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Are gifts to employees deductible?

Businesses that give their employees gifts deserve praise for recognizing the contribution their team members make to the company’s success.

But once the gifts have been distributed and enjoyed, there is an important question to consider: Are those employee gifts tax-deductible? Better yet, if you ask that question before you make gift-giving decisions you may be able to recognize employee contributions and achievements in a way that limits the financial impact on your company.

In Canada, client gifts can be claimed as advertising and promotion expenses. For instance, a fruit basket, a bottle of wine or a cheese box could be deducted. An important distinction is whether you are giving a gift or providing entertainment. For instance, tickets to a hockey or basketball game would be considered an entertainment expense, which is only 50% deductible.

Unlike the United States (see below), there is no per-gift or per-person limit on advertising and promotion-related gifts in Canada. But the expense needs to be something you could reasonably justify for the size and focus of your business should a friendly tax agent come knocking at your door.

In the United States, you can deduct $25 per person per tax year in gifts. Any amount above that is not deductible. Any incidental costs – such as wrapping, packaging or mailing the gift – can be deducted over and above the $25 limit.

This can create an opportunity to add an element of luxury to your modest gift, if for instance you give gifts worth less than $25 and deliver them in custom wooden boxes – the cost of which would be tax deductible – that will impress your gift recipients.

If you are unclear about how your corporate gift-giving strategy fits with tax regulations, be sure to consult the ultimate sources – the Canada Revenue Agency, the Internal Revenue Service or your local tax agency, as well as a professional accountant. If you are giving gifts to employees, consider as well whether they will need to claim the gift as a taxable benefit to ensure they do not receive any unexpected surprises come tax season.