Canadian Taxation Notes

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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 – Less: Allowable business investment losses (–)

–

3(c) Deductions under subdivision e

+ +

1

(–) +

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 cannot be negative; negative; if the allowable capital capital losses are greater 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 after 3(d) cannot cannot be negative; negative; if the amount after after 3(c) is greater 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 Income for Tax Purposes (Division B) B) Minus: Division C deductions: Individuals

Corporations

•

Employee stock option

•

Loss

carry over Home relocation loan Donations Loss carry over • Capital gain deduction Northern allowance

•

•

• •

•

Dividends

= Taxable Income (if any) EMPLOYED vs SELF-EMPLOYED FOR THE 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. Owne Owners rshi hip p of Tool Toolss 

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

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


An employer normally provides the tools to an employee

3. Chance Chance of of profit profit or or risk risk of loss 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. Inte Integr grat atio ion n tes testt  



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. Spe Specif cific ic result result test 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, wa wages & other re remuneration, in including gr gratuities, re received by by him (or her) in the year

6(1) 6(1)(a (a))

valu valuee of be bene nefi fits ts incl includ udin ing g GST be bene nefi fitt (IT(IT-47 470R 0R))

Value of board, lodging furnished at an unreasonably low rate (except for for the the valu valuee of bo boar ard d and and lodg lodgin ing g at spec specia iall work worksi site tes) s),, and and othe other r 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; ⇒ Holida Holiday y trips, trips, prizes prizes,, and incent incentive ive awards awards in recogn recogniti ition on of job performance; ⇒ Premiums paid by an employer under provincial hospitalization and medica medicall care care insura insurance nce plans, plans, and certai certain n Govern Governmen mentt of Canada 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:

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Employer contributions to a registered pension plan, group sickness or accident insura insurance nce plan, plan, priva private te health health servic services es plan, plan, supple supplemen mentar tary y unempl unemploym oyment ent benefit plan, deferred profit-sharing plan, or group term life insurance policy; retiremen mentt compen compensat sation ion arrang arrangeme ement, nt, an employ employee ee benefi benefitt plan, plan, or an ⇒ A retire 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: Disc Discou ount ntss on merc mercha hand ndis isee for for empl employ oyee eess 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; Subs Subsiidize dized d sch schoo ooll ser servic vices for for fam familie iliess of ⇒ employees in remote areas; Transportation to the job in a vehicle supplied by ⇒ the employer free or for nominal charge; Soci Social al or athl athlet etic ic club club fees fees wher wheree it is to the 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) 6(1)(b (b))

Allo Allowa wanc nces es:: All All allo allowa wanc nces es rec recei eive ved d by empl employ oyee eess must must be be take taken n into into income:

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

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Lecture Notes Part II • •

o

o

o

See specifics in B & L chapter 3 Some specific exceptions: Allowances for travel expenses paid to an employee who is employed to sell property or negotiate contracts for his or her employer; Allo Allowa wanc nces es for for trav travel el expe expens nses es paid paid to an empl employ oyee ee wher wheree the the employee is required to travel away from the municipality where his or her employer's establishment is located; and 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 any moto motorr vehi vehicl clee allo allowa wanc nces es no nott

•

based on kilometres driven. 6(1)(c)

Director’s or or ot other fe fees

6(1) 6(1)(e (e))

Stan Standb dby y ch char arge ge for for auto automo mobi bile less incl includ udin ing g GS GST T be bene nefi fitt

•

Employer Owned Employer Leased

•

Items C and E of formula include GST and PST

•

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

Where:

A

=

a)lesser of: i) person personal al kilo kilomet metres res driven driven,, and and ii) ii) valu valuee for for B (only if auto is used 50% or more for business purposes) -6-

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B C D E F 

= = = = =

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

The reason reasonabl ablee standb standby y charge charge is reduce reduced d by any reimbu reimburse rsemen ments ts made made by the the employee in the year

6(1) (1)(k) (k) •


Oper Op era atin ting Cos Cost Ben enef efiit re Pers ersonal onal 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 be benefit to to pa partner or or em employee of of pa partner Shareholder 15(5)

Auto benefit to shareholder

6(3) 6(3) paym paymen ents ts by by empl employ oyer er to to empl employ oyee ee 

Cons Consid ider erat atio ion n for for ente enteri ring ng into into a

contract of employment 

6(9) 6(9)

E.g. signing bonus

deemed dee med intere interest st ben benefi efitt unde underr 80.4 80.4(1) (1)

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He obtained an interest-free or low-



interest loan 

Impu Impute ted d inte intere rest st less less inte intere rest st paid paid

within 30 days of year-end 

Also Also

loans 6(15) 6(15) Forgivene Forgiveness ss of emplo employee yee loans loans 

Income inclusion

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incl includ udes es

relo reloca cati tion on

hous ho usin ing g

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7(1) 7(1),, (1.1 (1.1))

empl employ oyee ee sto stock ck opt optio ion n bene benefi fitt

 Taxable Benefit - Employment 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

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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) 8(1)(c)

legal expenses 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. ⇒ Th Thee empl employ oyee ee must must file file a pres prescr crib ibed ed form form wher wheree the the empl employ oyer er 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. Sale Salesm smen en are are enti entitl tled ed to a no nonn-ta taxa xabl blee allo allowa wanc ncee for for trav travel el expe expens nses es (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 unreas unreasona onably bly low, low, includ includee in taxabl taxablee income income and claim claim actual 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 employment-related duties.

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

The clai The claim m for for CCA CCA and and inte intere rest st expe expens nsee is no nott limi limite ted d to comm commis issi sion on 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 o o o o o o o o o o o o o

Advertising, promotion Meals & entertainment (50% limit applies) Lodging Motor vehicle costs Parking Supplies (including long distance calls and cell. Phone airtime) Licences (e.g. real estate agent) Leasing of computers and office equipment Salary to assistant Office rent Training costs Transportation costs Work space in home (see below) 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 nontaxable 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 cannot also also claim claim travel travellin ling g expens expenses es und under er paragr paragraph aph 8(1)( 8(1)(h) h) or 8(1)( 8(1)(h.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) 8(1)(h (h.1 .1)) 

moto motorr vehi vehicl clee tr trav avel elli ling ng exp expen ense sess



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 intere interest st paid paid on money money bo borro rrowed wed to purcha purchase, se, and capita capitall cost cost allowa allowance nce 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 allowance is for the purpose purpose of travellin travelling g in the performanc performancee of their duties duties as employees; and, - 13 -

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b) the allowan allowance ce is reasonab reasonable le and is based solely solely on the number number of kilome kilometer terss 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 li limitation: Un Unless sp specifically pe permitted, no no de deductions can be claimed in computing the employee's employment income.

8(4)

An employee may claim 50 per cent of meal expenses as 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) (a) In comp comput utin ing g inco income me from from empl employ oyme ment nt,, no amou amount nt is dedu deduct ctib ible le in respect of work space in the home except to the extent that the work space is either: 1.

The pla The place ce wh where ere the the indi indiv vidu idual pri princ nciipal pally pe perform formss the the dut dutie iess of the employment, or

2.

Used sed ex exclu clusive sively ly to earn arn inc incom omee fro from m emp emplo loy yment ment and use used on on a regular and continuous basis for meeting customers or other perso persons ns in the ordina ordinary ry course course of perfo performi rming ng the duties duties of employment;

(b) Where one one of the the condition conditionss in (a) are are met the the deductio deduction n cannot cannot exceed exceed the income from employment; and (c) Any amoun amountt not deducte deducted d in a year year can be carried carried forwa forward rd indefi indefinit nitely ely subject to (b). What is deductible:

 • • •

cost of fuel light bulbs minor repairs;

● electricity, ● cleaning materials

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 -

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Lecture Notes Part II 

Fax machine; Employee Deductions 8(1)(f) 8(1)(h) 8(1)(h.1) 8(1)(j)

Salesperson expenses Travel expenses Motor vehicle expenses of employee Interest and CCA

Limitations

13(7)( 13(7 )(g) g),, (h) (h) 20(16.1) 13(2) 67.2 67.3 18(1)(r)

Maxi Maximu mum m CCA CCA ($30 ($30,0 ,000 00 + GST GST + PST) PST) No terminal loss on Cl. 10.1 No recapture on Cl. 10.1 Maximum interest expenses - $300 Maximum lease cost - $8 $800 Lim Limitation on on pe per ki kilometre al allowance de deductible by by pa 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)]

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Canadian Taxation Notes

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