How to Give Like Santa and not end up like Scrooge

December is the time of year employers often choose to give a gift to their employees as a Christmas present.  However, anytime there is an exchange between the employer and an employee the tax consequences need to be considered.

Canada Revenue Agency has the following rules for gifts:

Cash and near-cash gifts or awards are always a taxable benefit to the employee.   A near-cash item is one that can be easily converted to cash such as a gift certificate, gift card, gold nuggets, securities, or stocks.

Non-cash gifts given to employees up to a total value of $500 are exempted from being treated as a taxable benefit to the employee with the following conditions:

  1. A gift has to be for a special occasion such as a religious holiday, a birthday, a wedding, or the birth of a child;
  2. There is no limit to the number of tax-free non-cash gifts and awards you may give your employee in a year;
  3. The employee must be unrelated [at arm's length] to the employer;
  4. If you give gifts totalling more than $500 the excess amount is taxable.  For example,  if you give an employee gifts in the year  with a total value of $650, there is a taxable benefit of $150 ($650 -$500).

 

Remember to Document Cash Expenses

One of the matters dealt with in a judgment issued by the Tax court of Canada [Morrissey v. The Queen, 2011 TCC 373, (July 29, 2011)], http://decision.tcc-cci.gc.ca/en/2011/2011tcc373/2011tcc373.html had to do with the payments of cash expenses.

The Honourable Justice Johanne D’Auray had the following comments:

[23]         With respect to the amounts paid to drivers, Justice Bowman’s remarks also hold true. It is impossible for me to determine the amounts that were paid to the S&G’s drivers.  As the auditor stated, they could already have been deducted under the subcontractors account.

[24]         In Njenga v. R., [1997] 2 C.T.C. 8, 96 DTC 6593 (Federal Court of Appeal), at paragraph 3, McDonald J. A. speaking for the court, stated:

 The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.

[25]         I would also add that while it may not be illegal to pay in cash, when a taxpayer chooses to pay in cash he or she should be all the more careful to ensure that payment can be proven if a deduction is claimed. Here, the appellant did not succeed in reversing the burden of proof as she was not able to demonstrate how much she paid the S&G’s drivers on behalf of Gary Bumstead  [Emphasis mine].

Employee or independent contractor?

 Prue v. M.N.R., 2011 TCC 9, (January 10, 2011), http://decision.tcc-cci.gc.ca/en/2011/2011tcc9/2011tcc9.html

This appeal brought before the Tax Court of Canada focussed on whether an individual was an employee or an independent contractor.  I haven’t read it line by line to come up with a detailed analysis but here is what I gleaned from the document.

1.  Document the  nature of the relationship – put it in writing, sign it.  Do the parties involved  want this to be an employee/employer relationship or that of an independent contractor.

2.  Individuals may find the idea of being an independent contractor appealing in that as a business venture they can claim expenses otherwise denied to employees.  However,  if, at some point in the future, the services of the contractor are no longer needed they might suddenly have a chance of heart.  Now they want to be an employee so they can claim Employment Insurance benefits.  To that end they can apply to the Rulings Officer at a Tax Services Office operated by Canada Revenue Agency (“CRA”) on the insurability of their employment.    This opens a whole can of worms for the employer with CRA - out of which very little of any good can result!

If it’s too good to be true….

Canada Revenue Agency issued the following warning to  taxpayers about donations to a gifting tax shelter.  For more information check out the following link:

http://www.cra-arc.gc.ca/nwsrm/lrts/2010/l101223-eng.html?=eml20101223

Warning: If you donate to a gifting tax shelter, expect to be audited

Each year, Canadian taxpayers participate in gifting arrangements that result in donation receipts worth three or four times the actual amount donated by the taxpayer. The Canada Revenue Agency (CRA) continues to warn Canadians against these gifting arrangements and audits those who participate.

To date, the CRA has denied over $4.5 billion in tax shelter gifting arrangement donations and reassessed over 130,000 taxpayers who have made donation claims through a gifting scheme.

For most claims, the CRA has denied the gift entirely. The CRA audits gifting arrangement tax shelters that provide donation receipts three or four times the out-of-pocket cost.

Decisions in recent court cases have concluded that the “donation” made by the taxpayer was not a gift or, where it was a gift, the amount did not exceed the out-of-pocket cost to the taxpayer. In the Maréchaux case, the Federal Court of Appeal upheld the Tax Court of Canada (TCC) decision that there was no gift given as a result of the defendant’s participation in a leveraged cash donation scheme. In the Lockie case, the TCC concluded that the gift in a buy-low-donate-high scheme was the amount paid by the taxpayer.

Tax shelter identification numbers

The CRA reminds taxpayers that tax shelter numbers are used for identification purposes only. Just because a tax shelter has an identification number does not mean that donations made to it will result in tax benefits.

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