Employee gifts, gift cards and awards: what the CRA taxes and what it doesn't

Summary

If your corporation gives an employee something of value, Canada’s Income Tax Act treats that value as pay. Pay belongs on that employee’s T4, which is the slip that reports employment income to the Canada Revenue Agency (the CRA). Some gifts stay tax-free anyway, up to $500 a year per employee. That $500 comes from policy the CRA publishes on its own website rather than from an exemption written into the Act, so the agency can change it at any time, without a federal budget or a vote in Parliament. Here is how the policy runs for the 2026 calendar year:

1. Non-cash gifts and awards, meaning the item itself rather than money (e.g. a watch or a food-and-wine basket), are tax-free up to $500 per employee per year. The $500 is measured by what the item would sell for in a store rather than by what you paid. Sales tax counts inside it, both GST/HST (the federal goods and services tax, or the harmonized sales tax where a province blends the two) and any separate provincial sales tax.¹
2. Above $500 only the excess is taxable, so $650 of gifts across a year adds $150 to that employee’s employment income. The CRA calls that a taxable benefit: the employee is taxed on the $150 as though it were $150 of extra salary, and you don’t pay that tax for them.
3. Cash is taxable from the first dollar, and so is reimbursing an employee who chose and bought their own gift and then handed you the receipt. So is near-cash, meaning anything easily turned into money, such as a prepaid Visa or Mastercard.²
4. None of the above reaches a gift to you, your spouse or anyone related to you, because the CRA switches its policy off for shareholders and relatives.³

We’d usually recommend non-cash gifts inside the $500-a-year limit for the staff you aren’t related to, and plain salary for the family. Where you and your spouse are the only two people on the payroll, that recommendation has nothing to work with, because neither of you can receive a tax-free gift. Take the money as salary or dividends instead.

The $500 a year for gifts and awards

One employee can receive an unlimited number of non-cash gifts and awards in a calendar year. None of it is taxable while their combined fair market value stays at $500 or less, including GST/HST and any provincial sales tax.¹ Fair market value means what the item would sell for in an open market rather than what it cost you. So a discount available to businesses but not to the public doesn’t help, because the ordinary retail price is what counts toward the $500. Tax sitting inside the limit rather than on top of it also matters when you shop. A gift priced at $500 on the shelf is already over the line, so work backwards from $500 with your province’s tax included.

The reason you gave it matters as much as the amount does. The CRA requires a gift to mark a special occasion of some kind (e.g. a birthday, a wedding, or the birth of a child). An award has to recognise an employee’s overall contribution to the workplace. The award also has to be chosen against criteria you wrote down in advance, such as a nomination form or a short written policy, and to go to some of your staff rather than to all of them. Anything handed over for hitting a target or finishing a project is a reward in the CRA’s vocabulary, and a reward is taxable in full at any value.

Small items don’t count toward the $500 at all, and the CRA names coffee and tea, T-shirts, mugs, plaques and trophies. However, it puts no dollar figure alongside those examples, so where “small” stops is judgment rather than a rule.

Gift cards, and what counts as cash

A gift card can count as non-cash, and sit inside the $500, but only where all three of the CRA’s conditions hold. They apply to cards provided on or after January 1, 2022:²

1. The card comes loaded with money and is usable only at a single retailer, or at a group of retailers named on the card.
2. Its terms and conditions state clearly that the balance can’t be converted into cash. Many retailer cards say nothing either way, and in our view silence isn’t enough: where the terms don’t rule out a cash-out, treat the card as failing and the full amount as taxable.
3. You keep a log recording, for each card, the employee’s name, the date, the reason, the card type, the amount and the retailer.

The log is one of the three conditions rather than tidy record-keeping. A card meeting the other two with no log behind it is near-cash and taxable in full. Keep the log with your payroll records, and don’t send it anywhere unless the CRA asks for it.

A card that meets all three buys your employee some choice, and it costs you a reading of the terms plus a log somebody has to maintain. A prepaid card on one of the big payment networks (e.g. Visa, Mastercard or American Express) spends anywhere, which is exactly why it fails condition 1, so it’s taxable however small the amount. Reimbursement counts as cash rather than as a gift. A $300 jacket is tax-free where your company buys it and hands it over, and fully taxable where the employee buys it and you pay them back.

Gifts to yourself, your spouse or anyone related to you

The CRA switches its gift policy off for employees who don’t deal at arm’s length with the employer. The agency describes them as a relative of the owner, a shareholder, or someone related to a shareholder.³ Dealing at arm’s length means dealing the way strangers would, with each side looking after its own interests. A company and the person who owns it are the opposite of that. So if you own shares of the company at all, and there’s no minimum percentage here, the $500 isn’t available to you. The same goes for a spouse or an adult child on the payroll, with the full fair market value taxable from the first dollar.

There’s a worse version of the same problem, and it turns on the corporation’s own tax bill. Normally the cost of a gift to an employee is a business expense, subtracted from the corporation’s profit before its tax is worked out. Sometimes the CRA decides a gift wasn’t pay for work at all, but value you took out of the company because you own it. The Act calls that a shareholder benefit and taxes the whole value in your hands under subsection 15(1). A benefit given because of share ownership also isn’t an outlay made to earn income, so the corporation usually can’t subtract the cost at all under paragraph 18(1)(a).³ The same dollars are then taxed once inside the company and again personally on you.

A gift that is actually reasonable pay for your work can instead be treated as employment compensation, with payroll reporting and a business deduction. Putting an owner’s purchase on a T4 doesn’t establish that purpose by itself, so document why it belongs to the employment relationship.⁴ In our view paying yourself in money is usually simpler than making that case for a personal object.

Putting a taxable amount through payroll

Where a gift or award does become taxable, add its value to that employee’s pay for the period on paper. Work out income tax and Canada Pension Plan contributions on the higher total, then take the extra out of the cash part of that paycheque. Their take-home pay drops even though the gift wasn’t money. Don’t withhold Employment Insurance premiums on a non-cash or near-cash amount, while a gift of actual cash has all three withheld: income tax, CPP and EI.⁵ Report the value in box 14 (employment income) and box 26 (pensionable earnings) of the T4, and again under code 40 in the “Other information” area. Add box 24 (insurable earnings) where the gift was cash. Put it through in the pay period the employee received it rather than at year-end. The CPP contribution rates for 2026, and the maximum earnings those rates apply to, are in our guide to salary or dividends.

How often this changes

Read the CRA’s gifts and awards page once a year, before you plan December. The $500 and the gift-card conditions are the CRA’s own policy rather than law passed by Parliament, so the agency can change them at any time, and it has: the cash and gift-card definitions were rewritten for cards provided on or after January 1, 2022.² No CRA or Finance Canada page states that the $500 is indexed, so we wouldn’t assume it rises with inflation. Read the page again sooner if you hire your first employee who isn’t a relative or a shareholder.

Closing thoughts

The dollars here are small next to the paperwork around them, which is a decent argument for keeping the whole thing simple: one round of non-cash gifts in December, bought by the company, with the log written as you go. What earns the topic any attention at all is what happens when it goes wrong, because a gift meant as a thank-you turns up as a chunk of tax taken off somebody’s next paycheque. Working out in November what you’ll give and how you’ll record it costs nothing.

How we handle it

We set the gift budget with you before you commit, read the terms of any gift card you plan to buy, and set up the log the policy asks for. Where an amount is taxable we run it through the pay period it belongs to, and the T4s come out of the same file. Payroll and benefits sit inside our GST/HST and payroll tax work.