Articles

Performance awards and tax

Business Brief June/July 2007
By Selwyn Cohen

It is common for employers to give awards to employees (and also often their spouses or companions) for outstanding performance during a past period. What most employees and perhaps some employers do not realise is that the award is taxable in the hands of the employee and spouse. Presumably there are employers who are aware of this, but do not make the appropriate declarations.

Not taxable
The benefit is, however, not taxable if it is given by someone other than the employer. This is illustrated by the facts of a case in which the Special Income Tax Court had decided that an award was taxable, but the Provincial Division of the then Supreme Court came to a contrary conclusion.

Wins holiday
What had happened was that an employee of a Delta Motor franchise was awarded a prize of a free seven-day holiday overseas for himself and his wife. The prize was neither redeemable nor transferable.

Tax on the award
The Special Income Tax Court decided that the taxpayer had to pay tax on the award. The employee appealed to the Provincial Division of the Supreme Court and succeeded. The court based its decision on the fact that the employee did not receive property on which a monetary value could be placed since he was not permitted to turn the prize into money and, secondly, because even if there had been an accrual, paragraph (c) of the definition of gross income in the Income Tax Act could not apply because the services that resulted in the award were not rendered to Delta (which had made the award), but to the employer's own employee.

There was no causal link between the receipt of the amount and services rendered.

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