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Canadian Taxation > Chapter 3 - Employment Income > Flashcards

Chapter 3 - Employment Income Flashcards

1
Q

Test for Determination of Employee vs Self-Employed or Independent Contractor

A
  1. Economic Reality or Entrepreneur Test (Control, Ownership of Tools, Chance of profit/risk of loss)
  2. Integration or Organization Test
  3. Specific Result Test
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2
Q

Control Test

A
  • Part of the Economic Reality Test
  • Control exists if the person for whom services are performed has the right to control the amount, the nature and the management of the work to be done and the manner of doing it
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3
Q

The Ownership of Tools Test

A
  • Part of the Economic Reality Test
  • In the case where the taxpayer is doing the work supplies the funds or equipment necessary to perform the work and takes on financial risks or responsibility, the taxpayer would be a independent contractor
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4
Q

The Profit/Loss Test

A 
- Part of the Economic Reality Test
Where the taxpayer doing the work:
- has a chance of making a profit
- risks incurring a loss from bad debts, damages to assets, or delivery delays and 
- must cover operating costs
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5
Q

The Integration Rest

A
  • Examines whether the individual doing the work is economically dependent on the organization
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6
Q

The Specific Result Test

A
  • In an employer-employee relationship, the employee puts his personal services at the disposal of the employer during a given period of time
  • A independent contractor may have an agreement that certain specified work will be done with assistance from the worker
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7
Q

Taxation Year

A
  • The taxation year of an individual always ends in December 31
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8
Q

Structure of Subsection a

A

Sec 5 Basic Inclusion
+Sec 6 benefits+allowances
+Sec 7 Stock Option Benefits
Less: Sec 8 deductions allowed

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9
Q

Subdivision a. Section 5 Basic Inclusion

A
  • Salary, wages and other remuneration, including gratuities received
  • Employment income is determined on a cash basis. However if these is a voluntary deferment of remuneration that the employee has an unconditional right to receive will be included in the year they became receivable.
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10
Q

Subdivision a. Section 6 Benefits + Allowances

A
  • 6(1)(a) indicates that all benefits received and enjoyed by virtue of employment will be included as part of the employees remunerations and will be taxed. There are some exceptions
  • Value of benefit could be estimated by reviewing the cost the employer pays
  • Benefit must increase net worth
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11
Q

Exclusions for Subdivision a. Section 6 Benefits + Allowances

A

ITA 6(1)(e,k,l)
Employer’s Contributions to:
- A registered pension plan or pooled registered pension plan
- A group sickness or accident insurance plan
- Private health service plan premiums and provincial health tax levies
- Retiring arrangement and allowance
- Employer-paid counselling services of the mental or physical health and the re-employment or retirement

But
- Employer-paid group term life insurance is included

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12
Q

Special Benefit Calculations Apply to:

A
  • Housing loss/cost benefits
  • Use of employer automobiles
  • Employee loan
  • Employment insurance benefits
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13
Q

Employer-paid for Employee’s Loss on Sale of Home

A

6(19)-(23)

  • One half of any amount above $15,000 is included
  • Eligible housing lose
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14
Q

An Automobile Provided by Employer

A

The Resulting benefit has two components:

  • The Standby Charge
  • The Operating Cost Benefit
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15
Q

The Standby Charge (If Employer Owns the Car)

A

6(1)(e), 6(2)

=(A/B) * (2% * (C * D)

A: Is equal to B, if the car is not primarily used for work (more than 50%). Otherwise, A=lesser of personal km and B

B: 1667km * # of available months

C: Cost of the Car

D: # of available months in the year

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16
Q

The Standby Charge (If Employer Leases the Car)

A

6(1)(e), 6(2)

= (A/B) * (2/3) * (E-F)

A: Is equal to B, if the car is not primarily used for work (ie less than 50%). Otherwise, A=lesser of personal km and B

B: 1667km * # of available months

E: Lease Payment (including insurance)
F: Insurance

17
Q

Operating Cost Benefit

A

6(1)(k)
Operating Costs =

Prescribed Rate ($0.28) * Personal km
or
1/2 of standby charge, primarily for work (more than 50%)
18
Q

Employee Provided Loans

A

Lower Interest Rate is a Taxable Benefit

Taxable Benefit = Prescribed Rate - Actual Interest Rate Paid

The prescribed rate changes quarterly and the benefit will have to be prorated if not for a full 3 months

In the case of a home purchase/relocation loan(for relocation for employment purposes, at least 40km closer to work), the prescribed rate used is the lesser of:

  • The prescribed rate in each quarter the loan was outstanding
  • The prescribed rate in effect at the time the loan was granted (reset every 5 years)
19
Q

Forgiveness of Employee Loan

A

The amount of the employer loan should then be included in income, net of the amount paid back by the employee.

20
Q

Employer paid Social Club Membership

A

Is not included as a taxable benefit, if it is for Employer advantage

21
Q

Employer paid Financial Counselling and Tax Return Preparation

A

Are included as a taxable benefit

22
Q

Non-Cash Holiday Gifts not Over $500

A

Are not included as a taxable benefit

23
Q

Allowances

A

Allowances refer to:

  • A fixed, specified amount paid above salary
  • to cover certain expenses incurred

6(1)(b)
All allowances are taxable, subject to specific exceptions

24
Q

Employment Insurance Benefits

A

6(1)(f)
Include into income the benefits/payment from the insurance plan

less: aggregated employee’s contributions

Conditions: The employer made a contribution and the benefits/payment are paid on periodic basis

Applied to:

  • Sickness or Accident Insurance Plan
  • Disability Insurance Plan or
  • Income Maintenance Insurance Plan
25
Q

Stock Option Benefits

A

Composed of:

  • Employment Income: is the difference between the fair market value of the shares at the time the option is exercised and the option price the employee paid for the shares
  • Capital Gain or Loss: is the difference between the proceeds of disposition on the sale of the shares and the fair market value of the shares at the time the options are exercised
26
Q

Employee-Owned Expense Benefit

A

6(1)(l)
Taxable benefit is reached by prorating the total cost paid by the employer by using the ratio of personal-use km to total km

27
Q

Option Granted in the Money

A

Options are “in the money” if the fair market value of the shares is greater tan option price at grant date

28
Q

Employee Benefits on Exercise Date

A
  • No benefit at this date for an employee of a private company
  • An employee of a public company will include an employee benefit equal to the (FMV of shares - Option Price)* Number of shares
29
Q

Employee Benefit on Selling Date

A
  • For an employee of a public corporation: On the selling date the employee will include 50% of thier capital gain or loss in their net income. This capital gain/loss equals: (Proceeds of Disposition - FMV of shares at Exercise Date)*Number of Shares
  • For an employee of a private company: Employee will include 50% of capital gains in their taxable income but will also include the employment income
30
Q

If an Employee is Granted Options not in the Money at Grant Date

A

A Division C partial deduction allows the employee to include only half of the employment income on the option

31
Q

Rule for Deductions on Employment Income

A

Sec 8

The general rule states that there are no deductions allowed unless specifically permitted

32
Q

Most Common Employment Income Deductions

A

Sec 8

  1. Salesperson’s Expenses 8(1)(f)
  2. Traveling Expenses 8(1)(h)(h.1)
  3. Professional and Union Dues 8(1)(i)
  4. Works Space in Home 8(1)(i), 8(13)
  5. Contributions to RPP 8(1)(m)
  6. The Use of Automobile 8(1)(h.1), 8(1)(i)
33
Q

Salesperson’s Expenses Deductions

A

8(1)(f)
Can deduct all amounts expended except:
- Capital Expense
- Recreational Club and facilities. Eg yacht, camp, lodge, golf course

Amount expensed is limited to the amount of commission earned and the employee is required to pay his or her own expenses.

Common Expense Deductions:

  • Advertising and promotional expense
  • Travel expenses including airfare, accommodations, and 50% of meals
  • Telephone expenses, used exclusively to earn employment income
  • Insurance and property taxes
  • Certain automobile expenses related to earning employment income
  • Interest paid to purchase a vehicle
  • etc
34
Q

Employment Income Deduction if the Employee holds the Shares for over 24 months

A

If they are an employee of a private corporation a Division C partial deduction allows the employee to include only half of the employment income on the option

If they are an employee of a public corporation this deduction does not exist

35
Q

Dues and Other Expenses Deductions

A 
8(1)(i)
An employee who is required to pay expenses related to their employment duties may also deduct:
- Professional membership fees
-  Office rent or salary to an assistant
- Supplies
- Expenses related to work space in home
36
Q

Work Space in Home Deductions

A

The principal place duties are performed (more than 50% of the time) or
Used elusively for earning employment income and
Used on a regular/continuous basis for meeting customers and clients

General home expenses are allocated between work and personal space based on square footage

8(1)(i)
Non-salesperson can deduct: Rent, utilities, repairs and maintenance, supplies, phone

8(1)(f)
Sales person can deduct all the items above plus: property taxes and house insurance, limited to commissions

37
Q

Registered Pension Plan Deductions

A

Total current employee/employer contribution limits to RRSP/RRPs are currently set at 18% of employment income up to 27,230.

This amount is deductible

38
Q

Interest on Car Loan and CCA Deductions

A

Interest deduction is the lesser of actual amount of interest paid and $300 per month

CCA has a 30% deprecation rate (one half of this for the first year)

Vehicle cost is limited to $30,000. Therefore if you buy a +30,000 car you would only be able to deduct the deprecation of a $30,000 car.

39
Q

Leased Passenger Vehicle Deductions

A

ITA: 67.3
Deduction is limited to the lesser of

($800 * # of aggregate months) - C- D- E

(( leasepayment * $30,000) / (0.85H) - D - E

C: lease payment deduction in previous years
D: interest on refundable amount over $1,000
E: Reimbursement received
H: is the greater of $30,000 * 100/85 and manufacturer’s list price

Canadian Taxation (3 decks)

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