Employment Income: Canadian Tax Principles

Canadian Tax Principles
Chapter 3
Employment Income
Copyright 2013, Clarence Byrd Inc.
Employment Income
General Concept
Results From Employment
Without Regard To Source
Includes Directors Fees
Employment Income
Employment Income In The Act

Section 5 - Definitions
Section 6 - Inclusions
Section 7 - Stock Options
Section 8 - Deductions
Cash Vs. Accrual

ITA 5(1) - Income from office or employment Subject to this
Part, a taxpayers income for a taxation year from an office
or employment is the salary, wages, and other remuneration,
including gratuities, received by the taxpayer in the year.
Bonus Arrangements
Example - On July 25, 2012, Martin Ltd. declares a bonus of

$100,000 in favour of one of its employees, Roger Jones. The
Companys year end is July 31.
Example - Case A
Bonus Is Paid After December 31, 2012,
But Before January 28, 2013
Employer
Deducts In Year Ending July 31, 2012
Employee
Includes In Income When Received In 2013
Example - Case B
The Bonus Is Paid After January 27, 2013
But Before July 31, 2015
Employer
Deducts When Paid
Employee
Includes When Received
Example - Case C
Salary Deferral Arrangements
Employer
Deducts When Accrued
Employee
Includes When Accrued
Employee vs. Self-Employed

Employee Perspective
Availability Of Deductions
Withholding vs. Instalments
CPP and EI
Fringe Benefits
Opportunity For Tax Evasion
Employer Perspective
No CPP, Payroll Taxes, Or EI
No Benefits Paid
Pay GST/HST
Less Of A Commitment Than To An Employee
10

Determination
Basic Factor Is Intent
Other Considerations
Control
Ownership Of Tools
Ability To Subcontract /Hire Assistants
Financial Risk
Responsibility For Investment And Management
Opportunity For Profit
11
Inclusions
Salaries And Wages

The basic form of compensation
12
Inclusions
13
Non-Salary Compensation
ITA 6(1)(a) requires any benefit received by employee to be

included in income.
14
Non-Salary Compensation
ITA 6(1)(a) Exceptions (Excluded From Income)
RPP Contributions By Employer
Premiums On Group Disability Insurance (If benefits are taxable)
Private Health Care
Deferred Profit Sharing Plans
Supplementary Unemployment Benefits
Counselling Re: Mental Or Physical Health
Counselling Re: Re-Employment Or Retirement
15
Other Fringe Benefits: IT-470R

Taxable
Room And Board
Travel Benefits
Use Of Employer Provided Automobile
Prizes Or Awards (Some)
Provincial Health Care
Tuition (See Later Slide)
Gifts From Employer (See Later Slide)
Cost Of Tools
Wage Loss Plans
Low Rate Or Interest Free Loans
Counselling Fees (Some)
16
Loyalty programs (frequent flyer points resulting from

employment travel)
Not a benefit if:
Not converted to cash
Not an alternative form of compensation
Not a tax avoidance scheme
17

Employer paid tuition
Specific employer related training (not taxable)
General employment related training (not taxable)
Personal interest training (taxable)
18
Tax free gifts and awards

Must be non-cash
Any number
Cannot be performance related
If total > $500, excess is taxable
Long-service award
Must be non-cash
Once every 5 years
If total > $500, excess is taxable
19

Non-Taxable
Merchandise Discounts
Subsidized Meals
Uniforms
School Services In Remote Areas
Job Transportation In Employer Vehicles
Use Of Recreational Facilities
Moving Expense Reimbursement
Private Health Care
Transportation Passes For Airline, Bus, Or Rail Companies
20
Tax Planning Considerations

Salary Is Benchmark
Deduct When Accrued
Taxed When Paid
Tax Reasons For Using Alternatives
Avoidance Of Tax
Deferral Of Tax
21
GST/HST/PST On Taxable Benefits

ITA 6(7) Benefits Determined With GST/HST/PST Included
22
Board And Lodging
Excluded From Employment Income If:

At a temporary special work site where commuting would
not be practical
At remote work site where establishing a domestic
establishment would not be reasonable
23
Employer Supplied Automobiles

Current Rules IT-63R5
Fixed Costs - Standby Charge
Variable Costs - Operating Cost Benefit
Amounts Reduced By Employee Payments
24
Standby Charge - ITA 6(2)

Less Than 50% Employment Usage
Employer Owns Car
[(2%)(Cost Of Car)(Months Of Availability)]
Employer Leases Car
[(2/3) (Lease Payments For The Year Excluding
Insurance) (Availability Factor)]
GST/HST/PST Included
25
Standby Charge
Primarily (50% Or More) Employment Usage
Multiply Regular Charge By:
Non Employment Kilometres

1,667 Kilometers Per Month Of Availability
Numerator Cannot Exceed 1,667 Km. Per Month
Fraction Cannot Exceed 1
26
Operating Costs - ITA 6(1)(k)

Less Than 50% Employment Usage
$0.26 Per Kilometre Of Non-Employment Usage For 2012
Primarily Employment Usage
Can Substitute One-Half Of Standby Charge
(If employment usage more than 50 percent)
27
Tax Planning For

Employer Provided Automobiles
Return The Keys And Vehicle
Keep Records
Leasing Vs. Buying
Minimize Standby Charge
Avoid Luxury Cars
Pay Employees To Use Own Cars
28
Allowances
An amount paid to an employee to cover some type of cost
29
Allowances
Reimbursements (Reasonable Amounts)

Not In employees income
Employee cannot deduct any of the costs
30
Allowances
Taxable Allowances
Included in employees income
Employee can deduct actual costs
31
Allowances
Non-Taxable Allowances
Must be reasonable
Not in employees income
Employee cannot deduct actual costs
32
Allowances
Automobiles
Reasonable = Based on Kilometers
33
Insurance Benefits
Life Insurance
A benefit
Health Care
Private Not a benefit
Provincial
Individual Premiums
a benefit
Payroll Tax not a benefit
34
Disability Insurance
Premiums Paid By Employer

ITA 6(1)(a): Not A Taxable Benefit
(Provided benefits are taxable)
Premiums Paid By Employee
Not Deductible When Paid
35
Disability Insurance
Benefits Received
Employer Makes Contributions Taxable
Can be offset by deducting employee contributions
Employer Does Not Make Contributions Not Taxable
36
Loans To Employees
General Rules
ITA 80.4(1) - Imputed interest at prescribed rate
ITA 80.5 - Allows deemed interest to be deducted if purpose
of loan is to produce business or property income
37
Loans To Employees
Home Purchase Loan
Benefit cannot exceed annual amount using original
prescribed rate
If prescribed rate goes down can use lower rate
Rule applies for first 5 years of loan
38
Loans To Employees
Home Relocation Loan

Moving closer to work location
Deduction available in calculating Taxable Income
39
Tax Planning Employee Loans
Cash Flow Analysis

Cash flows associated with granting loan
Cash flows associated with providing salary to cover loan
from 3rd party
See Paragraph 3-160 example
40
Stock Options
Defined: An option to buy shares at a specified price for a specified
period of time.
Provides incentive for employee performance
A tax effective form of compensation
41
Stock Options
An employee receives options to purchase 100 shares at $10. At
this time, the FMV of the shares is $10. The options are
exercised when the FMV is $15 and the shares are sold at $25.
42
Employer Is A Public Company

Granting
No Effect
Exercise [(100)($15 - $10)]
Employment Income
Sale [(100)(1/2)($25 - $15)]
Taxable Capital Gain
Net Income
$ 500
500
$1,000
43
Employer Is A CCPC
Issue - No Effect
Exercise - No Effect
Sale
Employment Income
[(100)($15 - $10)]
Taxable Capital Gain
[(1/2)(100)($25 - $15)]
Net Income
$ 500
500
$1,000
44
ITA 110(1)(d) and (d.1) deduction

One-half of employment income inclusion
A deduction from Net Income to get
Taxable Income
Available if:
At issue: option price market price; Or
If CCPC Available if shares held for two
years without regard to option price.
45
Options That Allow Cash Payments
If at the discretion of employer:

Employer can deduct
Employee includes full amount (no deduction)
If at the discretion of employee:

Employee gets deduction only if employer files an election
indicating they will not deduct the cash paid.
46
Other Inclusions
Payments by employer to employee

Forgiveness of employee loans
Housing loss reimbursement (if a moving expense see Chapter 9)
Discounts on employer merchandise are tax free.
Club dues and recreational facilities generally tax free
47
Deductions - ITA 8(1)(f)

Conditions
Required To Pay Expenses
Required To Work Away From Office
Paid At Least In Part By Commissions
If An Allowance, Included In Income
Have Signed Form T2200
48
Types Of Expenses - ITA 8(1)(f)
Accounting And Legal Fees

Advertising
Entertainment, Meals, And Lodging
Parking
Supplies
Licences
Bonding, Insurance, And Medical Fees
Equipment (if leased)
Salaries, Rents (including home office)
Transportation And Motor Vehicle Costs
49
Limitations ITA 8(1)(f)

Cant exceed Commission Income
Cant use ITA 8(1)(h) or 8(1)(h.1) for excess
The basic trade-off
50
ITA 8(1)(h) Travel

ITA 8(1)(h.1) Motor Vehicle
Conditions
Required To Pay Expenses
Required To Work Away From Office
If An Allowance, Included In Income
Signed Form T2200
No ITA 8(1)(f)
51
ITA 8(1)(i) Other Expenses
Examples
Union or professional dues
Office rent
Salary to an assistant
Cost of supplies
52
CCA And Interest Costs

Can only be deducted on
Automobiles
Aircraft
Musical instruments (CCA only)
Not available on other assets (e.g., computers)
53
Tool Costs
Tradespeoples tool expenses

Employer must require
Only costs in excess of $1,095
Limited to $500
54
Work Space In Home

Space is principal place of business, or
Space is used exclusively to produce income and it is used on a
regular and continuous basis for meeting clients or customers
55
Work Space In Home

Commission Salesperson
Operating and maintenance
Property taxes
Insurance
Other Employees
Operating and maintenance
56
57

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Employment Income: Canadian Tax Principles

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Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Employment Income In The Act

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Cash Vs. Accrual

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Example - On July 25, 2012, Martin Ltd. declares a bonus of

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Employee vs. Self-Employed

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Employee vs. Self-Employed

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Employee vs. Self-Employed

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Salaries And Wages

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

ITA 6(1)(a) requires any benefit received by employee to be

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Other Fringe Benefits: IT-470R

Canadian Tax Principles

Other Fringe Benefits: IT-470R

Loyalty programs (frequent flyer points resulting from

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Other Fringe Benefits: IT-470R

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Other Fringe Benefits: IT-470R

Tax free gifts and awards

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Other Fringe Benefits: IT-470R

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Tax Planning Considerations

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

GST/HST/PST On Taxable Benefits

Copyright 2013, Clarence Byrd Inc.

Canadian Tax Principles

Board And Lodging

Excluded From Employment Income If: