Everything you need to know about reporting corporate gifts to clients and employees as deductible expenses during the holiday season.
As we enter the month of December and prepare for the end of the year, individuals and organizations start thinking about ways to demonstrate appreciation to clients, employees, contractors and key stakeholders. Corporate gifts could qualify as deductible expenses for your business. Learn more about what to consider when buying corporate gifts this year.
What is a corporate gift?
Gifts from a business to its clients, consultants, employees, vendors, and prospects are considered corporate gifts. They are a personalized way to show appreciation, advertise your business and even build relationships with prospective clients. Corporate gifts can be given in appreciation of work anniversaries, as a thank you for a recurring client, and in recognition of personal or professional achievements such as completing a master’s program or starting a family. They also make a great welcome or onboarding gift to new employees and clients. Corporate gifts can be small or grand. They can vary from flowers and a chocolate box to merchandise, swag, baked goods, or even show or sports event tickets. The CRA establishes specific rules and criteria to regulate corporate gifts and how they are allocated and reported. Here is what you need to know:
Corporate Gifts for employees
Offering corporate gifts to employees is an excellent way to show appreciation and increase talent retention while improving internal culture. However, businesses must observe criteria and tax implications according to the type and value of the gift.
According to the CRA, gift cards and cash bonuses are taxable and included in the employee’s T4. In contrast, non-cash or near-cash gifts are not taxable. The exception is when the market value of non-cash gifts exceeds $500. In that case, the exceeding amount counts as taxable income. Businesses should always consult a tax expert and discuss implications with an accountant.
Corporate Gifts for clients
Gifts given to clients can also qualify as corporate gifts. According to the CRA, business expenses incurred to gain or maintain clients can be tax deductible. How these expenses are recorded and reported can take different forms. For example, corporate gifts such as gift cards, sports tickets, or entertainment expenses would fall under meals and entertainment (50% deductible). Gifts like stationery and personalized items used to promote your business to new clients or to show appreciation to existing clients can fall under advertisement expenses (100% deductible).
The following are considerations to keep in mind when declaring corporate gifts:
1. Ensure that the corporate gift value is reasonable in proportion to the nature of the business
There is no specific regulation or limitation regarding the value of deductible expenses for corporate gifts. However, businesses should consider the size of the client and the amount of business it represents. A $1,000 expense to a client who brings your company $100,000 per year could be reasonable. But the same amount spent as a corporate gift to a client whose account brings $2,000 of business per year might be considered unreasonable.
As stated above, corporate gifts are those used to obtain or maintain clients. If the amount of the gift exceeds the amount of business, that can be grounds for investigation.
2. Demonstrate the business purpose of the corporate gift
For a gift to be considered a deductible expense, one must demonstrate the business purpose of the gift. This means that the person receiving the gift has a direct association with your business. In general, customers, suppliers, investors, and contractors would qualify. However, family members or friends who support your business or lend a hand from time to time could also be eligible.
3. Keep the receipts
According to best practices, all receipts related to corporate gifts expenses should be saved. Accounting records should also include specific details on the reason for the gift, how it qualifies for business purposes, and to which client they are applicable.
4. Ensure the correct allocation for the type of gift
Not all gifts are 100% deductible or fall within the same allocation. When allocating corporate gifts, you should ensure their allocation to the correct category:
- Meals and Entertainment: gift cards for restaurants or sports and entertainment tickets still fall within the meal and entertainment category (50% deductible) even if given to a client or employee.
- Advertising and Promotion: Gifts outside of the meals and entertainment category can be allocated to advertising and promotion expenses (100% deductible). This would include stationary, flowers, promotional materials, etc.
- Nonprofit gifts made to a non-profit should include a mention of the contribution or sponsorship.
- Charitable Donations: Donations to a charitable organization should be accompanied by an official donation receipt. These would be reported under charitable donations on a corporate tax return or a deductible tax credit on personal income tax returns for non-incorporated entities.
Need help ensuring compliance with CRA regulations?
Our experts at E&E can help clarify your questions about corporate gifts and charitable donations and ensure you are compliant with CRA guidelines. Check out our Small Business Consulting services or contact us today.
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