Acco 643 Lecture Notes

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

3(c)Deductions under subdivision e (–)

+

3(d) Losses from an office or employment –

Losses from business –
Losses from property –
Allowable business investment losses – –
2
Net income for the year +

__________________________________
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".

-1-
Acco 643 Lecture Notes
Part II

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

-2-
Acco 643 Lecture Notes
Part II

 An employer normally provides the tools to an employee

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.

-3-
Acco 643 Lecture Notes
Part II

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:

-4-
Acco 643 Lecture Notes
Part II

⇒ 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;
⇒ 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;

-5-
Acco 643 Lecture Notes
Part II

• 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;

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

-6-
Acco 643 Lecture Notes
Part II

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 GST
D = available days/30 (rounded)
E = lease payments include PST and GST
F = insurance component of lease

 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 Partner

12(1)(y) Auto benefit to partner or employee of partner

Shareholder
15(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)

-7-
Acco 643 Lecture Notes
Part II

 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

-8-
Acco 643 Lecture Notes
Part II

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 Deduction
50% 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

-9-
Acco 643 Lecture Notes
Part II

 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?

- 10 -
Acco 643 Lecture Notes
Part II

EMPLOYMENT EXPENSES

8(1)(b) legal expenses

8(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.

- 11 -
Acco 643 Lecture Notes
Part II

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

 Any expenses claimed must be reasonable in the circumstances.

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

o Advertising, promotion
o Meals & entertainment (50% limit applies)
o Lodging
o Motor vehicle costs
o Parking
o Supplies (including long distance calls and cell. Phone airtime)
o Licences (e.g. real estate agent)
o Leasing of computers and office equipment
o Salary to assistant
o Office rent
o Training costs
o Transportation costs
o Work space in home (see below)
o Legal fees to collect wages

- 12 -
Acco 643 Lecture Notes
Part II

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,

- 13 -
Acco 643 Lecture Notes
Part II

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

- 14 -
Acco 643 Lecture Notes
Part II

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;

- 15 -
Acco 643 Lecture Notes
Part II

 Fax machine;
Employee Deductions

8(1)(f) Salesperson expenses

8(1)(h) Travel expenses
8(1)(h.1) Motor vehicle expenses of employee
8(1)(j) Interest and CCA

Limitations

13(7)(g), (h) Maximum CCA ($30,000 + GST + PST)

20(16.1) No terminal loss on Cl. 10.1
13(2) No recapture on Cl. 10.1
67.2 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 Auto

No recapture [13(2)]
No terminal loss [20(16.1)]
Possibly ½ CCA in year of disposal
[Reg. 1100(2.5)]

- 16 -