6 May 1997 Internal T.I. 9710616 - TAXATION OF EMPLOYEE AWARDS OF NOMINAL VALUE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

taxation of employee awards of nominal value, whether an admin position for awards of value less than $25.

Position:

no admin position although if the award is a plaque, trophy or other momento of nominal value for which there is no market, a fair market value does not exist and it is not necessary to include any amount in an employee's income as a taxable benefit. Onus rests with employer to reasonably determine when a market for a nominal does not exist

Reasons:

                                         May 6, 1997

        XXXXXXXXXX                    Business, Property and Employment
                                      Sandra Short
      Attention:  XXXXXXXXXX                  (613) 957-2136
                                     971061

Taxation of Employee Awards of Nominal Value

This is in reply to your enquiry of April 17, 1997, in which you ask whether an employer is required to include an amount in an employee's income if the employee has received a small non-cash item such as a mug, cap or pen. You are hopeful that the Department has a position of not requiring an amount to be included in an employee's income when items, of limited value, are awarded to an employee as part of the recognition program. Specifically, you have enquired whether there is an administrative position which permits an employer to not include an amount in an employee's income if the benefit is for an item with a value of less than $25. You have also asked that we comment on the accuracy of the following statements:

1.Incentive awards are taxable benefits under paragraph 6(1)(a) of the Income Tax Act and are not "gifts" since they are based on performance.

2.An employee who is given a plaque or trophy is not in receipt of a taxable benefit.

3.An employee in receipt of other non-cash awards is required to include the fair market value of such an award in income as a taxable benefit.

4.While an inscription or a logo might reduce the resale market value of an article, its cost remains the same and the cost should be considered as the value of the benefit under the Income Tax Act.

5.When a non-cash benefit is being provided, then no tax withholding is required.

6.Withholding is not required from cash award of up to $500, although the award is taxable and must be reported on the form T4 Supplementary at year's end.

7.An employer may choose to pay the tax liability which results from the inclusion, in an employee's income, of the value of an award. For example, if an employer wishes to give a net award of $50, a gross award of approximately $90 may be given. The gross amount of the award is included on the employee's T4 Supplementary.

Our Comments:

When an employee is rewarded by an employer with merchandise or other non-cash item, the fair market value of the award must be included in the employee's income. If an item is personalized with a corporate logo or engraved with the employee's name or a message, the fair market value of the item may be affected. In such cases, the amount to be included in the employee's income may be reduced by a reasonable amount, having regard to the circumstances. Each situation of this nature should be considered on its own merits. There is no administrative position which provides that so long as the award has a fair market value of less than a defined dollar limit, no amount is required to be included in the employee's income. However, when the award is a plaque, trophy or other memento of nominal value for which there would be no market, a fair market value does not exist and it is not necessary to include any amount in an employee's income as a taxable benefit. The onus rests with the employer to reasonably determine when a market for a nominal item does not exist.

A gift given by an employer to an employee results in a taxable benefit to the employee. However, as you may be aware, the Department does have an administrative position relating to gifts. If the gift (in cash or in kind) is for a wedding, Christmas, or similar occasion and is valued at $100 or less, no amount is required to be included in the employee's income, so long as the employer does not claim the cost of the gift as an expense. The policy applies to one gift per employee per year. Two gifts are permitted in the year an employee marries, as long as one of them is a wedding gift. This administrative position is well publicized and can be found, for example, in both the "Employer's Guide to Payroll Deductions, Taxable Benefits and Non-Resident Information" as well as Interpretation Bulletin IT-470R. It is our understanding that there are no plans to expand this position to include incentive awards or similar awards. However, you may wish to discuss this with Mr. Guy Proulx, Director, Trust Accounts Division at 954-1284.

We have reviewed the statements which summarize your understanding of the Department's general positions on the taxation of awards. In addition to the above, we offer the following clarifications:

5.It is true that when an employee is given a non-monetary taxable benefit, at a time when no cash amount is being paid, that the employer cannot withhold an amount of tax. However, when an employer pays a cash award, or provides non-cash benefits in addition to salary or wages, the employer is required to include the value of the benefit in the employee's gross income package, and normal withholdings should take place. In order to administer the legislation in a fair and uniform manner, the Department encourages employers to make withholdings from employee's cash remuneration to the extent possible without imposing actual hardship upon the individual employee.

6.The Department has an administrative position which does permit an employer not to withhold on awards with a value of up to $500. The award remains taxable and must be included on the employee's T4 Supplementary at year's end. You may wish to contact the Trust Accounts Division on this issue, as it is our understanding that the award is subject to Employment Insurance premium withholding as well as to Canada Pension Plan contributions withholding and remittances.

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch