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The Season of Giving – is it taxable?
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As the holiday season approaches, it is not unusual for doctors to provide gifts to their employees, hospital administrative staff, colleagues, and nurses.
While these gifts are generous gestures, they may result in unexpected tax implications.
Gifts to Employees
When it comes to gifts provided to employees, the CRA has clear guidelines regarding what is, and more-importantly, what is not taxable.
An employee is an individual who is paid directly by you/your corporation, with tax withheld, in return for work completed. Employees are generally paid via salary and receive a T4 at the end of the year. Employees are not equivalent to contractors, for whom you may not withhold taxes.
The tax implications of the gift depend on a few factors:
- Does it meet the definition of ‘gift’ as outlined by the CRA?
A gift to an employee, by CRA’s standards, is given in connection with a special occasion (religious holiday, birthday, wedding, etc.) and is not related to their employment or job performance.
- What is being gifted?
CRA has identified 3 categories of gifts:
Summary of Tax Implications of Employee Gifts
- Deductible to the corporation
- Taxable to the employee (T4 Slip)
- Requires withholdings – income tax, CPP, and EI
- Deductible to the corporation
- Taxable to the Employee (T4 Slip)
- Withholdings required – income tax and CPP (No EI)
- Deductible to the corporation
- Sometimes taxable to the employee (T4 Slip)
- Withholdings Required [*if taxable]- income tax and CPP (No EI)
*Only if the amount is taxable based on the ‘non-cash’ gift rules explained below.
Cash gifts are simply cash or cheques. Cash gifts are always taxable to the employee and are subject to income tax, CPP, and EI premium withholdings.
‘Near-cash’ gifts include items such as prepaid credit cards, or easily convertible property such as securities or cryptocurrency. ‘Near-cash’ gifts are also taxable to the employee but are only subject to income tax and CPP premium withholdings.
Taxable gifts must be included on the employee’s T4.
‘Non-cash’ gifts include items such as tickets to an event or a gift basket. Essentially, ‘non-cash’ gifts are redeemable for specific items or events with no option for the employee to choose the item/event or exchange it for money.
If the total value of ‘non-cash’ items gifted to an individual employee during the year is less than $500, the gifts are non-taxable to the employee. Amounts exceeding $500 are taxable to the employee and are subject to income tax and CPP premium withholdings.
Items of minimal value, such as cups, mugs, or t-shirts, are not taxable and should not be included in the calculation of ‘non-cash’ gifts.
Non-taxable gifts do not need to be included on the employee’s T4.
Canada Revenue Agency has recently updated its administrative position on gift cards.
Historically, gift cards were considered a ‘near-cash’ gift and were always taxable to the employee.
This year the CRA has identified that gift cards may in fact be a ‘non-cash’, therefore non-taxable, gift to employees, if it meets the following conditions:
- The value of the card is under $500.
- It comes with money already on it and can only be used to purchase goods or services from a single retailer or a group of retailers identified on the card.
- The terms and conditions of the gift card clearly state that amounts loaded to the card cannot be converted into cash.
- A log is kept recording gift card information containing all the following:
- Name of the employee.
- Date the gift card was provided to the employee.
- Reason for providing the gift card (part of social event, gift, or award).
- Type of gift card.
- Amount of the gift card.
- Name of the retailer(s).
This includes gift certificates, chip cards and electronic gift cards. If the gift card meets all these conditions, it is considered non-cash for the purpose of the CRA’s administrative policy. If the card does not meet these conditions, it is considered a near-cash benefit and is taxable.
Gifts to Non-Employees
Often, doctors and their medical corporations give gifts to individuals that they do not employ, such as department administrative staff, nurses, colleagues, or professional advisors.
As these individuals are not employees of the doctor there is generally no obligation to report the gift as income nor withhold tax.
Gifts in this case could be considered advertising/promotion costs, which are generally deductible against practice income. The deductibility of gifts in this case is subject to the typical business expense deductibility tests:
- Is the expense related to the income generating activity of the corporation?
If a gift helps to establish or maintain professional relationships, there would be an argument that the cost is associated with the income producing activity of the corporation, as it enhances the current and future revenues of the business.
For example, a gift to a colleague who regularly refers patients to your practice.
- Is the amount of the expense reasonable?
Even if an expense is arguably related to income producing activity, the value of the gift in relation to the benefit to the business must be considered.
Using the above example, purchasing a gift basket of wine, chocolate, coffee, etc. for your colleague could be a reasonable expense given the benefit received by your practice. In contrast, purchasing an all-expense paid vacation to Maui for the same colleague as a gift would likely be viewed as an unreasonable expense.
If you have questions on the above, please contact us to book a consult.
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