CRA could tax firm items to workers: Learn how to know if it is tax free

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Have you ever acquired a present out of your employer this vacation season? Relying on what you bought, and its worth, that present could also be tax free, or it could possibly be thought-about a taxable employment profit.

The tax guidelines surrounding items by employers had been up to date final yr, so with the vacations approaching, what higher time to overview the rules, together with the Canada Income Company’s up to date administrative positions.

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For starters, the CRA distinguishes between items, awards and long-service awards. The worth of items and awards are usually taxable to workers as employment revenue, however sure non-cash items and awards is probably not taxable underneath the up to date administrative insurance policies.

What’s the distinction between a present and an award? A present is one thing given to an worker for a special day comparable to a non secular vacation, birthday, wedding ceremony or the beginning of a kid. Items given round this time of yr will usually fall underneath this class.

An award is given for an employment-related accomplishment comparable to excellent service, or an worker’s suggestion. It acknowledges an worker’s “total contribution to the office, not recognition of job efficiency.” A legitimate, doubtlessly non-taxable award has clearly outlined standards, a nomination and analysis course of, and a restricted variety of recipients, based on the CRA.

Distinction this with a reward, which is supplied to workers for performance-related causes, comparable to assembly or exceeding gross sales targets, or finishing a undertaking. These rewards are thought-about to be taxable advantages to the worker, akin to a bonus or additional compensation.

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Underneath the CRA’s administrative coverage, workers can obtain a limiteless variety of tax-free non-cash items or awards every year, supplied the mixed whole honest market worth of these items and awards is lower than $500 (together with tax).

Excluded from this $500 restrict are small gadgets or gadgets of a trivial worth comparable to espresso or tea, T-shirts, mugs, plaques and trophies. If, nonetheless, the whole of non-cash items and awards is greater than $500 in a calendar yr, the quantity over $500 will probably be thought-about a taxable employment profit.

Underneath the brand new CRA steering issued for 2023, long-service awards have their very own $500 restrict, however the unused portion of the $500 restrict for non-cash items and awards mentioned above can’t be utilized to long-service awards.

As of this yr, a long-service award gained’t be taxable if it’s a non-cash present or award, it’s given in recognition of 5 or extra years of service with the employer, it has been at the very least 5 years because the final time the employer gave the worker a long-term service award and the honest market worth of the award is $500 or much less (together with tax). Lengthy-service awards that fail to satisfy all these situations are thought-about to be a taxable employment profit.

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The CRA’s up to date administrative insurance policies on tax-free items and awards don’t apply if the present or award is taken into account money or “near-cash.” In that case, the profit is taxable. For this goal, money consists of foreign money (or its equal) and cheques. It additionally consists of reimbursements, the place the worker will get to pick out their very own present, purchases it themselves after which submits a receipt to the employer, receiving a money reimbursement in return.

Close to-cash gadgets, additionally excluded from the tax-free coverage, embody issues simply transformed to money comparable to bonds, securities, valuable metals/jewels, cryptocurrency or a pay as you go bank card that can be utilized to pay for purchases.

What about present playing cards? Previously, the CRA has thought-about them to be near-cash, and thus all the time taxable, however in 2022, the CRA modified its administrative coverage and introduced that present playing cards, together with present certificates, chip playing cards and digital present playing cards, will be thought-about “non-cash” and thus doubtlessly non-taxable supplied the cardboard meets sure situations.

First, it comes with cash already on it. Second, it could solely be used to buy items or providers from a single retailer or a bunch of shops recognized on the cardboard. And, lastly, the phrases and situations of the present card clearly state that the quantities loaded to the cardboard can’t be transformed into money.

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As well as, the employer should maintain a log to document the gift-card data together with the title of the worker, the date the present card was supplied, the rationale for offering the present card (a part of a social occasion, present or award), the kind of present card, the quantity of the present card and the title of the retailer(s).

Right here’s a easy instance, tailored from the CRA’s web site, that exhibits how these guidelines could apply for 2023. Let’s say that within the present yr, Marc acquired two non-cash items from his employer: a $450 present card in honour of Hanukkah to spend at an electronics chain, and a separate $250 present card for a similar electronics chain for his sixtieth birthday earlier this yr. He additionally acquired a T-shirt with the corporate emblem (with a price of $15) for taking part in a charity run. And he acquired a long-service award value $400, recognizing his four-year anniversary with the corporate.

Making use of the above guidelines, Marc acquired two non-cash items totalling $700 ($450 plus $250). The T-shirt is of nominal worth and will be disregarded. For the reason that $500 most for non-cash items and awards within the yr has been exceeded, the $200 extra is the worth of the taxable worker profit that will probably be included on Marc’s 2023 T4 slip.

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As for the $400 long-service award, underneath the CRA’s pointers, Marc’s “lengthy” service isn’t fairly lengthy sufficient to qualify for the extra $500 exemption as a result of underneath the CRA’s up to date administrative coverage, for a long-service award to be tax free, it should be in recognition of 5 or extra years of service with an employer.

In consequence, Marc’s 2023 T4 will present a taxable employment profit totalling $600, being $200 for the non-cash items plus $400 for the long-service award.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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