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Reward vs. Award

by Kimberly Fiume | on Oct 18, 2012 | No Comments

Why is it that when an employee or group of employees does great service that we have to tax them on any sort of thank you that is not verbal?

Picture this:
•Employer thanks the employee for brining in the project ahead of schedule and under budget
• Employer provides employee with an Apple iPad.
• Employee is very pleased and thanks the employer – thinking to him or her self, wow, it really was worth it, all that extra time and effort.
• Employer subsequently advises the employee that the value of the Apple iPad will be included on the employee’s next pay and the applicable statutory withholdings (Canada and or Quebec Pension Plan contributions and income taxes) on the fair market value of the Apple iPad will be deducted from the pay. In other words, the employer advises, that the employee’s net take home pay will be less than what it is normally due to the additional taxes on the FMV of the Apple iPad.
• Employee shakes their head and walks away not really understanding what just took place, but mutters to him or herself –yeah, thanks but no thanks.

Sound all too familiar?

Perhaps the picture could be a little bit brighter whereby the generous employer agrees to pay the taxes on the employee’s behalf. Paying taxes on the employee’s behalf is, you guessed it, a taxable benefit. So we are darned if we do and darned if we don’t when it comes to REWARDING our employees.

Bottom line, Income Tax legislation requires us to tax employees when we reward them for doing a good job. As administrators of the Income Tax Act, CRA reminds us that employee’s are hired to do a good job, so to reward them for doing what they were hired to do is taxable, no exceptions.

In a recent Canada Revenue Agency Views on the subject of employee awards the Agency had this to say.

An employer requested clarification of the CRA’s administrative policy regarding employee non-cash awards as set forth in Income Tax Technical News No. 40 (ITTN #40).

Paragraph 6(1)(a) of the Income Tax Act (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.

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 noncash 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 ITTN #40 which stated 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”.

The CRA’s administrative policies as to the qualifying nature of gifts and awards remain unchanged. For example, performance-related rewards (e.g., sales targets) or cash and 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.”

In the hypothetical situation presented, the employer will use a certificate system in which arm’s length employees will be given certificates for performing well in the jobs they were hired to do for the corporation. In other words, employees will receive certificates based on employment-related activities. These certificates are only available to employees of the corporation. They are not available to the general public. The employees will be able to accumulate the certificates and use the accumulated certificates towards a limited selection of merchandise from the employer’s stores. The certificates cannot be transferred or redeemed for cash and the items acquired cannot be returned for cash. The merchandise acquired will be at the retail sales price with the employee responsible for paying the applicable sales tax when the certificates are redeemed.

It is the CRA’s view that the certificates are essentially near-cash rewards provided in respect of, or by virtue of, an office or employment. As such, the economic advantage received by the employee will be considered a taxable benefit under paragraph 6(1)(a) of the ITA and the fair market value of the certificates must be reported on the employee’s T4 slip in the year the certificates are redeemed.

Employers are reminded to review the circumstances under which they are rewarding their employees to ensure that taxable situations are dealt with correctly. For additional information employers should visit the CRA’s web site referencing the documents referred to above or the T4130 Taxable Benefits and Allowances publication.

Awards have very specific definitions and can be referenced at this link:
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/plcy-eng.html.

Additional references can be found here:
http://www.cra-arc.gc.ca/E/pub/tg/t4130/README.html
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/menu-eng.html http://www.cra-arc.gc.ca/E/pub/tp/it470r-consolid/README.html
http://www.cra-arc.gc.ca/E/pub/tp/itnews-40/README.html.

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