As a small business owner, you know that your success is directly tied to the relationships you build with customers and clients. And it's not just about the money — building relationships can be the key to developing long-term partnerships, referrals, and repeat business.
To help foster those relationships, many small business owners give gifts to customers or clients. But what about when those gifts are tax deductible? The Canada Revenue Agency (CRA) has rules on what kinds of gifts are deductible from income, and what kinds are not. In this article, we'll talk about some common gift-related questions that small business owners ask us daily.
The CRA needs to know that you're not trying to write off social gifts as expenses.
The CRA will ask for details about the gift, including:
- What the gift was worth.
- Who you gave it to.
- The date on which you gave it.
- They must relate to your business (for example, promoting your business through awards or certificates)
- They must not include any advertising message or logo related to your business
- The value of the gift must be less than $500 (or $75 if given to a business associate)
- The gift should be for a special occasion such as Christmas, a birthday, or an anniversary
- The gift should not be an incentive for services rendered by employees in exchange for salary or wages
The CRA will also want to know that you weren’t just trying to write off a personal expense as an expense related to your business (i.e., they need proof that this was not just a personal gift). Keep in mind that it's okay if you received something from your client in return for giving them a gift—as long as both gifts were worth over $50 and neither one constitutes taxable income for either party at tax time, then everything should be fine!Meals with employees, contractors, or associates
If you're hosting a meal with an employee, contractor, or associate, the CRA needs to know that it's not just a social event.
For example: If you own a small grocery store and you treat your customers to coffee and donuts every morning at 6:30 AM, this is likely considered a legitimate business expense because it helps cement your reputation as being helpful and friendly to those who shop there frequently. But if you buy coffee for the whole office once per year on someone's birthday or anniversary, that's probably not deductible—it's more like giving them candy at Christmas time than treating them like valued customers who deserve special treatment from their local grocer!
Similarly for contractors—if they're working onsite during the day in shifts where lunch breaks are necessary for everyone involved (like builders making repairs), then any meals purchased during those times are likely considered legitimate business expenses that can be deducted from taxes owed on income earned throughout 2018 (and beyond).
Meals on your own can be expensed as well, but only if you have traveled a significant distance from your home. For example, if you live in one province but have traveled to another for a business meeting and have bought lunch while there, then that meal is considered a legitimate expense. If you live in the same city as your client or customer but had lunch with them during the work day because it was more convenient than taking time off from work—that's not an expense you can write off on taxes.
If you are giving out gifts to customers or clients, there is a question of whether the gift can be deducted as an advertising expense.
Generally, gifts given in connection with advertising are not deductible. However, there is an exception for non-advertising gifts given to customers and clients. These non-advertising gifts may be tax deductible if they meet certain requirements:
If these requirements are met, then these types of non-advertising items can be deducted as a business expense on Schedule C for sole proprietorships or Schedule F for farmers and ranchers.
Gifts to staff
The tax law allows deductions for gifts to staff if they are reasonable and not extravagant in nature, as well as if they are given on a special occasion. The following guidelines apply:
When in doubt, ask.
If you're unsure whether a gift is deductible, it's better to ask than to assume. To find out if your company's expenses are tax-deductible, contact the CRA and/or ask your accountant or tax professional. If you're an employee, talk to your HR department.
If you're unsure about whether or not your gifts, entertainment, and meals are tax-deductible, contact a tax professional at Online Accountant or the Canada Revenue Agency (CRA). They will be able to tell you if they meet the criteria for deductibility. Getting your small business expenses organized before tax season remains burdensome for many business owners. Luckily, the team at Faber LLP is available to help you along the way. Online Accountant has been working with clients to uncover where their expense management function lacks and develop viable solutions to get them back on track. Reach out today for more information on the value we can provide to your business.