Chapter 3 - Employment Income

Question 1

Determination tests:

Answer 1

1) Economic reality;
2) Integration test; and
3) Specific result test.

Question 2

1) Economic reality test:

Answer 2

1) Control
2) Ownership of tools
3) Chance of profit/risk of loss

Question 3

2) Integration test:

Answer 3

Assesses how economically dependent the individual performing the services, is on the organization.

An employee usually has one (perhaps two) employers. The employee is economically dependent on the employer and often derives other benefits in terms of insurance benefits, pension benefits, etc. If the employee were to lose their job, they would usually have to find other employment.
In contrast, a self-employed person tends to have many customers or clients, and is usually not economically dependent on any one of them. The self-employed person does not enjoy the other benefits provided to employees.

Question 4

3) Specific result test:

Answer 4

Assesses whether the individual is retained only to complete a specific task (achieve a desired result) or whether the individual provides their services on an ongoing basis.

An employee places their services at the disposal of the employer on an ongoing basis. When one job is completed they are assigned another.
A self-employed person tends to have many customers or clients, and is usually not economically dependent on any one of them. The self-employed person does not enjoy the other benefits provided to employees.

Question 5

Steps to Addressing Employed vs. Self-Employed Issue

Answer 5

1. Assess the situation and identify the issues.
   (a) Gather all the facts relating to the person’s position and activities.

(b) Organize your thoughts around the following tests:

a.    Economic reality or entrepreneur test
  Control
  Ownership of tools
  Chance of profit/risk of loss
b.    Integration or organization test
c.     Specific result test

2. Analyze the Issues:
   (a) Based on the tests above, develop your best arguments for both employed and self-employed. Be balanced in your analysis.
   (b) Analyze the strengths and weaknesses of your arguments.
3. Conclude and Advise:
   (a) Arrive at a conclusion of employed or self-employed consistent with your analysis.

(b) Assess the impact of your decision and advise on the implications.
(i) Expenses deductible for tax purposes,
(ii) Tax rates applicable to the income, and
(iii) Non-tax factors such as employee and government benefits.

Question 6

Employment Income

Answer 6

Taxation year. Reported on calendar-year basis.
Includes salary, wages, and other remuneration including gratuities.
Reporting based on amounts received (cash basis).

Question 7

Employment Benefit Inclusions:

Answer 7

• Benefits included in section 6

- Benefits from employer stock options in section 7

Question 8

Employment Benefit Inclusions:

General Rule: Par. 6(1)(a)

Answer 8

includes benefits that arise in the course of or by virtue of office or employment.

Question 9

Exceptions: Employer’s contributions to:

Answer 9

RPP/PRPP
Group sickness or accident insurance plan
Private health services plan premiums and provincial health levies, but not provincial health plan premiums
Supplementary unemployment benefit plan
Deferred profit sharing plan (DPSP)
Group term life insurance policy

Question 10

Other exceptions to par. 6(1)(a):

Answer 10

Benefits under a retirement compensation arrangement, an employee benefit plan, or trust which are already included in income under other provisions;
Benefits in respect of the use of an automobile;
Benefits from counselling services; and
Benefits under a salary deferral arrangement already included in income.
Education assistance received by an individual other than an employee under a program provided by the employer (proposed)

Question 11

Employment Benefit Inclusions

Answer 11

Employee Loans:
- Imputed interest benefit included in employment income on an interest-free or low-interest loan.
Benefit = (Interest at prescribed rate) - (Actual interest charged by employer)
- Actual interest paid is deductible
- Sec. 80.5 deems interest benefit to be paid.
- Important for deduction of interest paid on funds borrowed to purchase a car for use in employment or purchase shares of a corporate employer.

Question 12

Home Purchase Loans

Answer 12

Benefit calculated each quarter the loan is outstanding as the lesser of:
Prescribed rate for the quarter while the loan was outstanding; and
Prescribed rate in effect at the time the loan was made.

Question 13

How do you test if an employee is employed vs. self-employed?

Answer 13

All 3 tests tend to be applied and a decision made based on a “balance of probabilities”. Relationships and services vary. In different situations, one or two tests may be more relevant or determinative than the other(s).

Question 14

Calculation of Employment Income:

Answer 14

S5-7 deal with specific inclusions in income, while S8 deals with potential deductions in arriving at employment income under subdivision a.

Question 15

REMEMBER

Answer 15

If the employer (or the employer’s customer) incurs a cost and the employee derives a PERSONAL benefit therefrom, this represents a potential employment income inclusion! If the employee incurs a cost to earn EMPLOYMENT income, this represents a potential deduction from employment income! These provisions again provide fairness in the taxation of employment income, considering the different employment contracts or provisions which may be negotiated.

Question 16

S5 includes

Answer 16

salaries, wages (hourly), commissions, bonuses, tips (from employers, customers) and honoraria received in the tax year. (Cash basis)

Question 17

S6 begins by including in income all benefits of any kind (other than those mentioned in S5) derived by virtue of the employment.

Answer 17

(whether paid by employer or others) S6(1) lists the potential taxable benefits, though 6(1)(a) itemizes some important exceptions! (The many exceptions to the rules in the Act and a drafting style which sometimes seems contradictory, make the study of taxation interesting but complex. Read in particular S6(1)(a) with respect to life insurance premiums and S6(4)). The balance of S6 provides amplification of the rules in S6(1).

Question 18

Specific potential taxable benefits and related exceptions studied:

Answer 18

Value of board & lodging.
RRSP contributions by employer.
Group disability insurance premiums.
Group term insurance policy premiums.
Health insurance plan premiums.
Value of various counselling services.
Social, athletic or fitness club membership costs.
Personal use by employee of frequent-flyer points and other loyalty program rewards accumulated by employer paid trips or expenditures.
Employer paid/reimbursed relocation costs.
Reimbursement of loss on employee=s sale of home.
Employer paid trips for employee or spouse to accompany employee.
Employer paid tuition fees.
Special occasion (Christmas) gifts.
Employee purchase discounts.

Employee loans - low interest rates, or forgiveness of balances owing.
Allowances (fixed amounts received without the requirement to provide receipts).
Directors fees and other fees. (Juror fees, Executor fees)
Standby charge and operating expense benefits of employer provided automobile.
Employer paid GST on benefits.
Payments by employer to employee immediately before or after employment.

Question 19

S6(1)(b) – Allowances vs Reimbursements:

Answer 19

Allowances are defined as lump sum amounts received by employees in addition to salary/wages without any requirement to substantiate amounts expended. By contrast, reimbursements are defined as amounts received by employees as repayment for employment related expenses incurred by the employee which are substantiated by receipts and other documentation. (eg. Motor vehicle costs, meals & accommodation while travelling for employer.)

Question 20

S7 deals with the potential benefit derived from employee stock options.

Answer 20

(Also discussed are the potential 50% deduction related to employee stock option benefits under S110(1) in Division C, and the calculation of he capital gain or loss on eventual sale of the acquired stock.)

Question 21

S8 deals with deductions which may only be claimed against employment income. Similarly, S8(2) specifies that no other deductions may be claimed in determining employment income.

Answer 21

Specific Deductions Studied Include:
Travelling expenses other than motor vehicle expenses.
Motor Vehicle Expenses.
Legal Expenses incurred in collecting wages.
Dues and other expenses.
Work space in home expenses.
RPP contributions.

Question 22

“Application of rules under subdivision a”

Answer 22

in par 3300 in the text, provides an excellent detailed problem with solution on the calculation of employment income.

Question 23

S8(1)(f) - Sales/Negotiating persons expenses:

Answer 23

An employee involved in sales or negotiating contracts on behalf of their employer who has at least some portion of their employment income based on the level of sales (ie commission), has the option of using S8(1)(f) instead of S8(1)(h) and (h.1)

Question 24

S8(1)(f)

Answer 24

allows for greater latitude as to nature of deductible expenses incurred to earn commission type income, but the total deductions under (f) cannot exceed commission income.