Tax tip: A free iPod or gift certificate received by your employees is a lot less attractive if they have to pay tax on it?

Today I would like to share a great article written by Jamie Golombek. Mr. Golombek is managing director, tax & estate planning at CIBC Private Wealth Management.

The gift that takes.


Do your employees sometimes receive gifts from customers? If so, are they allowed to accept them and, perhaps more importantly, can they keep them for personal use or do the gifts have to be shared, where feasible, with the entire team? And what about the tax implications of such a gift?

Under the Tax Act, an employee's income from employment includes salary and wages, as well as "other remuneration received by the taxpayer in the year." Other remuneration includes cash and near-cash gifts (i. e., gift cards) received "by virtue of employment."

A technical interpretation released by the Canada Revenue Agency (CRA) earlier this year shed further light on the tax treatment of gifts, particularly gifts and awards received via an employee draw. In this case, the CRA was asked what the tax implications would be if employees who receive gifts from a customer -- be they cash, gift cards or physical items, such as an iPod -- choose to donate these gifts to the employer's Social Committee. The Social Committee, which is not funded in any way by the employer, other than it hosting an annual holiday party, then gives the gifts away in a random draw that includes all employees.

In response, the CRA reiterated that if an item is given to one employee by an employer via a prize draw and the draw is only open to employees of the company, then any item won is a taxable benefit of employment since it was gained by virtue of his or her employment. If, on the other hand, an item is paid for by a social committee and given via a draw, as long as the social committee is neither funded nor controlled by the employer, it's the CRA's position that such a prize is considered to be a tax-free windfall.

But in this particular situation the gift was received by an employee from a customer, and the CRA concluded it must be included in the recipient employee's income, regardless of whether the employee donates the gift to the social committee. When the committee subsequently awards it to another employee via a draw in which all employees can participate, the employee who ultimately receives that gift is not considered to have received a taxable benefit.

While it may be kind of the CRA to not insist on taxing the same gift twice, the taxman's harsh position on the initial gift seems a bit cruel -- and may certainly discourage employees from donating a taxable gift to their company for any reason.