Prizes are a common tool for manufacturers to promote the sale of their products, in both wholesale and retail sales and distribution. So long as these awards are somehow tied to employee performance, they are taxable income which must be reported to the CRA. However, which party – the manufacturer or the employer – is responsible for reporting this income, when are source deductions required and when are these awards also subject to other payroll taxes such as CPP and EI?
To answer these questions, it’s important to make two distinctions: one, between awards or prizes provided by the employer versus the manufacturer, and two, between cash or non-cash prizes.
Prizes provided to employees in the form of cash, or near-cash, are always subject income tax source deductions. For income tax purposes, it does not matter whether the cash is given to employees by the manufacturer or the employer. Whoever actually passes on a cash prize must deduct income tax at source from the payment. However, the normal rules for reducing income tax at source also apply. For example, if an employee is effectively exempt from income tax because the person’s entire taxable income for the year is expected to be less than the deductions/credits available on the TD1, the employee can also file a TD1with the manufacturer to avoid income tax at source on payments received from that 3rd party.
Apart from income tax source deductions there are two differences in cash payments received from employers versus 3rd parties such as manufacturers.
One is the year-end slip used. If the cash payment is made by the employer, this must be reported on a T4, using code 40, in the “Other Information” area. If the payment comes from a manufacturer, the manufacturer reports this on the T4A, using code 154 in “Other Information”.
The other is CPP/EI. The CRA does not require CPP/EI source deductions or reporting unless the cash is received by employees directly from the employer. In other words, cash or near-cash prizes are pensionable and insurable only if there is an employment relationship between the entity providing the prize and the employee. The fact that the CRA requires reporting on a T4A where there is no such relationship marks such payments as CPP and EI exempt.
How to tell who “provides” an employee with a prize or award? For this purpose, the CRA seems to interpret “provided” literally. In other words, if a cash payment flows directly from a manufacturer’s bank account to an employee, the manufacturer has made this payment. Apparently none of any other details of the award or prize program itself matter.
The same literal interpretation of “provides” applies to non-cash prizes or awards. No matter who decides which employees are eligible, or how this is determined, if such an award passes through the employer’s physical or administrative control, it’s the employer who has provided it. Based on this CRA interpretation, it seems that even utilizing its own mailroom services to distribute gift cards or coupons would count as the employer “providing” such non-cash prizes or awards.
There is no difference in the year-end reporting requirements for cash versus non-cash prizes and awards. All performance related awards provided by employers are reported on a T4 and all such awards provided by 3rd parties are reported on a T4A. This is the same as for cash or near-cash prizes and awards.
However, there is a difference for income tax and CPP source deductions between non-cash prizes and awards provided by employers versus 3rd parties.
For income tax purposes, non-cash items are still income taxable and must be reported on a T4 or T4A. However, unless there are other cash payments involved, there is no practical means to deduct income tax from a physical item. This does not matter, in the case of employers, who presumably have other earnings from which the income tax related to non-cash awards could also be taken. By contrast, 3rd parties, who only provide employees with non-cash prizes, presumably have no such other earnings from which to make deductions at source. So, it’s not that the income tax rules are different for non-cash awards provided by 3rd parties. It’s just that, without other cash payments, there is no practical means for 3rd parties to deduct the income tax otherwise required.
For CPP purposes, the rules for cash and non-cash prizes and awards are the same. Unless there is an employment relationship between the provider and the employee, prizes and awards are not CPP pensionable.
For EI purposes, non-cash prizes and awards are not EI insurable, whoever provides them to employees. In this case, the rules are different. Most taxable benefits, such as non-cash prizes and awards, are not insurable earnings, no matter how they are received by employees.
Finally, it’s important to stress that the above relates to performance or sales related prizes or awards. In other words, items that are directly related to or measured by the employment services provided. Such prizes or awards that are directly related to employment do not qualify for the exemptions provided for other forms of employer gifts, such as Christmas or long-service awards.
Alan McEwen is an HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at email@example.com, (905) 401-4052 or visit www.alanrmcewen.com for more information.