As the holiday season quickly approaches, you may be thinking about whether or not you should be giving gifts to your clients to celebrate the holidays, or to celebrate another good year of business. Or, as a small business owner, you may simply be thinking of giving a gift to your customers as a simple way to say thank you for their business.
Either way, we’ve arrived at the season for gift giving.
Being a small business owner though, you may also be wondering what sort of tax implications there are for giving gifts to clients or other businesses.
You may be questioning if you can write-off the entire value of the gift, or even a portion of it, and these are good questions to have, because we know that anything to help you out when it comes to tax time is always appreciated.
As with a lot of things when it comes to taxes, the short answer is—it depends. In fact, with regards to gifts there are a few different answers that we need to cover.
When it comes to giving gifts to clients, one quick answer that you will very often see online is that any gift should really be of a “reasonable value”, and the gifts that you give should not be too frequent. Or, in other words, according to the government, your gifts shouldn’t be too big, and they should be seasonal.
The reason for this, is that you simply don’t want to raise any red flags at tax time. If you’re off spending tens-of-thousands of dollars on client gifts, you’ll probably have someone knocking on your door asking questions.
But that raises the question… What is a “reasonable value”?
This is subjective, and it really depends upon your business. The value of the gift should be proportionate to the revenue of your business.
For example, if you’re a business that only nets a few hundred thousand dollars of business, you probably won’t want to be spending thousands of dollars on gift baskets for clients. In fact, a nice card and maybe a gift card to Tim Hortons or Starbucks would suffice.
However, if you’re a large company that nets ten million each year, these gifts can be a bit more lavish.
According to the CRA, you may deduct all reasonable business expenses from your business income on your tax return. As with anything related to CRA, there are guidelines around what is deemed reasonable.
Of course, since the CRA enjoys giving non-black-and-white answers instead of gifts, we suggest that you check in with your bookkeeper or accountant to see what would be deemed reasonable, and what guidelines apply to your business.
One popular way to give a gift to your client may be taking them out for dinner or even treat them to a Canucks game. You may even choose to give them your tickets so they can take a friend.
Regardless, according to the CRA, this type of gift is considered to be an entertainment expense.
This rule also applies if you are gifting coffee cards, or a gift card to a popular restaurant.
So, you can think of entertainment expenses as giving a gift that pertains to food or experience where your client has to go somewhere to redeem or get that gift.
When it comes to these entertainment expenses, you can deduct up to 50% of the lesser of the following amounts:
- The amount you incurred for the expenses
- An amount that is reasonable in the circumstances
This is something to keep in mind if this is your gift of choice.
There are a few exceptions to this rule that could allow up to 100% of your bill as a deduction, but they certainly would not be considered gifts.
For example, if you take your client out for dinner and you pay for dinner, but then you invoice them and then they reimburse you, you can deduct the entire amount.
Again, this isn’t really a gift to your client because they’re having to pay for their portion of the experience or dinner, so you should be looking at other options.
Another option could be organizing an event, such as a customer appreciation event. Even though you may be offering food and beverages at this function, the rules may fall under different guidelines. This event may actually be considered to be advertising, so you would be able to write it off entirely, within reason of course.
Instead, perhaps you decide that you would rather provide your clients with a tangible gift, like a plant. That’s great, but the rules may not appear as obvious. You may be able to deduct more of the gift’s expense, but again it depends if it is deemed a reasonable expense.
You can actually spend as much money as you want on a gift. The thing to remember is that you will likely be questioned, and you may not be able to write any of it off.
When it comes to gifting your clients, what can be used as a deduction is any cost that adds value to the gift itself. Things such as postage or wrapping are not considered to be adding value, therefore are not deductible.
Even though the CRA may believe that the rules are clear on gift giving, again, we suggest that it is always best to check with your bookkeeper so that you don’t run into problems at tax time.
Another option for providing gifts to your clients comes in the form of marketing. In some cases, you are able to write off 100% of the cost of the gift when it is considered to be a promotional expense, or marketing for your business.
If your company has swag that you want to gift to your clients, and it is deemed to be a reasonable business expense, you can write-off 100% of this cost.
If you are planning on giving gifts to your employees as well, there are a different set of rules where they are concerned.
The Canada Revenue Agency does allow for the giving of non-cash gifts to your employees, as well as awards. An award is considered something that is given to a limited number of people, or an individual, and they need to have done something ‘above and beyond’ to receive it.
The CRA will allow you to gift an employee up to the total value of $500 annually. For example, if you have decided to gift an employee a surfboard for their birthday and fair market value (FMV) of the board is $600, you will be able to write-off the first $500. There will be a taxable benefit of $100 ($600-$500) though that your employee will be responsible for.
You will also need to ensure that you are providing your employee with an award if you want to fall under the $500 deduction limit, not a reward. A reward is something that is typically based upon your employee’s work performance, and it is taxable. This may include reaching a certain sales milestone.
Another thing to keep in mind is that cash and near-cash gifts are always a taxable benefit for the employee. A near-cash item is something that is similar to cash like a gift card, or something that can be converted to cash, like a stock.
For example, back to gifting the employee with a surfboard. If you decide that you would rather give them a gift certificate to the local surf shop rather than picking the board out yourself, this will be considered near-cash. As a result, you would need to report this gift on their T-slip and that means that they will have to pay taxes on it.
To wrap up, remember there are a few things to remember when you are gifting. In order to not get flagged at tax time, ensure that the value of the gift is reasonable.
As with everything when it comes to bookkeeping and your business, make sure that you keep all of your receipts. When you are gift giving, it is also beneficial to make a note of who the gift is to, and what the purpose of the gift was so that you aren’t trying to figure that out at tax time. Your bookkeeper will appreciate it!
Need help from an expert?
There are many different rules when it comes to gifting, deductions and tax implications. Let one of our experts at Valley Business Centre help. For over 30 years, Valley Business Centre has been providing comprehensive bookkeeping, payroll and tax services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.
Disclaimer
This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.
