A while back I wrote about the recognition points system my employer started using to give employees rewards for good work. I had thought the system was simple enough, but now that I have my T4, I see a few interesting (and disturbing) wrinkles.
Back in December, I thought the taxable benefit kicked in only when we redeem points. If this were the case, I would control when I got hit with extra taxes. But our finance department has since found out that CRA considers the points themselves to be valuable, so I get hit with extra taxes as soon I’m awarded points.
Fortunately, I found something worthwhile for me in the rewards catalog: gift cards for a retailer I use often enough. So, at least I can get some value back to offset my reduced pay due to higher tax withholdings.
Some more good news is that my employer has decided to give us all some extra pay to offset the taxes we pay on the recognition points. Unfortunately, they treat us all as though we’re in a 30% marginal tax bracket (Ontario income from $46k to $74k). This means higher income earners must pay some income taxes for their points.
A friend of mine works in finance at another company where the employees are treated as though they’re in a 26% tax bracket. So, I guess my company is a little better.
The most surprising news after I examined my T4 is that the company values the points 40% to 50% higher than their actual value. For the particular gift card that interests me, my initial award of 2000 points is worth $113.38, but is valued at $166.16 when calculating my taxes.
At my marginal tax rate, after the extra pay my employer gives me to offset the taxes, I pay $56.12 for my 2000 points. So, I pay about half the cost of the gift cards I get. Compared to what my employer says these points are worth, their value to me is about one-third.
In the end, I’m glad this new points system at least has positive value for me. I know the dollar amounts at stake are modest. But if it had worked out that the points cost me more in taxes than I could get back in gift cards, it would have made it hard for me to accept more reward points graciously.
The gift point company makes money from the corporations it signs up, that's where your money is going :(. Still better than not getting the bonuses I guess, but companies should just give cool efficient cash bonuses :).
ReplyDeleteMy company also has this system for some bonuses, and it's not clear if it's being added to my income and taxed as it should be. It's relatively small and gets mixed in with other bonuses, restricted stock, and share purchase plan transactions on my pay history at unspecified US$-C$ exchange rates, with random to me reporting delays.
@Greg: I assumed the gift point company was making at least some of their money from the over-valuation of the points, but I haven't sorted any of that part out, and probably never will.
DeleteI didn't go through all the gory details, but I went to significant effort to uncover the information I wrote. Then I confirmed it with our finance group. So, I can certainly believe that few people would go to the trouble of figuring this stuff out.