Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether certificates offered only to arm's length employees are required to be included in the employee's income as an employee benefit subject to tax.
Position: Yes
Reasons: CRA's administrative position as outlined in ITTN #40 does not exempt awards for employment or performance-related activities from tax. Therefore, award certificates provided to arm's length employees by an employer, by virtue of, or in the course of, an office or employment would be a taxable benefit under paragraph 6(1)(a) of the ITA.
XXXXXXXXXX
2011-042398
K. G. Weir
April 11, 2012
Dear XXXXXXXXXX :
Re: Employee Awards
We are writing in response to your letter dated October 7, 2011, requesting a technical interpretation with respect to the taxation of non-cash awards to employees. Specifically, you requested clarification of the administrative policy of the Canada Revenue Agency (CRA) 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 non-cash 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 will 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 you 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 our 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 from his or her employer 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.
We trust our comments will be of assistance.
Yours truly,
Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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