Chapter 3: Employee Benefits and Taxable Benefits Flashcards
What common facts support the existence of an independent contractor relationship?
Registering for GST/HST
Working for multiple clients
Advertising services
Covering their own overhead costs (e.g., equipment, supplies)
Issuing periodic invoices
Having a lawyer prepare an independent contractor agreement
What does ITA 6(1)(a) specify regarding taxable employee benefits?
ITA 6(1)(a) states that income includes the value of any board, lodging, or other benefits of any kind received or enjoyed by a taxpayer, provided by an employer or someone who does not deal at arm’s length with the taxpayer, in respect of or by virtue of the taxpayer’s office or employment.
What is the definition of a “benefit” under ITA 6(1)(a)?
A benefit is defined by the courts as an economic advantage primarily enjoyed by the employee, even if the employer also benefits in some way.
An example is an employer covering travel expenses for an employee’s spouse.
What does the term “value” mean in the context of employee benefits?
“Value” refers to the fair market value (FMV) of the benefit, which is the amount that would be negotiated between two parties at arm’s length.
What is meant by “received or enjoyed” in relation to employee benefits?
“Received” refers to the receipt of property (e.g., cash or items), while “enjoyed” applies to situations where the employee uses employer-provided property (e.g., company cars or housing).
How is the phrase “in respect of, in the course of, or by virtue of” used to determine whether a benefit is taxable?
This phrase ensures that a benefit is related to the individual’s employment.
If the benefit is provided due to the employee’s role, it is likely taxable.
What is the five-step analysis for determining if an employee benefit is taxable?
Is there a benefit? (Economic advantage)
Was the benefit received or enjoyed because of employment?
Is the employee or related party the primary beneficiary?
What is the value of the benefit?
Is the benefit excluded?
How are personal-use employee benefits taxed?
If an employee receives a benefit intended primarily for employment use but allows some personal use, only the personal-use portion may be taxable (e.g., a company-provided smartphone used for both work and personal purposes).
What are the three basic reasons for using non-salary benefits as a form of compensation?
Income Tax Considerations: Certain benefits may be excluded from taxable income (e.g., medical insurance plans), reducing the employee’s taxable income and the employer’s costs.
Employee Motivation: Benefits like stock options incentivize employees to increase company value.
Employee Retention: Offering benefits like day care services may help retain employees by making it less appealing for them to leave for competitors.
How do income tax considerations affect the decision to use non-salary benefits?
Non-salary benefits can reduce the employee’s taxable income if the benefit is excluded from taxation (e.g., certain medical insurance plans).
This also provides cost savings for the employer.
What is the purpose of CRA administrative concessions on taxable benefits?
The CRA makes administrative concessions to simplify the process of tracking and reporting relatively small benefits that are difficult to quantify, ensuring fairness and consistency in the tax treatment of benefits.
In the case of Jessica’s discounted camping gear, why was her benefit not included in her employment income?
Although Jessica received an economic benefit of $300 (the difference between the fair market value of $500 and the $200 she paid), the CRA has an administrative concession that allows employee discounts to be tax-free, provided the price paid by the employee is not below the employer’s cost.
How does the CRA handle employee discounts on merchandise?
The CRA allows employee discounts on merchandise to be tax-free, as long as the price paid by the employee is not below the employer’s cost.
This concession does not apply to high-ticket items like cars or homes.
What are some of the specific ITA 6(1) inclusions for employment income?
ITA 6(1)(b): Amounts received as an allowance for personal or living expenses.
ITA 6(1)(c): Director’s or other fees.
ITA 6(1)(e): Standby charge for automobiles.
ITA 6(1)(e.1) & (f): Wage loss replacement plans (received periodically to replace employment income).
ITA 6(1)(j): Reimbursements and awards (for deductible legal expenses).
ITA 6(1)(k): Automobile operating expense benefit.
What are some ITA 6(1)(a) exclusions from taxable employment benefits?
Employer contributions to registered pension plans (RPPs).
Group sickness or accident insurance plans, provided any benefits received under the plan will be included in income under ITA 6(1)(f).
Private health services plans (PHSPs).
Counseling services related to mental health, re-employment, or retirement.
Reduced tuition provided to children of employees at private schools, provided it is an arm’s-length transaction.
How should ITA 6(1)(a) be understood in relation to the fair market value (FMV) of employee benefits?
ITA 6(1)(a) generally requires that the FMV of non-excluded benefits be included in employment income.
When a benefit’s value is not based on FMV (e.g., group term life insurance), other sections of the ITA determine the amount.
What are the three types of employee benefits under the ITA?
Benefits that are not taxable.
Benefits that are taxable using FMV.
Benefits that are taxable using something other than FMV.
What is the default rule for valuing employee benefits under ITA 6(1)(a)?
ITA 6(1)(a) uses FMV as the default rule for valuing most benefits, except where legislatively or administratively excluded.
When the benefit’s value is something other than FMV, other sections of ITA 6 will apply.
What do ITA 6(2) and 6(2.1) provisions on reasonable standby charges establish?
These provisions determine the dollar amounts that must be included in income when an employer-provided vehicle is made available for personal use.
What is the role of ITA 6(3) and 6(3.1) regarding payments by an employer to an employee?
These provisions require the inclusion of amounts paid either immediately before employment begins or after employment ends, even if receipts are related to employment.
For example, a signing bonus must be included.
