Taxable Gifts: How It Can Complicate Your Payroll Tax
The year is swiftly coming to a close, and your nanny, caregiver, or housekeeper has given you excellent service. You only want to return the favour by giving them a thoughtful present of your own—a kind act of reciprocity.
Tax consequences of gifting domestic workers may be surprising. Gifts might be taxable, but certain exceptions allow your employee to ring in the new year feeling valued while also avoiding potential payroll tax traps.
The Giving of Money
Cash and near-cash gifts (such as gift certificates) are typically the most straightforward methods for anybody on a tight schedule.
Remember that whenever you provide your workers cash or a near-cash present, it should be recorded as part of their earnings. As a result, the amount you must pay to the Canada Revenue Agency will most likely increase and might exceed your budget.
Giving non-cash presents with a fair market value of less than $500 on special occasions such as religious ceremonies, weddings, birthdays, or the birth of a child will not be subject to the CRA's definition of taxable benefits.
However, non-cash gifts do not always follow the procedures above. Check to see if you must include the gift's fair market value in your employee's income.
The $500 Rule
As stated on the CRA website:
You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value(FMV) of the gifts and awards you give your employee is greater than $500, the amount over $500 must be included in the employee's income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650-$500).
There are special rules for Long service awards.
Items of small or trivial value do not have to be included when calculating the total value of gifts and awards given in the year for the purpose of the exemption. Examples of items for small or trivial value include:
Coffee or tea
T-shirts with employer's logos
Plaques or trophies
Knowing the laws will protect you and your employee against any potentially costly surprises come tax time, So be sure to consult a professional and ensure your employee can receive their gifts with gratitude, knowing they'll spend less time dealing with paperwork and more time enjoying themselves.