, you give her a box of personal care products, valued at $50. You notice, however, that this same employee has received two other gifts over the year: a $150 air fryer for Christmas, and an overnight stay at the hotel of her choice, valued at $350, to celebrate her wedding.

The total value of the gifts received for the year is now $550. Since this amount exceeds the government’s allowable limit, the employee will be taxed on her birthday gift.

Scenario B: To celebrate the arrival of a new child in the family of one of your employees, you offer him a gift basket filled with baby items valued at $200. Since the value of the gift is under the $500 limit allowed by tax law, the employee won’t have to pay tax on it.

A Note on Social Events

Did you know that the events you host in-house can impact the taxes your employees have to pay?

Costs associated with social events, such as year-end parties, are non-taxable as long as they do not exceed $150 per person. For instance, if a holiday party costs $200 per employee, the first $150 is tax-free, but the remaining $50 is taxable. At a tax rate of 20%, this means each employee will pay $10 in taxes on the excess amount.

However, if the company organizes a summer picnic costing $80 per employee, this amount will not be taxable, as it falls below the $150 threshold. Certain conditions must also be met for an event to remain non-taxable: all employees must be invited, and the total number of social events in a year must not exceed six.

Lastly, if gifts are provided at these events, the tax rules outlined in

Practical Tips for HR Professionals

Here are a few tips to help you manage employee gifts effectively and avoid tax surprises to deliver an optimal employee experience.

1. Track all gifts: Maintain a record of all gifts, awards, and rewards given to each employee to monitor their status and ensure you don’t exceed the taxable threshold
2. Ensure clear communication: Clearly inform employees about which gifts are taxable to avoid confusion and promote transparency when preparing tax returns.
3. Plan ahead: Create a budget for gifts and events, allowing flexibility for unexpected expenses, so you can celebrate important employee milestones without exceeding tax thresholds.
4. Consult the experts: Work with your accounting firm to ensure tax compliance and effective budget management.”

By understanding these tax rules, HR professionals can celebrate their employees’ achievements and milestones while remaining compliant with Canadian and Quebec tax laws. Recognizing employees’ hard work is important, and doing it correctly ensures that everyone benefits without tax surprises. For more detailed information, consult the Canada Revenue Agency and Revenu Québec guides, or contact your accounting firm.