Chapter 3: Cash Basis and Timing of Income Flashcards
How does the ITA define “office” in the context of employment income?
The ITA extends the rules of employee taxation to individuals such as judges, members of parliament, and members of corporate boards, who may not typically be considered employees.
This is done through the definition of an “office” in ITA 248(1).
How does the ITA distinguish between an employee and an independent contractor?
The ITA applies legal principles to determine if an individual is offering services as an employee (contract of service) or an independent contractor.
This distinction affects how income is treated for tax purposes.
When is employment income required to be reported?
Employment income is included in the year it is received, regardless of when it is earned.
For example, if payment for work done in December 2024 is received in January 2025, the income is reported in 2025.
How does the ITA treat tips and gratuities in relation to employment income?
Tips received from customers are considered to be part of employment income, as they are received as a result of the employment, irrespective of who actually pays the amount.
What is the general rule for determining whether an amount is employment income?
A key test is to ask whether the amount would have been received if not for the employment.
If the answer is no, the amount is likely employment income.
What is the significance of the “cash basis” for employment income in Canadian tax?
Employment income is taxed on a cash or received basis, meaning income is only included for tax purposes when it is actually received, not when it is earned.
How does the ITA define “received” in the context of employment income?
Income is considered “received” when it is available to the employee.
Even if the employee chooses not to pick up or collect their payment, the income is still considered received when the employee has access to it.
What is an example of a situation where income is considered “received” even if it wasn’t physically collected by the employee?
If an employee delays picking up their paycheck on December 30, 2024, until January 2, 2025, the income is still considered “received” in 2024 because the employee could have collected it earlier.
How does ITA 248(7) affect the timing of income received by mail?
ITA 248(7) deems that income is considered “received” when it is mailed.
For example, if an employer mails paychecks on December 31, 2024, the pay is considered received in 2024, even if the employee physically receives it in 2025.
What is the difference between the cash basis and accrual basis in Canadian taxation?
Employment income is taxed on a cash basis (when received), while business income is taxed on an accrual basis, meaning income is taxed when it is earned, regardless of when it is received.
