As we prepare to say goodbye to 2018, many of us begin to turn our attention to plans for holiday season festivities and gift giving. However, when considering parties and gifts to clients, employees, or other business contacts, don’t let the potential tax consequences spoil this special time of year.

Gifts to Clients

Reasonable business expenditures, incurred for the purpose of earning income, are generally deductible for tax purposes.

Accordingly, reasonable gifts and entertainment expenditures incurred to establish or maintain a business’ clientele may qualify as deductible expenditures.

While reasonable gifts may generally qualify as advertising or promotional expenses eligible for a full deduction, meals and entertainment related expenditures are limited to a 50% deduction.

As such, only one-half of the cost of treating a client to dinner or a night out at the game, for the purpose of building or maintaining a business relationship, may qualify for a deduction for tax purposes.

Likewise, the cost of restaurant gift cards or event tickets given to clients in appreciation of their business, will also be subject to the 50% limitation. Other gifts or retail gift cards unrelated to food, beverages, or entertainment may qualify for a full deduction.

In all cases, expenditures should be supported by receipts (including who received the items) and their business purpose documented.

Gifts to Employees

Generally, gifts, awards, or holiday bonuses given to employees are a taxable benefit to the recipient employee.

However, the CRA administratively allows employers to give unrelated employees tax-free, non-cash gifts (subject to certain annual dollar limitations discussed below) for certain special occasions, such as religious holidays, birthdays or other milestone events. Employers can also give tax-free, non-cash awards to employees in limited circumstances, but only where the award is not performance based.

Generally, if these gifts or awards are not cash or “near cash” (i.e.: gift cards), they are not taxable benefits to the employee provided the total value of such gifts to any particular employee is under $500 annually (including GST/HST). For example, if you give an employee a watch as a birthday gift, and this is the only gift they receive for the calendar year, the employee will not be subject to tax on the receipt provided the value is under $500.

If the value of the non-cash gifts or awards is greater than $500 in a given calendar year, the excess must be included in the employee’s taxable income.

Cash bonuses or gift cards given to employees will be taxable to them and the full amount of the gift must be reported on their T4 slip. Irrespective of the taxability of the gift to the employee, the expenditure may still be eligible to be deducted by the employer as an expense for reasonable employee compensation.

Finally, for employers wishing to recognize an employee’s years of service, there is a separate $500 exemption for long-service awards. Qualifying awards will only be exempt from the employee’s taxable income if given once every five years.

Accepting Gifts from Clients

As the holiday season is all about the spirit of giving, it is understandable that some clients may wish to reciprocate.

Small-business owners and self-employed individuals may receive voluntary gifts from clients on a tax-free basis, as long as the gifts are not received in exchange for goods or services provided.

Similarly, gifts received by employees from clients also may not be considered a taxable benefit, provided the gifts are received in the employee’s capacity as an individual and not by virtue of their employment position or function.

Holiday Parties

Meals and entertainment expenditures for holiday parties, or other such events to which all employees from a particular place of business are invited, may be fully deductible. Up to 6 such events per year may be exempted from the 50% deduction limitation generally applicable to meals and entertainment, even if families of employees and / or clients of the business are invited.

Don’t spend too much on your holiday party! In fact, be careful not to spend more than $150 per person (including GST/HST), or CRA may consider the entire cost of the party to be a taxable benefit to employees in attendance. Maintaining the cost of the party to under $150 per person can spare your employees the “tax hangover”. There is no reason to compromise on safety, however as transportation home, taxi fare, and overnight accommodations are not included in the $150 per person limitation.

CRA's page contains helpful guidance, including rules for gifts and awards and the policy for non-cash gifts and awards. As always, please consult with your tax advisor before making any big decisions.