Employee gifts and holiday parties: the CRA $500 and $150 rules

A gift or award to an employee is a taxable benefit from employment, whether it is cash, near-cash or non-cash. The CRA has an administrative policy that exempts some non-cash gifts. It never covers cash or near-cash: something that works like cash or converts easily to it, such as securities, stocks or gold nuggets.

The policy also does not apply to gifts for non-arm's-length employees, such as the owner's relatives, shareholders or people related to them. For a family business, that is often most of the staff.

An employer can give an employee any number of non-cash gifts and awards with a combined value of $500 or less a year. Only the amount over $500 goes into the employee's income.

• A gift has to be for a special occasion: a religious holiday, a birthday, a wedding, the birth of a child.
• An award has to recognize an employment-related accomplishment, such as outstanding service or an employee's suggestion. It has clear criteria, a nomination and evaluation process, and a limited number of recipients.
• A reward for doing the job well (meeting a target, finishing early or under budget, overtime, covering for a colleague) is not an award under the policy. It is taxable in full.
• Value is the fair market value of each gift, including GST/HST and PST, not what the employer paid.
• Small or trivial items do not count toward the $500: coffee or tea, T-shirts with the employer's logo, mugs, plaques or trophies.
• Event tickets for a set date and time, and vouchers for one specific item (the CRA's example is a turkey worth up to $30, no substitutes) are generally non-cash.

A gift card (including a gift certificate, a chip card or an electronic card) counts as non-cash, and fits inside the $500, only if all of these apply:

• It has money already on it and can be used only at one retailer or a group of retailers named on the card.
• Its terms and conditions clearly say the amount cannot be converted into cash.
• A log is kept with: the employee's name, the date the card was given, the reason (a social event, a gift or an award), the type of card, its amount and the retailer(s).

If any condition fails, the card is near-cash and taxable from the first dollar. The CRA says the employer has to review each card's terms case by case. A prepaid card usable anywhere will usually fail the first condition. The log is the part a bookkeeper can set up today.

Once every five years, an employer can also give a non-cash long-service or anniversary award worth $500 or less, tax-free. It must be for at least five years of service, and at least five years must have passed since the last such award. It does not use up the yearly $500 for other gifts. A shortfall cannot be carried over: an award worth $300 does not raise the other limit to $700.

A free party or other social event open to all employees is not a taxable benefit if it costs $150 per person or less. Transportation home, taxi fare and overnight accommodation are not counted in the $150. If the cost goes over $150 per person, the whole amount, those extra costs included, becomes a taxable benefit.

• Virtual events: tax-free if open to all employees and the cost, taxes included, is $50 or less per employee for meals, drinks and delivery only, or $100 or less if entertainment is included. Receipts are needed for reimbursements, and gift cards for food delivery must meet the gift card conditions above.
• Hybrid events: $150 or less per person, taxes included, where persons include spouses or common-law partners.
• For virtual and hybrid events the CRA sets a yearly maximum of six employer-paid social events, in-person and virtual combined.

A taxable gift or party goes on the T4 in the year the employee received it, in box 14 "Employment income" and under code 40 in "Other information". The CRA's Benefits chart sets the deductions:

Tickets given for business use (an employee who has to be at the game to host clients or supervise) are not a benefit. Keep a record of who got the ticket and why. Tickets for personal use are taxable unless they fit the gift policy.

Food, drinks and entertainment are usually deductible at 50%. The CRA's business income guide T4002 (line 8523) lists exceptions, and one is an office party or similar event to which all employees from a particular location are invited. The limit is six such events a year. For those, the 50% cap does not apply.

T4002 is the guide for sole proprietors and partnerships filing T2125. These are federal rules. Revenu Québec has its own, and this page does not cover them.