Employee Recognition Under the Lens: When Can Employee Benefits Become Taxable?

Employee recognition programs can become taxable benefits. Generally, the taxability of an employee benefit or recognition depends on its nature, value, and frequency. For example, cash rewards and gift cards are taxable as income, while non-cash rewards may be exempt from taxation. Additionally, if the value of the reward exceeds a certain threshold, it may trigger tax withholding requirements. 

On the other hand, the frequency of the rewards also matters. If given too regularly, they may be considered part of the employee's regular compensation and therefore be subject to taxation.

What Is Considered an Employee Benefit by the CRA?

According to the CRA, a benefit is a good or service you give or arrange for a third party to give your employee, such as free use of property you own. A benefit includes an allowance or reimbursing an employee's personal expenses. Benefits can be divided into three categories: cash, near-cash, and non-cash.

Cash: This includes physical currency, cheques and direct deposits.

Near-cash: A near-cash benefit functions as cash or something that can easily be converted to cash, such as a security, stock, or gold nugget.

Non-cash: A non-cash (or "in kind") benefit is the actual good, service, or property that you give to your employee. This includes a payment you make to a third party for the particular good or service if you are responsible for the expense.

Check the complete list of benefits and determine their value for taxation here.

When Can Employee Benefits Become Taxable?

According to the CRA, in general, gifts, awards and long-service awards employers provide to employees are taxable.

Gifts: A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child.

Awards: An award must be for an employment-related accomplishment such as outstanding service or employee suggestions. It is recognition of an employee's overall contribution to the workplace, not recognition of job performance. Generally, a valid, non-taxable award has clearly defined criteria, a nomination and evaluation process, and a limited number of recipients.

Rewards: A reward is provided to your employees for performance-related reasons and is a taxable benefit for the employee.

How to Calculate the Value of the Employee Benefit and How to Report It?

If the benefit is taxable, the value of the benefit is equal to the combined total fair market value (FMV) of the gifts and awards provided in the year. Where CRA’s policy on non-cash gifts and awards policy applies, only amounts over the $500 limit must be included in the employee's income. For example, if the employer provides gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650 – $500).

Employers must report taxable employee benefits on the T4 slip. Non-cash and near-cash benefits must be reported on the following:

• Box 14 - Employment Income


• Box 26 - CPP/QPP pensionable earnings
  


• Code 40 - Other Information
  

On the other hand, cash benefits should be reported on:

• Box 14 - Employment Income
  


• Box 24 - EI insurable earnings
  


• Box 26 - CPP/QPP pensionable earnings
  


• Code 40 - Other Information
  

Overall, employers need to structure their recognition programs in compliance with Canadian tax laws to avoid any unexpected tax liabilities for themselves or their employees. It's always a good idea to consult with a benefits specialist for guidance on how to structure these programs. Visit the 17th Floor’s Members Directory to find one and grow your network.

Does your company offer near-cash or non-cash employee benefits? Share some examples in the comments section below.

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Sources:

• Canada Revenue Agency