Entrepreneurs: The Tax Implication of Giving Gifts to Clients and Employees

You give gifts for many reasons, sometimes as a token of appreciation, sometimes to celebrate holidays and birthdays, and sometimes to say thank you. In business, you give gifts to clients to build goodwill, customer loyalty and get more business. Giving and accepting gifts are not taxable. The Canada Revenue Agency (CRA) allows business owners to account for gifts as tax-deductible expenses.  As with all tax deductions, only a certain amount, deemed reasonable, can be deducted as a business expense. If you can justify your gift expense with documents and proper reasoning, you can deduct it. This article will unwrap what kind of gifts qualify as tax-deductible expenses.

What Gifts Qualify As Business Expenses? 

According to the CRA, entrepreneurs can claim the amount spent on gifts as business expenses if the amount is reasonable. The value of “reasonable” depends upon your business. If you deduct a gift expense claiming it is being used to generate business income, the value of the gift should justify your business revenue.

For instance, a $300,000 revenue business spending $3,000-$5,000 on gift baskets or a branded purse seems unreasonable. Such a business might probably spend a few hundred dollars on a gift. However, a larger company earning millions in revenue could probably deduct a higher gift expense. 

Apart from being reasonable, a gift should suffice two more conditions. 

• The gift should be given to a client, supplier, investor, employee or someone that adds to the business income. 
• The nature of the gift should justify the purpose. For instance, a diamond ring cannot justify a business purpose, but a planner or a diary can. A Christmas card, a mug, or a tree decoration could be acceptable holiday season gifts to clients and employees. 

A professional bookkeeper can help you choose a reasonable gift that passes the CRA’s definition of a gift. 

Whenever you claim a tax deduction, ensure you save those receipts for the gifts and write down whom you gave it to and for what purpose. It could come in handy if the CRA comes knocking at your door. 

The tax treatment of gifts differs depending on the nature of the gift. 

Tax Treatment For Gifts Related To Meals and Entertainment 

If you are gifting something used for human consumption of food or entertainment, you can deduct 50% of the amount under the business expense “meals and entertainment”. 

• Entertainment can be taking a client out for a game or gifting tickets to a sporting event, even if you don’t accompany the client. 
• Meals can be a chocolate bar or goodies basket, taking a client out for lunch or dinner, or gifting meal coupons or gift certificates to a restaurant. 

Exceptions Where Entrepreneurs Can Claim 100% Deduction 

Sometimes, you can claim the entire amount spent on clients under advertising or promotional expense. 

• If you take your client out for dinner and later bill them, and they reimburse you their share, you can deduct 100% spent on the meal. 
• You may organize an event for customers offering free food and beverages and deduct 100% of the amount spent on the event as an advertising expense. 
• You may also deduct the entire food and entertainment amount spent for a fundraising event for a registered charity.

However, the money you spend on a social function like a wedding where you hand out business cards might not qualify as a business expense. 

Accepting Gifts From Clients

While small business owners can reduce taxes on gifts given to clients, they can also avoid paying taxes on gifts received from the clients. The one condition is that the gift should not be in exchange for payments of goods or services. If the gift is a payment, the business has to declare the gift as taxable income. Failure to do so could attract penalties, fines, or imprisonment, depending on the nature of the gift. 

Giving Gifts To Employees 

The CRA also allows entrepreneurs to consider gifts to employees as tax-deductible business expenses, provided the gift meets the following conditions: 

• The gift is in kind and not cash or near cash. 
• It is given for a special occasion like a birthday or as an award for something special. The award should have limited recipients. 
• The total value of the gift should be $500 annually. 

For instance, RA Associates gives his employee William a mobile phone worth $700 as an award for his creative wall painting. The business can deduct $500 as a business expense, and William has to add $200 to his taxable income. But if RA Associates gives a gift certificate, it would be considered near cash. While the business can still deduct $500 as a business expense, William must pay tax on the entire $700. 

Similar is the case with reward, which is taxable and tied to work performance. For instance, a cash bonus or a company’s stocks for achieving a sales target is a taxable reward. 

The rules of gifting are simple yet complicated. It is always better to check with a professional bookkeeper which gift qualifies for tax deductions before claiming it. 

Contact KSSP Partners LLP in Markham for Bookkeeping Services

At KSSP Partners LLP, our bookkeeping experts can help you record your expenses with necessary supporting documents so that you can make the most of tax deductions. To learn more about how KSSP Partners LLP can assist you with bookkeeping services, contact us online or by telephone at 289-554-5997.