Crease Harman News & Resources

Christmas Bonus Tax Planning

By Bruce Hallsor

It has been a longstanding principle of English and Canadian Tax law that gifts are non-taxable. In order for funds to be taxable, they have to qualify as income under the Income Tax Act, which defines income (excluding capital gains or dividend income) as something that another person is obligated to pay you in exchange for your provision of goods, services, or capital. If you receive an inheritance from your grandmother, or a lottery prize from the Hospital Foundation, or a gift from your friend, these are windfalls and are not taxable income.

However, Canada Revenue Agency has long taken the position that Christmas bonuses, and other cash prizes given from employers to employees are table as part of the employment relationship, even where the employer has no legal obligation to make these payments. You might be feeling generous toward your employees this Christmas, but your generosity will have to extend in part to CRA, which will expect your employee to pay tax on his bonus.

There are, however, some limited exceptions to this rule which you can take advantage of. For example:

• Non-cash gifts are not taxable, provided the total value of non-cash gifts made in a year does not exceed $500.00. This rule does not apply, however to near-cash gifts such as gift certificates, gold nuggets, securities, or any item which can be easily converted to cash. It does, however, allow you to give spa packages, hotel accommodations, flights, and tangible goods that do not have a convertible monetary value.
• Special Employee discounts are not taxable, provided they are not too deep. You can allow your employees generous discounts on items you sell, even greater discounts than you offer to the public, provided that the special discounts have a business purpose, such as promotion (friends and family nights) or moving old inventory without upsetting the market for newer inventory items. But if you start offering 90% discounts on major items, CRA may consider that you are really giving them a gift valued at more than $500.00.
• Computers can be provided to employees, without being considered a taxable benefit, provided they are intended to enhance the employees quality of life and computer literacy, under the CRA’s guidelines for employment-related training.
• Contributions to a registered pension plan are not taxable. So, if you want to give a bonus by way of topping up a pension plan, the sky is the limit.
• Board or lodging at a special work site or a remote work site is non-taxable. So it is possible to send your employees to a special retreat under this head. However, you will have to be very careful to ensure that you require them to attend various work related activities while at this retreat. If they have any significant personal time, or bring relatives with them, a portion of this expense will be taxable to them.
• Special work related clothing can be provided tax free as well. Even if you are not in the habit of providing your employees with work boots or other special attire they are required to wear for the job, you can always make a special gift of these items and the employee will pay not tax on your generosity.

There are of course many other exceptions, such as payment of tuition fees, moving expenses, legal fees, on site child care, and health services, which are non-taxable but might not be greeted warmly as a special Christmas present or seasonal tax-free bonus.

Tax considerations should not be your only consideration when rewarding employees, but it is always good to avoid giving them something that will result in an extra, unexpected tax bill in April.

Bruce Hallsor practices business law with Crease Harman and Company. His practice includes estate and tax planning, as well as employment matters.

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