CH 05

Chapter Five
Employment Income
1
© 2007, Clarence Byrd Inc.
Employment Income
General Concept
 Results From Employment
 Without Regard To Source
 Includes Director’s Fees
2
Employment Income
Employment Income In The Act

 Section 5 - Definitions
 Section 6 - Inclusions
 Section 7 - Stock Options
 Section 8 - Deductions
3
Cash Vs. Accrual
ITA 5(1) - Income from
office or employment
— Subject to this
Part, a taxpayer’s
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.
4
Bonus Arrangements
Example 1 - On July 25, 2007, Martin Ltd.

declares a bonus of $100,000 in favour of
one of its employees, Roger Jones. The
Company’s year end is July 31.
5
Example - Case A
Bonus Is Paid Prior To January 28, 2008

 Employer
 Deducts In Year Ending July 31, 2007
 Employee
 Includes In Income When Received
6
Example - Case B
The Bonus Is Paid After January 27, 2008,

But Before July 31, 2010
 Employer
 Deducts When Paid
 Employee
 Includes When Received
7
Example - Case C
Salary Deferral Arrangements

 Employer
 Deducts When Accrued
 Employee
 Includes When Accrued
8
Employee Vs Self-Employed
Employee Perspective
 Availability
Of Deductions
 Withholding Vs. Instalments
 CPP and EI
 Fringe Benefits
 Tax Evasion
9
Employee Vs Self-Employed
Employer Perspective
 No CPP, Payroll Taxes, Or EI
 No Benefits
 Pay GST
10
Determination
Master/Servant Relationship?
 Control
 Ownership Of Tools
 Chance of Profit/ Risk of Loss
 Ability To Subcontract Or Hire Assistants
 Responsibility For Investment And

Management
11
Non-Salary Compensation
Salary Is Benchmark
 Deduct When Accrued
 Taxed When Paid
Tax Reasons For Using
Alternatives
 Avoidance Of Tax
 Deferral Of Tax
12
Excluded Under ITA 6(1)(a)
Excluded From Income
 RPP Contributions By Employer
 Premiums On Group Disability Insurance
 Private Health Care
 Deferred Profit Sharing Plans
 Supplementary Unemployment Benefits
 Counselling – Re: Mental Or Physical Health
 Counselling – Re: Employment Or Retirement
13
Excluded Under ITA 6(1)(b)
Reasonable Allowances
 Salespersons And Others
 Allowance Vs. Reimbursement
 Treatment
 Employer Deducts
 Employee
• Can Ignore
• Can Include In Income And Deduct Actual Costs
14
Excluded Under ITA 6(1)(b)
Reasonable Allowances For Motor Vehicle

 Must Be Based On Kilometres
 Not On Individual’s T4
Treatment Of “Non-Reasonable” Allowances

 OnThe Individual’s T4
 Employee Can Deduct Actual Costs
15
Other Fringe Benefits: IT-470R
Taxable
 Room And Board
 Travel Benefits
 Use Of Employer Provided
Automobile
 Gifts From Employer (Some)
 Prizes Or Awards (Some)
 Provincial Health Care
 Tuition
 Cost Of Tools
 Wage Loss Plans
 Low Rate Or Interest Free
Loans

Counselling Fees
16
Other Fringe Benefits: IT 470R
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
17
GST On Taxable Benefits
ITA 6(7) Benefits Determined

With GST And PST Included
18
Board And Lodging
 Excluded From Employment Income If:
 Some distance from employee’s residence
 Work is temporary
 New residence would not be practical
 Benefits for not less than 36 hours
19
Employer Supplied Automobiles
Current Rules – IT-63R5

 Fixed Costs - Standby Charge
 Variable Costs - Operating Cost Benefit
 Amounts Reduced By Employee Payments
20
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 And PST
 GST Included
 PST Included
21
Standby Charge
Primarily (50% Or More) Employment

Usage
Non− Employment Kilometres
1,667 Kilometers Per Month Of Availability
• Numerator Cannot Exceed 1,667 Km. Per Month

• Fraction Cannot Exceed 1
22
Operating Costs - ITA 6(1)(k)
Less Than 50% Employment Usage

 $0.22 Per Kilometre Of Non-Employment
Usage For 2007
Primarily Employment Usage
 Can Substitute One-Half Standby Charge
23
Tax Planning For Employer Provided
Automobiles
Return The Keys

Keep Records
Leasing Vs. Buying
Minimize Standby Charge
Avoid Luxury Cars
Pay Employees To Use Own Cars
24
Insurance Benefits
Life Insurance
Health Care
 Private
 Provincial
 Individual Premiums
 Payroll Tax
25
Disability Insurance
Premiums Paid By Employer
 ITA 6(1)(a): Not A Taxable Benefit
Premiums Paid By Employee
 Not Deductible When Paid
Benefits Received
 Employer Makes Contributions
 Employer Does Not Make Contributions
26
Loans To Employees
General Rules
 ITA 80.4(1) - Imputed
Interest At Prescribed
Rate
 ITA 80.5 - Allows
Deemed Interest To Be
Deducted If Applicable
27
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.
28
Employer Is A Public Company
Issue
 No Effect
Exercise [(100)($15 - $10)]
 Employment Income $500
Sale [(100)(1/2)($25 - $15)]

 Taxable Capital Gain $500
29
Employer Is A CCPC
Issue - No Effect
Exercise - No Effect
Sale
 Employment Income $500
 Taxable Capital Gain
[(1/2)($25 - $15)] $500
30
Other Considerations
 ITA 110(1) Deduction
 Deferral On Publicly
Traded Shares
 An Election
 Defers taxation from
exercise to sale
 Available on $100,000
of market value
31
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
32
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
33
Limitations – ITA 8(1)(f)
Can’t Exceed Commission

Income
Can’t Use ITA 8(1)(h) or

8(1)(h.1) For Excess
The Basic Trade-Off
34
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)
35
ITA 8(1)(i) – Other Expenses
 Examples
 Union or professional dues
 Office rent
 Salary to an assistant
 Cost of supplies
36
Tool Costs
 2006 budget – Tradespeople’s tool
expenses
 Employer must require
 Only costs in excess of $1,000
 Limited to $500
37
Work Space In Your 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
38
Work Space In Your Home
 Salesperson
 Operating and maintenance
 Property taxes
 Insurance
 Other Employees
 Operating and maintenance
39

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CH 05

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Chapter Five

 Includes Director’s Fees

Employment Income In The Act

 Section 7 - Stock Options

Example 1 - On July 25, 2007, Martin Ltd.

Bonus Is Paid Prior To January 28, 2008

The Bonus Is Paid After January 27, 2008,

Salary Deferral Arrangements

 Responsibility For Investment And

Reasonable Allowances For Motor Vehicle

Treatment Of “Non-Reasonable” Allowances

ITA 6(7) Benefits Determined

 New residence would not be practical

 Benefits for not less than 36 hours

Current Rules – IT-63R5

 Amounts Reduced By Employee Payments

Less Than 50% Employment Usage

Primarily (50% Or More) Employment

• Numerator Cannot Exceed 1,667 Km. Per Month

Less Than 50% Employment Usage

Return The Keys

Sale [(100)(1/2)($25 - $15)]

Can’t Exceed Commission

Can’t Use ITA 8(1)(h) or

The Basic Trade-Off

 If An Allowance, Included In Income

 Signed Form T2200

Space Is Used Exclusively

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