Canada Revenue Agency guidelines for employee fringe benefits

While travel awards are a proven motivator as an incentive tool, one often overlooked consequence can be the tax treatment of this benefit in the hands of employees. Since 'pure' incentive travel rewards are considered a taxable benefit, they can potentially trigger an unexpected - and unloved - tax hit in the hands of the employee.

While you should always seek professional tax advice for your particular circumstance, you can find helpful guidelines in Canada Revenue Agency's Income Tax Interpretation Bulletin IT-470R (Consolidated) related to Employees' Fringe Benefits. Here's a summary of key points outlined in this CRA Bulletin:

Holiday Trips, Other Prizes and Incentive Awards Where an employer pays for a vacation for an employee, the employee's family or both, the cost to the employer constitutes a taxable benefit to the employee. This includes the fair market value of use of a vacation property owned by an employer is used for vacation purposes by an employee, the employee's family or both. In any case, the taxable benefit may be reduced if there is conclusive evidence to show that the employee was involved in business activities for the employer during the vacation.

In a situation where an employee's presence is required for business purposes and this function is the main purpose of the trip, no benefit will be associated with the employee's traveling expenses necessary to accomplish the business objectives of the trip if the expenditures are reasonable in relation to the business function. Where a business trip is extended to provide for a paid holiday or vacation, the employee is in receipt of a taxable benefit equal to the costs borne by the employer with respect to that extension.

There may be instances where an employee acts as a host or hostess for an incentive award trip arranged for employees, suppliers or customers of the employer. Such a trip will be viewed as a business trip provided the employee is engaged directly in business activities during a substantial part of each day; otherwise it will be viewed as a vacation and a taxable benefit, subject, of course, to a reduction for any actual business activity.

Where an employee receives a prize or other award related to sales or other work performance, the fair market value of such an incentive is regarded as remuneration to be included in the employee's income. Keep in mind that Revenue Canada's income tax interpretation bulletins (ITs) provide technical interpretations and positions regarding provisions contained in income tax law, but do not carry the force of law.

Find out more at the Canada Revenue Agency website or consult your tax professional.