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.
Principal Issues: 1. Whether gifts selected from a catalogue by employees based on a points system for various employment and performance-related activities are taxable. 2. Whether gifts selected from a catalogue by employees based on a points system for milestones every five years based on their hire date are taxable.
Position: 1. Yes. 2. Question of fact.
Reasons: 1. CRA's administrative policy as outlined in ITTN#40 does not exempt gifts or awards for employment or performance-related activities and are therefore subject to tax under paragraph 6(1)(a) of the ITA. 2. In accordance with CRA's administrative policy outlined in ITTN #40, gifts awarded for milestones every five years are tax exempt
XXXXXXXXXX
2011-040536
K.G. Weir
June 28, 2011
Dear XXXXXXXXXX :
Re: Employee Rewards
We are writing in response to your email dated May 4, 2010, concerning the taxation of employee awards and rewards. More specifically, you enquired whether several different reward and award programs for employees were subject to tax and whether items with a company logo would have any impact on their tax status.
You advise that the award/reward program consists of a point system where each employee can select items from a catalogue, sponsored by the employer, based on the number of points accumulated in their own account. Points are awarded by a committee made up of both employees and members of management for performance-related or employment-related activities such as perfect attendance, volunteering, set milestones, and meeting and exceeding sales targets. The determination of the number of points to be allotted rests with the committee. In some situations the points are pre-determined and in other cases the committee determines the number of points. In lieu of points, employees can also elect to receive cash or a gift certificate.
The redemption of points is at the discretion of the employee with no requirement to redeem the points on a yearly basis. Employees have the option to receive several small items throughout the year based on the points accumulated or save the points until employees are able to acquire a larger item from the catalogue such as travel vouchers.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
Subsection 5(1) of the Income Tax Act ("ITA") provides that an individual's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year. While the term "other remuneration" is not defined in the ITA, it is a broad expression meaning the same general type of income as salary and wages and includes cash and near-cash gifts received by virtue of employment. It is our view that cash or near-cash awards such as gift cards and gift certificates will be included in an employee's income for tax purposes.
Paragraph 6(1)(a) of the ITA stipulates that the value of benefits of any kind received by an employee in respect of, in the course of, or by virtue of an office or employment are included in income and subject to tax unless otherwise excluded by another provision of the ITA. It is our view that any award or reward received in respect of, in the course of, or by virtue of, an office or employment is a benefit received and will be included in income of the recipient in the year it is received.
Although, there is no provision in the ITA that excludes gifts and awards provided to an employee from being subject to tax, the CRA has a long standing administrative position in which non-cash gifts and non-cash awards to employees are tax exempt under specific circumstances. This is outlined in Interpretation Bulletin IT-470R, Employees' Fringe Benefits (Consolidated), which provides an overview of common fringe benefits and indicates whether items are taxable or non-taxable to the employee. In addition, the CRA provided an update on its administrative position with respect to the taxation of gifts and awards in Income Tax Technical News No. 40 ("ITTN #40") which provides the following with respect to non-cash gifts and non-cash awards effective for 2010:
"Non-cash gifts and non-cash awards to an arm's length employee, regardless of number, will not be taxable to the extent that the total aggregate value of all non-cash gifts and awards to that employee is less than $500 annually. The total value in excess of $500 annually will be taxable.
In addition to the above, a separate non-cash long service/anniversary award may also qualify for non taxable status to the extent its total value is $500 or less. The value in excess of $500 will be taxable. In order to qualify, the anniversary award cannot be for less than five years of service or for five years since the last long service award had been provided to the employee. For the purposes of applying the $500 thresholds, the annual gifts and awards threshold and the long service/anniversary awards threshold are separate. In other words, a shortfall in value under one policy cannot be used to offset an excess value of the other. . . .
For clarification purposes, items of an immaterial or nominal value, such as coffee, tea, T-shirts with employer logos, mugs, plaques, trophies, etc., will not be considered a taxable benefit to employees. There is no defined monetary threshold that determines an immaterial amount. Factors that may be taken into account include the value, frequency, and administrative practicability of accounting for nominal benefits.
The CRA's administrative policies as to the qualifying nature of gifts and awards will remain unchanged. For example, performance-related rewards (e.g., sales targets) or cash near cash awards (e.g., gift certificates) will continue to fall outside the administrative policy and will be required to be included in the taxable income of the employee."
Based on the information provided, the employer controls the point system. The points are awarded to employees primarily for performance-related and/or employment-related activities. Therefore, awards obtained through the point system are taxable under paragraph 6(1)(a) of the ITA and the fair market value of the award must be reported on the recipient's T4 slip in the year the points are redeemed for items from the catalogue.
Anniversary awards or long-service awards given once every five years for a value of $500 or less are exempt from tax. The $500 exemption for anniversary or long-service awards has no impact on the $500 exemption for other non-cash gifts.
With regards to the issue of company logos, it is the type of gift or award and its value that is of concern for tax purposes. In other words, the existence of a logo or trademark on an award, while it may have an impact on the value of the item, does not necessarily negate the employee benefit.
Finally, it should be noted that CRA's administrative policy regarding employer gifts and awards does not apply to non-arm's length employees or related persons of the non-arm's length employee.
We trust these comments will be of assistance.
Phyllis Waugh
A/Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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