Year-end gifts and the staff party are where many small employers create a taxable benefit without realising it. The rules have not changed for 2026, but a gift card or party bill can still end up on an employee's T4 if it falls outside the CRA's administrative policy. Those benefits go on the 2026 T4 slips that employers issue early next year.
The short answer: non-cash gifts and awards to an arm's length employee are tax-free up to $500 a year in total. Cash and near-cash gifts are always taxable. A staff party is tax-free when it is open to all employees and costs $150 or less per person, including taxes.
What the rules are and who they affect
- The rule: The CRA treats gifts and awards to employees as taxable employment income, then makes an administrative exception for qualifying non-cash gifts and awards up to a combined $500 a year, plus a separate exception for a non-cash long-service award.
- Status for 2026: No change this year. The limits below are the CRA's current published figures. The $150 social event limit has applied since 2018, when it rose from $100, so older guides quoting $100 are out of date.
- Who it affects: Every employer that gives staff a holiday gift, a gift card, a service award or a party. It matters most to owner-managed corporations, because the policy does not apply to non-arm's length employees, which includes the owner, shareholders and their relatives.
Source: CRA — Gifts, awards, and long-service awards and CRA — Social events and hospitality functions.
Are employee gifts taxable? The CRA limits at a glance
| Item | Tax-free limit | What happens above the limit | Conditions |
|---|---|---|---|
| Non-cash gifts and awards | $500 a year, all gifts and awards combined (fair market value, including taxes) | Only the amount over $500 is taxable | Arm's length employee; gift for a special occasion or award for overall contribution to the workplace |
| Non-cash long-service award | $500, once every 5 years | Only the amount over $500 is taxable | At least 5 years of service, and at least 5 years since the last long-service award |
| Cash and near-cash gifts | $0 | The full amount is taxable | Includes cash, cheques and gift cards that do not meet the CRA's conditions |
| Items of small or trivial value | Not counted toward the $500 | — | Coffee or tea, T-shirts with the employer's logo, mugs, plaques or trophies |
| In-person social event (for example a holiday party) | $150 per person, including taxes | The full cost per person is taxable, not just the excess | Available to all employees; spouses or partners attending count as persons |
| Virtual social event, meals and delivery only | $50 per employee, including taxes | Taxable | Available to all employees |
| Virtual social event with entertainment | $100 per employee, including taxes | Taxable | Available to all employees |
The two $500 limits are separate. If a long-service award costs less than $500, the unused part cannot be added to the annual $500 for gifts and awards.
What counts as a non-cash gift
The $500 exception covers a gift for a special occasion, such as a religious holiday, a birthday, a wedding or the birth of a child, and an award that recognises an employee's overall contribution to the workplace. A reward for job performance, such as hitting a sales target, is not an award under the policy: it is taxable whatever form it takes.
The value is the fair market value of the item, not what you paid for it, and for a non-cash gift it includes GST/HST and provincial sales tax. A gift that cost you less because of a bulk discount is still valued at what the employee would pay for it.
Are gift cards taxable benefits?
A gift card is near-cash, and fully taxable, unless it meets all of the CRA's conditions for treating it as a non-cash gift:
- it can only be used to buy goods or services from a single retailer or a group of retailers named on the card;
- its terms state that the amount loaded on it cannot be converted into cash; and
- the employer keeps a log recording the date the card was given, the reason for it, the type and amount of the card, and the retailer or retailers.
A card that meets the conditions counts toward the $500 annual limit like any other non-cash gift. A card that fails them is taxable from the first dollar: a $100 prepaid card that works anywhere, for example, is near-cash and goes on the T4 in full.
Is a holiday party a taxable benefit?
Under the CRA's administrative policy, an in-person party or other social event is not a taxable benefit when:
- it is available to all employees; and
- it costs $150 or less per person, including taxes. Each spouse or common-law partner who attends counts as a person when you divide the cost.
If the cost per person is over $150, the CRA treats the whole amount as a taxable benefit, not just the part over $150. A $160-per-head party is a $160 benefit per attendee, not a $10 one. When the budget is close to the line, a lower menu cost or a smaller bar tab usually costs less than the payroll work of a taxable event.
Source: CRA — Social events and hospitality functions.
Can the business deduct the party in full?
Meals and entertainment are normally only 50% deductible. Section 67.1 of the Income Tax Act lifts that limit for up to six special events in a calendar year where the food, beverages or entertainment are generally available to all employees at a particular place of business. A holiday party for all staff at a location qualifies; a dinner for managers or owners only does not. The same six-event exception applies when recapturing GST/HST input tax credits on meals and entertainment.
Source: Justice Laws — Income Tax Act, section 67.1 and CRA — Business expenses.
How to report a taxable gift
When a gift, award or party is taxable, the benefit runs through payroll in the pay period it is given:
| Type of taxable gift | Income tax | CPP | EI | T4 reporting |
|---|---|---|---|---|
| Non-cash gift or award (amount over the limit) | Yes | Yes | No | Box 14 (employment income), box 26 (CPP pensionable earnings) and code 40 |
| Cash or near-cash gift | Yes | Yes | Yes | Employment income in box 14, and pensionable and insurable earnings |
Because a non-cash gift puts no cash in the employee's hands, the source deductions come out of their regular pay. Some employers gross up the gift so the employee is not out of pocket. That gross-up is itself taxable income. For the wider payroll picture, see our source deductions guide for employers and the CPP, CPP2 and EI explainer.
Source: CRA — Determine if a benefit is taxable and CRA — Employers' Guide: Taxable Benefits and Allowances (T4130).
Edge cases owner-managers get wrong
Gifts to yourself and your family. The $500 policy is for arm's length employees. If your corporation buys a gift for you as a shareholder-employee, or for your spouse or child on the payroll, the exception does not apply. Treat it as a taxable benefit, or simply do not run personal gifts through the company.
One $500, not one per occasion. The limit covers all non-cash gifts and awards to an employee for the year combined. A $300 holiday gift and a $300 birthday gift to the same employee is $600, and $100 of it is taxable.
Performance rewards dressed up as gifts. A gift card for "best quarter ever" or for closing a deal rewards job performance. It is taxable even if it is a non-cash item worth less than $500.
The party that is "for all staff" but is not. If only one team, the managers or the owners are invited, the event is not available to all employees and the $150 rule does not protect it. It may also lose the 100% deduction under the six-event exception.
Long-service awards on the wrong schedule. A non-cash award for 5 years of service is tax-free up to $500. A second award at 7 years is not a long-service award under the policy, because 5 years have not passed since the last one. It counts toward the annual $500 instead, if it qualifies at all.
Missing gift card logs. The log is one of the conditions. Without it, a store card fails the test and is near-cash, taxable in full. Keep the log with your payroll records.
What to do before your December payroll
- Decide on gifts in kind or qualifying gift cards, not cash or open-loop prepaid cards, if you want them to stay tax-free.
- Total each employee's gifts and awards for 2026, including anything given earlier in the year, against the $500 limit.
- Budget the party per person, spouses and partners included, and keep it at or below $150 including taxes.
- Start a gift card log now with the date, reason, card type, amount and retailer for each card.
- Run anything taxable through payroll in the pay period it is given, so it is in the 2026 T4 slips your business must issue by the last day of February 2027.
Key takeaways
- Are employee gifts taxable? Non-cash gifts and awards to arm's length employees are tax-free up to $500 a year in total. Cash and near-cash gifts are always taxable.
- Gift cards count as non-cash only if they are tied to named retailers, cannot be converted to cash, and are logged.
- A holiday party open to all employees is tax-free at $150 or less per person including taxes. Over that, the whole cost is a benefit.
- Up to six all-staff events a year are fully deductible instead of 50%.
- Owners and their family fall outside the gift policy.
RN Canada runs payroll and prepares T4 slips for owner-managed businesses across Canada, from offices in Edmonton and Vancouver and remotely everywhere else. If you want your year-end gifts and party set up so they stay tax-free, or the taxable ones coded correctly before the T4s go out, our bookkeeping and payroll team can help.