Employee Gifts and Awards

A recent revision of tax policy regarding employer-provided gifts and awards to their employees is good news for both employers and employees.

Effective for the 2001 and subsequent tax years, employers can give their employees two non-cash gifts per year on a tax-free basis to a maximum of $500 for special occasions. In addition, non-cash gifts now include non-cash awards given to honour employees’ length of service or to recognize other achievements.

This new policy should make it easier to administer these costs, as employers will no longer have to incur the administrative burden of valuing these small gifts and awards for T4 reporting purposes.

The $500 annual limit includes the total cost of the two gifts or awards that you give to an employee, including taxes (i.e., GST/HST and PST). The amount is considered tax-free, as the employee does not have to declare the gifts or awards as part of his or her taxable income.

A further change in policy allows the business to deduct the cost of the award even though it has not been included in the employee’s income.

Two Non-cash Gifts/Awards a Year

Note that you are allowed to give only two non-cash gifts/awards to an employee in a year. What happens if you give more than two gifts or awards to an individual employee? When determining which gifts are tax-free, you can choose the ones for which the combined cost is closest to the $500 yearly limit.

The full fair market value (not the cost of the item) of the remaining gift or gifts is then included in the employee’s income and subject to deductions for CPP and income tax.

Fair market value is considered to be the amount an employee could receive if the item was sold immediately after it was received. For example, say you gave four awards to a valued employee last year — a serving tray (that cost $200), a travel clock ($100), a watch ($300) and a pen set ($50).

You could choose to exclude the two awards for which the total is closest to the allowable $500 limit. As you would likely choose to exclude the cost of the serving tray and the watch to maximize the limit of $500, you would then include the full fair market value of the travel clock and pen set in the employee’s taxable income.

What if you gave a retiring employee a gold watch that cost $350 but it was appraised for $550? The gift would not be considered a taxable benefit to the employee since the cost to you (including taxes) does not exceed the $500 yearly limit, even though the fair market value is higher.

What happens if a gift or award includes the company logo or name as an integral part of the design? In a recent case, an employee who had received a gold ring for 15 years of service challenged the company’s including a $562 amount of taxable benefit in his income.

The employee argued that the ring, which was a traditional company gift for long-term employees, was worth significantly less than the amount included in his income because it had been engraved with the company’s name and logo. The Tax Court concurred and determined that the award was worth only $73 in scrap value and the employee was reassessed for this much lesser amount.

Cash and Near-cash Gifts and Awards

This new policy does not apply to cash or near-cash gifts or awards, which are still considered taxable benefits.

Near-cash gifts and awards include items such as gift certificates, gold nuggets, stocks, silver, precious jewels and precious metals. Also keep in mind that the cost to the employer includes GST/HST and PST. So if you awarded your employee a bonus of $1,000 for implementing a timesaving business process and later in that same year, a gift certificate for $125, you would have to include the total of these cash and near-cash gifts, i.e., $1,125 in Box 14 of the employee’s T-4 as a taxable benefit. As cash and near-cash gifts are considered insurable, you must also deduct Employment Insurance (EI) premiums.

However, if it is a non-cash taxable benefit, you do not deduct EI premiums.

Incentives and Recognition

Providing incentives to employees who develop innovative ideas or demonstrate exceptional performance has long been a positive means of increasing employees’ productivity and promoting loyalty. The increased limit for the giving of non-cash gifts and awards to your employees can help you recognize your employees’ special occasions and reward their efforts.

MANAGEMENT

Put it in Writing

When an owner/manager first starts out, the business may look simple enough. But add a partner or a shareholder, sprinkle in a few employees, expand your customer base and find yourself needing to deal with more and more regulations and taxation rules, and all too soon you realize the need for careful documentation.

While business agreements are sometimes founded on a handshake and a verbal agreement and sometimes a letter of intent, perhaps it is time to put these agreements in writing.

Formalizing the understandings between the company and its employees, suppliers or contractors with a written agreement or contract ensures the terms are clearly defined and avoids misunderstandings that could be costly.

Of course, when you are drawing up any document that stipulates the terms of agreement between your company and other parties, it is important to get professional advice before finalizing the arrangement. Here are some agreements that are commonly used in business today and may be applicable in your company dealings.

Confidentiality Agreement

Whether confidentiality is addressed in a separate agreement or is included as a provision in another agreement with an employee, commission sales representative or consultant, the confidentiality agreement protects your company’s interests, such as trade secrets, customer lists and other proprietary interests.

Consulting Agreement

A consulting agreement sets out matters such as the services to be provided by a consultant, the duration, and the remuneration. This agreement is important for clarifying the understandings between the company and the consultant. It also serves to establish that the consultant is not an employee for purposes of withholdings such as Workers’ Compensation and income tax.

Commission Sales Agreement

A commission sales agreement sets out the terms of the relationship between your business and the commission salesperson that is representing and selling your company’s products or services. Elements of the agreement usually include matters such as the structure of commission and other compensation, scope of territory and whether it is on an exclusive or non-exclusive basis, provisions if the company supplies a company vehicle, and reimbursement for travelling and entertainment.

A commission sales agreement will also usually include provisions for non-competition as well as confidentiality to protect the company’s interests. Like the consulting agreement, the commission sales agreement also serves to establish that the salesperson is not an employee for taxation and other purposes.

Employment Agreement

An employee agreement sets out the rights and obligations of the employee and employer, including salary and other payment structures, timing of salary increases, hours of work, arrangements for overtime and vacation time, health and benefit plans, the person to whom the employee reports, and if applicable, the provision of a company vehicle.

An employment agreement will often include provisions for non-competition and confidentiality to protect the employer’s interest in areas such as trade secrets, customer lists and other proprietary interests.

Management Agreement

This type of contract is essential if your business needs to contract management to assist with the business.

The agreement should cover such areas as the services to be provided, the manager’s responsibilities, the rate of remuneration and procedures for billing and payment, and the duration of the contract. In addition, the agreement should include provisions for confidentiality and proprietary of business items and an explicit understanding that all services provided will not breach the laws, rules and regulations that govern good stewardship of the business.

Non-competition and Non-disclosure Agreement

This agreement restricts employees, businesses, consultants or contractors who work with your business from copying or disclosing your company’s processes, confidential information or trade secrets for a predetermined period or within a specific geographic area.

This type of agreement lets you outsource for expertise in the development of projects without the fear of losing your investment in time and money or of having a proprietary process pirated.

Partnership Agreement

A partnership agreement is used when two or more individuals, corporations or partnerships carry on business or trade for the purpose of making a profit.

This agreement typically sets out the name of the partnership, the responsibilities of the individual partners, and provisions for the retirement, death or expulsion of partners. The agreement may also incorporate dispute mechanisms, buy/sell provisions, financing terms, repayment of capital, confidentiality, remuneration, indemnification rights and a host of other issues depending on the partners’ needs and the business they are in.

Shareholders’ Agreement

A shareholders’ agreement sets out the rights and obligations of the shareholders beyond the rights and obligations that are established by regulations and statutes of the applicable corporate legislation, depending on whether the corporation is federally or provincially incorporated.

The agreement usually covers matters such as the amount of issued stock, names of shareholders and the amount and class of shares that they own. Other matters include necessary approvals by shareholders, nominees of shareholders and buy/sell provisions as well as organizational matters such as the number of directors, name of the public accounting firm, location of books and records, and the cap on the indebtedness that the incorporation can incur. As this agreement protects the interests of the shareholders, no owner-managed business with more than one shareholder should be without one.

Work with the Professionals

Formalizing the working relationship with employees, contractors, consultants, shareholders and others makes good business sense. Of course, it is not always possible to arrive at an agreement that completely satisfies all parties so negotiations may be necessary in order to find compromises that will work.

To make sure an agreement does not disadvantage your business, you are well advised to involve your chartered accountant and your business lawyer in the development and negotiating stages.

Your chartered accountant can assist you in determining the current and long-term consequences for your business and personal financial planning as well as ensure that you have carefully considered any tax consequences that could arise.

Before signing on the line, all parties should get independent legal and tax advice to ensure they fully understand the impact of the provisions of the agreement.

MONEYSAVER

Keeping Customers

Advertising to create product/service awareness and attract customers is a significant cost for most businesses. Equally important is to allocate some of the advertising budget to train your front-line employees in delivering quality customer service. In today’s competitive market, not only do you need to be sensitive to changes in your market but you also need to continually look for ways to differentiate your company from your competitors.

Like every business today, your goal is to increase sales. However, while advertising may bring customers to your place of business, it is your company’s ability to deliver exceptional customer service that will keep them coming back.

The other side of the coin is that poor customer service will send them straight to your competitor’s place.

Exceptional Service is the Key

Of the four major factors that attract customers — location, price, product/service and customer service — some customers will always place a higher value on price. But trying to maintain customers on price alone may mean that you may be missing one of the most important elements of customer retention — exceptional customer service from representatives who are knowledgeable about your products or service and who consistently provide courteous, high quality service.

When your representatives are able to meet your customer’s expectations for service, the seeds of loyalty are planted and the next time they want a similar product or service, these customers will return. However, if you are not committing the time and money to training your representatives to deliver this level of service, you may be losing more sales to your competitors than you realize.

Product/Service Training

Your representatives’ ability to provide exceptional service starts with their having a solid knowledge of the product/services you offer. All of your employees need to be fully aware of the specifications and other features of your products or services. And since this knowledge is a dynamic in the business, it is important to keep them up-to-date as products or services change or improve.

Follow-up sessions also serve to keep staff enthusiastic about the company’s offerings. Not only should staff be provided the requisite training programs and be encouraged to use the products or services you offer, they need to be informed about your competitor’s products or services so that they can offer credible comparisons.

Representatives also need to know what your company is all about and what it stands for. When a prospective customer walks through the door and asks about a product or service, the salesperson has an opportunity to demonstrate that the customer is purchasing not only the item but also the experience and reputation of your company.

Most businesses today offer a range of prices in each category to meet the needs of customers to make comparisons. Representatives should be able to point out the features of products/services at the various price points. In this way, they can provide the information that can help the customer make the best purchase decision.

Consider also that comparisons of the various offerings may help the customer conclude that the higher end item is the better choice.

Customer Service Training

Studies show that there is a direct correlation between exceptional customer service and a company’s sales and profits. Conversely, poor service is the most cited reason for customers defecting to another company.

Have you ever left a store without making a purchase simply because you could not catch the eye of a salesperson who was talking on the telephone or worse still, couldn’t even find a salesperson?

Personal customer service includes things such as asking the customer if you can be of assistance, returning phone calls promptly, smiling and making eye contact, greeting a regular customer by name and overall treating each person that walks in the door as a valued customer regardless of the purchase.

These are the things that keep your customers coming back.

Service is also the follow up after the transaction is completed. A phone call to ask customers if they were pleased with their purchase or the service communicates that your company is interested in their satisfaction.

Consider also that this is your opportunity to confirm those areas in which your business does well as well as hear about those areas that may need improvement.

Another aspect of service is the way your company deals with a customer’s complaints and problems. The unhappy customer deserves the same respect and prompt attention as the satisfied customer. Consider also that bad news spreads fast.

Here your staff should be trained to listen carefully and ask questions to ensure that they fully understand the nature of the complaint so that the problem can be rectified as soon as possible.

Exceptional Service Keeps Customers Coming Back

While companies spend thousands of dollars on marketing to get the attention of potential new customers, sometimes they do so without committing sufficient resources to keep those customers once they walk through the door. Allocating some of that budget to educating your staff about your products and services and the importance of quality customer service will help ensure a better return on your advertising dollars.

TECHNOLOGY

The USB Advantage

Until recent years, computer connectors have not kept pace with the faster connection speeds of today’s peripherals.

If you have purchased a computer in the last few years, you may have noticed additional connectors on the back of the computer. Called USB ports, an acronym for Universal Serial Bus, these are a relatively new technology that provides a simple, standardized way to connect external devices to a computer.

The development of USB has solved some of the major headaches that users often experienced when connecting peripherals such as digital cameras and scanners to their computers. The decade-old serial parallel ports often meant you had to install a special card in the computer itself to connect a device that required faster connections — an installation that could be a daunting task for many users. Even then the speed of the connection was usually less than satisfactory.

If you disconnected the device and later reconnected it, you would need to reboot your computer in order for it to be recognized. Another limitation was the number of connectors available — most computers only came with one parallel port, usually used for the printer, and two serial ports.

Since its introduction in 1996, USB has conquered the PC and peripherals market. The easy-to-use USB connectors are now found in virtually all new PCs as well as peripherals such as PC cameras, scanners, printers, digital camcorders and digital modems.

With a maximum data transfer rate of 12 megabits per second, the USB is lightning fast compared to yesteryear’s serial and parallel ports.

Just Plug it in

A very attractive feature is that you don’t have to open the computer case to add and configure new peripherals nor do you have to reboot your computer when you are connecting with USB.

The USB technology is plug and play.

Just plug it in and everything configures automatically. What’s more, USB devices are “hot-swappable”. This means that they can be connected and disconnected at any time with no need to reconfigure or reboot your computer.

If your older model PC doesn’t have USB ports, you can purchase an adaptor, plug it into your computer, and let your operating system auto-detect it.

USB is compatible with all modern Windows operating systems (except Windows NT and Windows 95 release 1). These operating systems will usually have the driver for the USB device or it can be downloaded from an update site.

Expand with Ease

Most PCs today come with one or two USB sockets. Higher end models may have six. With so many USB devices on the market today such as scanners, Web cams, printers and network connections, most users will need many more ports.

The easy solution is to buy an inexpensive USB hub. These usually have four ports but may have more. Simply plug the hub into your computer and then plug your devices into the hub. You can also plug a hub into a hub to build up dozens of USB ports on a computer. What is most amazing is that you can connect up to 127 devices to the host computer.

The hubs come powered or unpowered; that is, low power devices such as your mouse or digital camera can get their power right from the hub rather than from the computer. High power devices such as printers and scanners have their own power supplies so a powered hub is not required.

Speed, Speed and More Speed

The revolutionary first generation of USB is already being replaced with a new version that is even faster. Introduced earlier this year, USB 2.0 (sometimes called Hi-Speed USB) is capable of 40 times the speed of USB 1.1. This new generation offers enough bandwidth to support high-performance peripherals such as high-resolution digital cameras, broadband modems, MP3 players and wireless networks. It also has backward capability so that it is compatible with USB 1.1 devices, cables and connectors. These of course will work at their normal speed.

The new USB 2.0 peripherals now on the market are also backward capable; that is, they will work even when plugged into a USB 1.1 port. Of course, as to be expected, the performance is faster when both the computer and the device support USB 2.0.

For even greater speed, consider the latest, fastest port/bus available, “Firewire”. Officially known as IEEE 1394, but invented by Apple under the Firewire moniker, this is a 400Mbps bus that is commonly used to transfer video from a digital video camera into the PC.

Before you Upgrade

Just about every peripheral now comes in a USB version. If you plan to upgrade your PC or any of your peripherals, be sure to consider the advantages of the USB technology.

BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

BUSINESS MATTERS is prepared bimonthly by The Canadian Institute of Chartered Accountants for the clients of its members.

Richard Fulcher, CA – Author; Kathleen Aldridge, B.A., Dip. Ed. – CICA Editor.