The holiday season is a time when many employers want to show appreciation to their employees. Gift cards are a popular and convenient choice for recognizing hard work and spreading some seasonal cheer. But employers need to be aware of the employment and tax implications of gifting gift cards, especially here in Canada. Missteps can result in unintended financial consequences for both the employer and the employee.
If you’re planning to hand out gift cards this year, here’s what you need to know.
Gift Cards Are Generally Considered Taxable Benefits
In Canada, the Canada Revenue Agency (CRA) considers gift cards to be taxable benefits for employees in most situations. This means that if you give an employee a gift card, its value is considered income and must be reported on their T4 slip.
The CRA treats gift cards like cash because they have a clear, monetary value and can often be used broadly to purchase goods or services. For example:
- A $100 grocery store gift card can easily be treated as $100 in cash income.
- Similarly, a prepaid Visa or Mastercard gift card can be spent anywhere, making it almost indistinguishable from cash in the CRA’s eyes.
Employers are required to include the value of the gift card as part of the employee’s income, which may impact deductions like Employment Insurance (EI), the Canada Pension Plan (CPP), and income tax.
When Gift Cards May Be Considered Non-Cash
While gift cards are typically treated as cash equivalents and taxable, the CRA makes a narrow exception when a gift card meets all of the following conditions:
- The gift card has specific restrictions on where and how it can be used (e.g., it is limited to a single store or a specific list of vendors).
- It cannot be converted to cash.
- The employer maintains documentation showing the card’s limitations and usage.
If these conditions are satisfied, the gift card may qualify as a non-cash gift under the CRA’s gifts and awards policy, potentially making it tax-free, provided its total value (along with other non-cash gifts) does not exceed $500 annually per employee.
The $500 Limit Rule
Under the CRA’s policy, if the total value of non-cash gifts and awards given to an employee exceeds $500 in a year, the first $500 remains tax-free, but any amount above $500 becomes taxable. This rule applies to restricted gift cards that qualify as non-cash gifts.
For example:
- If an employer gives a restricted $600 gift card that meets the CRA’s non-cash criteria, the first $500 is tax-free, but the remaining $100 must be included as taxable income.
- A $100 gift card that can only be used at a specific bookstore and cannot be exchanged for cash might qualify as a non-cash gift.
- A $100 prepaid Visa card or a gift card to a large retailer like Amazon or Walmart would not qualify, as they are broadly usable and resemble cash equivalents.
Employers must ensure proper documentation and compliance to support the gift card’s non-cash status during an audit.
The CRA’s Exceptions for Non-Cash Gifts Don’t Apply to Most Gift Cards
Under the CRA’s gifts and awards policy, certain non-cash gifts and awards (like physical items) can be given tax-free to employees, provided:
- The gift is for a special occasion (e.g., holidays, birthdays, or work anniversaries).
- Its total fair market value is less than $500 annually.
However, because most gift cards are considered cash equivalents, they do not qualify as non-cash gifts under this policy unless they meet the narrow criteria outlined above.
To illustrate:
- A $300 coffee maker gifted to an employee may qualify for the tax-free gift exemption.
- A $300 gift card to a coffee shop probably does not and must be treated as taxable income.
Employers who mistakenly classify broadly usable gift cards as tax-free gifts could face compliance issues during audits, and employees could be surprised by tax implications.
Administrative Burden for Employers
Giving out gift cards involves more than just handing over a little envelope. Employers need to:
- Keep records of the gift cards’ values and recipients.
- Include the gift card amounts in employees’ payroll calculations for tax, EI, and CPP purposes.
- Report the amounts on employees’ T4 slips at year-end.
If you use a payroll provider, ensure they are aware of the gift cards and can include them properly. Otherwise, you risk underreporting income, which can create tax headaches for both you and your employees.
For example:
- If an employer gives each employee a $200 gift card without reporting it as income, the CRA could audit and require retroactive adjustments, including unpaid taxes and potential penalties.
How Employers Can Make Gift Cards Work
Despite the tax treatment, gift cards remain a flexible and appreciated option for many employees. Here’s how to make them work effectively:
- Communicate Clearly: Let employees know the gift card is a taxable benefit, so there are no surprises when they see it on their T4 slip.
- Keep It Meaningful: Gift cards to retailers or services that align with your employees’ interests can show thoughtfulness and boost morale.
- Budget for Taxes: If you’re planning to give a $100 gift card, consider whether you want to gross up the amount to cover the taxes on behalf of the employee.
For example:
- If you give a $100 gift card and gross it up for taxes, the employee receives the full $100 value after deductions, and you absorb the tax cost.
The CRA does not restrict or discourage gross ups, and there are no legal barriers preventing a business from grossing up a taxable benefit in Canada. If the gross-up is reported correctly, with the appropriate deductions and remittances, businesses can use this strategy.
Alternatives to Gift Cards
If you’re looking for tax-efficient ways to reward employees, consider alternatives to gift cards that fall within the CRA’s gifts and awards policy:
- Non-Cash Gifts: Physical gifts like electronics, home items, or gift baskets valued under $500 annually can qualify for the tax-free exemption.
- Holiday Parties or Meals: Hosting a holiday lunch or virtual event can be a tax-exempt option if it’s reasonable and offered to all employees.
- Wellness or Experience Gifts: Non-cash options like event tickets or fitness memberships may also be tax-free if they meet the policy requirements.
While these options require more effort than a simple gift card, they can provide additional tax advantages for employees.
Final Thoughts
Gift cards are a popular holiday gesture that employees often appreciate, but employers must be aware of the tax implications. Under CRA rules, gift cards are taxable benefits and must be reported as income unless they meet the narrow exception for restricted non-cash gift cards. The $500 limit offers some flexibility, but careful documentation and planning are key to compliance. By understanding these rules, employers can avoid compliance issues and ensure their gifts are well-received.
If you’re unsure about how to handle gift cards or holiday gifts, consider consulting with us or a tax professional to ensure you remain compliant with CRA guidelines. Showing appreciation to employees is important, but it’s equally important to do it right.
