Canadian Taxation Notes

Acco 643 Lecture NotesPart II

EMPLOYMENT INCOME

DIVISION B - NET INCOME SECTION 3

Section 3

3(a) Income from each office or employment +Income from each business +Income from each property +Other sources of income (excluding taxable C/G) + +

3(b) Taxable capital gains +Net taxable gain on LPP + +

Less:Allowable capital losses –Less: Allowable business investment losses (–) – + 1

+

3(c)Deductions under subdivision e (–)+

3(d) Losses from an office or employment –Losses from business –Losses from property –Allowable business investment losses – –

Net income for the year + 2

__________________________________1 The amount at 3(b) cannot be negative; if the allowable capital losses are greater

that the taxable capital gains, the amount at 3(b) is nil but the difference is known as "net capital losses".

2 The amount after 3(d) cannot be negative; if the amount after 3(c) is greater than the total amounts after 3(d), the amount is the taxpayer's net income; if the amount after 3(c) is less than the total amounts under 3(d), the net income is 0 and the difference is a notional "non-capital loss".

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DIVISION C - TAXABLE INCOME

Net Income for Tax Purposes (Division B)

Minus: Division C deductions:

Individuals Corporations

Employee stock option Loss carry over Home relocation loan Donations Loss carry over Dividends Capital gain deduction Northern allowance

= Taxable Income (if any)

EMPLOYED vs SELF-EMPLOYED

EMPLOYEE V. SELF-EMPLOYED (RELEVANT ALSO FOR THE CONCEPT OF PERSONAL SERVICES BUSINESS):

If unclear whether an individual is employed or self-employed, must consider several tests as defined by the courts; no one test is conclusive:

1. Control

Who determines what is done, where, when, and how?

A principal tells a self-employed agent what to do; An employer not only tells an employee what to do but also how to do it

2. Ownership of Tools

A self-employed normally supplies the tools required to do a job

An employer normally provides the tools to an employee

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3. Chance of profit or risk of loss

A self-employed contractor normally has a chance to earn a profit on a job, and also bears the risk of realizing a loss on the job.

Usually an employer assumes all the risk of profit or loss on a particular job, and the employee earns a wage or salary no matter what happens on the job.

4. Integration test

Determines how integral to the business the worker is.

A worker, who is part of the business, or whose work is an integral part of the business, is probably an employee.

If the worker is an accessory to the business, he or she is probably self-employed

5. Specific result test

Determines whether the person is providing services for specific period of time or on ongoing basis

An employee provides services for an unlimited period of time

A self-employed provides services for a specific period of time after which he or she is free to provide services to anyone.

Conclusion

You should always conclude either way.

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EMPLOYMENT INCOME

Section

5 Salary, wages & other remuneration, including gratuities, received by him (or her) in the year

6(1)(a) value of benefits including GST benefit (IT-470R)

Value of board, lodging furnished at an unreasonably low rate (except for the value of board and lodging at special worksites), and other benefits of any kind whatsoever received or enjoyed by the taxpayer in the year;

Other common forms of taxable benefits include: Frequent flyer programs for personal travel from credits accumulated

during business-related travel. Rent-free or low-rent housing provided by the employer; Personal use of employer's automobile; Gifts in cash or in kind, including Christmas gifts (with exceptions of

2 gifts totalling $500 ) if the gift is disguised as remuneration; Holiday trips, prizes, and incentive awards in recognition of job

performance; Premiums paid by an employer under provincial hospitalization and

medical care insurance plans, and certain Government of Canada plans;

Tuition fees paid for, or reimbursed to, employees in respect of their private education;

Travelling expenses or employee's spouse's; Wage loss replacement plans; and Interest-free or low-interest loans.

See specifics in B & L chapter 3.

Exceptions [6(1)(a)]:

Any economic advantage derived from:

Employer contributions to a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit-sharing plan, or group term life insurance policy;

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A retirement compensation arrangement, an employee benefit plan, or an employee trust;

A benefit in respect of the use of an automobile (taxed under other provisions); Benefits derived from counselling services; and Benefits under a salary deferral arrangement (taxed under other provisions).

As a matter of administrative policy, the Canada Revenue Agency (CCRA) does not generally consider the following as taxable benefits:

Discounts on merchandise for employees of merchandising businesses; Subsidized meals to employees, staff lunchrooms, and canteens; Uniforms and special protective clothing supplied by employers, including cost

of laundry and dry-cleaning; Subsidized school services for families of employees in remote areas; Transportation to the job in a vehicle supplied by the employer free or for

nominal charge; Social or athletic club fees where it is to the employer's advantage for the

employee to be a member; Moving expenses of an employee paid or reimbursed by the employer; Premiums under private health services plans paid on the employee's behalf by

the employer; and Contributions by employers to provincial hospitalization and medical care

insurance plans to the extent that the employer is required to pay amounts to the plan.

6(1)(b) Allowances: All allowances received by employees must be taken into income:

Personal and living expenses must be borne by the taxpayer; Income inclusion when employee receives an allowance for personal or

living expenses; See specifics in B & L chapter 3 Some specific exceptions:

o Allowances for travel expenses paid to an employee who is employed to sell property or negotiate contracts for his or her employer;

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o Allowances for travel expenses paid to an employee where the employee is required to travel away from the municipality where his or her employer's establishment is located; and

o Allowances for the use of motor vehicles received by an employee from the employer for travelling in the performance of the duties of an office or employment

What is reasonable ?

based on facts of the case compare allowance to actual expenses

Deemed not reasonable

any motor vehicle allowances not based on kilometres driven.

6(1)(c) Director’s or other fees

6(1)(e) Standby charge for automobiles including GST benefit

Employer Owned A/B x 2% x C x D Employer Leased A/B x 2/3 x (E-F)

Items C and E of formula include GST and PST

Where:

A = a)lesser of:i) personal kilometres driven, andii) value for B

(only if auto is used 50% or more for business purposes)b) value for B

(if auto is not used 50% or more for business purposes)B = 1,667 x available days/30 (rounded)C = full original cost includes PST and GSTD = available days/30 (rounded)E = lease payments include PST and GSTF = insurance component of lease

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The reasonable standby charge is reduced by any reimbursements made by the employee in the year

6(1)(k) Operating Cost Benefit re Personal Use

24¢ x personal kilometres (includes GST benefit)(if > 50% business use then option of 50% of standby charge instead)

If primarily (50%) for employment and notification is given to employer, 50% of standby charge;

Must be reduced by any reimbursements made by the employee in the year or in the 45 days following the end of the year;

Partner or Employee of Partner12(1)(y) Auto benefit to partner or employee of partner

Shareholder15(5) Auto benefit to shareholder

6(3) payments by employer to employee

Consideration for entering into a contract of employment E.g. signing bonus

6(9) deemed interest benefit under 80.4(1)

He obtained an interest-free or low-interest loan Imputed interest less interest paid within 30 days of year-end Also includes relocation housing loans

6(15) Forgiveness of employee loans

Income inclusion

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7(1), (1.1) employee stock option benefit

Taxable Benefit - Employment Income

= FMV at exercise minus exercise price

ACB of Shares

= Exercise price plus taxable benefit, i.e., FMV at exercise

Capital Gain or Loss

= Selling price minus ACB

When to Report Taxable Benefit

If CCPC shares:

At the time the shares are disposed of

If not CCPC shares:

At the time the option is exercised or at the time of disposition if deferral was elected (see below).

Division C Deduction50% deduction if either option shares are of a CCPC and have been held for two years, or

the exercise price was equal or greater than the FMV at the time the option was granted and the share is like a common share.

Deferral of Option Benefit (Non CCPC Options)

May defer employment benefit until shares are sold (similar to CCPC rules) Annual limit of $100,000 (per vesting year based on FMV of shares at grant date) Must elect. Applies to options exercised after Feb. 27, 2000

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Eligible employees Arm’s Length Not specified shareholders

Eligible Options Common shares only (as defined) Traded on stock exchange Ex. Price is equal or greater than FMV at Grant Date

Deferral $100,000 annual limit (based on vesting year i.e. year the shares become

exercisable and FMV at grant date) Deferral until shares sold, employee dies or becomes non-resident. Employee to complete T1212. T4 to report deferral amount.

Example – Part A

In January 2006, Mary's employer, PubliCo, grants her options to acquire 16,000 common shares. The exercise price is $10/sh., which is the FMV of the shares at the time the options are granted. 25% of the options vest immediately, and the remaining options vest in equal parts on January 1 of each 2007, 2008 and 2009. Mary exercises all of the options in 2009, at which time the shares have a FMV of $100 each. Mary wishes to take maximum advantage of the deferral available under 7(8).

Part B

What would be the answer had all the options vested in 2009?

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EMPLOYMENT EXPENSES

8(1)(b) legal expenses8(1)(c) clergyman’s residence

8(1)(f) salesman’s expenses

A salesperson may deduct expenses from employment income if he or she is: Employed to sell property or negotiate contracts; Required to pay his or her business expenses; Ordinarily required to carry out his or her duties away from the

employer's regular place of business; Remunerated, at least in part, by commissions related to the volume of

sales; and Not in receipt of a tax-free allowance for travelling expenses that is

excluded from income. The employee must file a prescribed form where the employer certifies

that the employee has satisfied the above conditions;

The maximum amount of the deduction is limited to the commission income that he or she receives in the year.

Salesmen are entitled to a non-taxable allowance for travel expenses (including motor vehicle expenses) provided the allowance is reasonable.

Includes transportation (car allowance, plane etc.) meals, lodging.

if unreasonably high or low in relation to the actual costs incurred, the allowance is taxable;

If unreasonably low, include in taxable income and claim actual expenses.

Under 8(1)(j) a salesperson may also deduct CCA and interest expense in respect of a motor vehicle or aircraft that he or she uses in the performance of employment-related duties.

The claim for CCA and interest expense is not limited to commission income and may be used to reduce income from other sources.

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Any expenses claimed must be reasonable in the circumstances.

Items that can be deducted under 8(1)(f) include:

o Advertising, promotiono Meals & entertainment (50% limit applies)o Lodgingo Motor vehicle costso Parkingo Supplies (including long distance calls and cell. Phone airtime)o Licences (e.g. real estate agent)o Leasing of computers and office equipmento Salary to assistanto Office rento Training costso Transportation costso Work space in home (see below)o Legal fees to collect wages

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8(1)(h) travelling expenses

Employees who:

o Are ordinarily required to carry on their employment duties away from their employer's regular place of business,

o Are required to pay their own travelling expenses, and

o Do not receive a tax-free allowance,

are allowed to deduct their travelling expense

To the extent that they are not reimbursed by their employer (cannot receive a non-taxable allowance under 6(1)(b)(v), (vi) and (vii));

The deduction is available to all employees and is not restricted to commissioned salespeople.

A salesperson who claims a deduction for expenses under paragraph 8(1)(f), however, cannot also claim travelling expenses under paragraph 8(1)(h) or 8(1)(h.1). The salesperson may, however, claim the deduction under whichever of the two provisions that is most advantageous to him or her.

8(1)(h.1) motor vehicle travelling expenses

Subject to the restrictions in respect of travelling expenses, an employee may also deduct motor vehicle and aircraft expenses incurred in the course of employment.

Any interest paid on money borrowed to purchase, and capital cost allowance resulting from the ownership of, a motor vehicle or aircraft is deductible to the extent that the vehicle or aircraft is used in the course of employment. [8(1)(j)]

Employee cannot receive a tax-free allowance

Automobile allowances paid to employees who are not salespeople are considered tax-free if:

a) the allowance is for the purpose of travelling in the performance of their duties as employees; and,

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b) the allowance is reasonable and is based solely on the number of kilometers used to conduct employment duties.

8(1)(i) dues & other expenses of performing duties

8(1)(j) motor vehicle & aircraft costs - interest & CCA

8(1)(m) RPP contributions

8(2) general limitation: Unless specifically permitted, no deductions can be claimed in computing the employee's employment income.

8(4) An employee may claim 50 per cent of meal expenses as part of travel costs if he or she consumes the meal while away for at least 12 hours from the municipality in which his or her employer is located.

8(10) T2200 needed

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8(13) Work space in the home

(a) In computing income from employment, no amount is deductible in respect of work space in the home except to the extent that the work space is either:

1. The place where the individual principally performs the duties of the employment, or

2. Used exclusively to earn income from employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of employment;

(b) Where one of the conditions in (a) are met the deduction cannot exceed the income from employment; and

(c) Any amount not deducted in a year can be carried forward indefinitely subject to (b).

What is deductible:

cost of fuel ● electricity, light bulbs ● cleaning materials minor repairs;

Applies to salesmen [8(1)(f)] who have earned commission income or who have deducted rent payments [8(1)(i)] or supplies;

Under 8(1)(f), sales person can deduct, against commission income, property taxes & insurance paid on a home;

However cannot deduct mortgage interest;

Cannot deduct CCA on any assets other than motor vehicle and aircraft [8(1)(j)].

Leasing costs are however allowed; therefore should consider leasing the following assets if used to earn employment income:

Computer equipment; Cellular phone; Fax machine;

Employee Deductions

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8(1)(f) Salesperson expenses8(1)(h) Travel expenses8(1)(h.1) Motor vehicle expenses of employee8(1)(j) Interest and CCA

Limitations

13(7)(g), (h) Maximum CCA ($30,000 + GST + PST)20(16.1) No terminal loss on Cl. 10.113(2) No recapture on Cl. 10.167.2 Maximum interest expenses - $300 67.3 Maximum lease cost - $800 18(1)(r) Limitation on per kilometre allowance deductible by payer

Deductible automobile expense – employees

Owned Interest [67.2, Reg. 7307]Maximum of $300 /month

CCA [13(7)(g) Cl. 10.1, Regs. 1101(laf) & 7307]Maximum cost of $30,000 + PST + GST)

Leased Lease cost [67.3, reg. 7307]$800 per month + PST + GST

Disposal of Luxury AutoNo recapture [13(2)]No terminal loss [20(16.1)]Possibly ½ CCA in year of disposal

[Reg. 1100(2.5)]

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Documents

Canadian Taxation Notes