Chapter 3: Income or Loss from an Office or Employment Flashcards
1
Q
What types of income are considered part of employment income for income tax purposes in Canada?
A
Employment income includes:
Wages or salary
Tips or commissions
Benefits such as medical prescription plans, hospital plans, dental plans, stock option benefits
Employer contributions to pension plans
Employer-provided automobile
Use of employer-provided tools
Travel expenses and union dues
2
Q
What is the source concept in relation to employment income?
A
The source concept applies on a net basis, meaning for each specific employment you must determine:
Which amounts are included as income for that employment
Which expenses can be deducted from income for that specific employment.
3
Q
How does the source concept affect the deduction of employment expenses?
A
You are not allowed to deduct employment expenses from one source of employment income against a different source of employment income.
4
Q
What additional employment-related expenses can employees who earn commissions deduct compared to those who do not?
A
Employees who earn commissions can deduct a broader range of expenses than employees who do not earn commissions.
5
Q
How are employment income and employment expenses reported on the T1 income tax return?
A
Employment income amounts are reported on lines such as:
10100, 10120, and 10400 for income
20700, 21200, and 22900 for employment expenses
6
Q
How does the ITA treatment of employment income differ from the T1 income tax return?
A
The ITA determines employment income as one net amount after including all taxable income and subtracting all deductible expenses.
On the T1 return, income and expenses are reported on various separate lines.
7
Q
What sections of the ITA define employment income and its related deductions?
A
Section 5: Describes types of standard receipts considered employment income.
Section 6: Expands the list of what is required to be included in employment income by specifying other receipts and benefits.
Section 7: Defines rules for employer-provided stock option plans.
Section 8: Lists specific deductions available to reduce employment income for the year.
8
Q
What is defined as employment income under ITA 5(1)?
A
Employment income includes salary, wages, and other remuneration, including gratuities, received by the taxpayer from employment.
9
Q
How does the ITA define “office” in the context of employment income?
A
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).
10
Q
How does the ITA distinguish between an employee and an independent contractor?
A
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.
11
Q
When is employment income required to be reported?
A
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.
12
Q
How does the ITA treat tips and gratuities in relation to employment income?
A
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.
13
Q
What is the general rule for determining whether an amount is employment income?
A
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.
14
Q
What is the significance of the “cash basis” for employment income in Canadian tax?
A
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.
15
Q
How does the ITA define “received” in the context of employment income?
A
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.
16
Q
What is an example of a situation where income is considered “received” even if it wasn’t physically collected by the employee?
A
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.
17
Q
How does ITA 248(7) affect the timing of income received by mail?
A
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.
18
Q
What is the difference between the cash basis and accrual basis in Canadian taxation?
A
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.
19
Q
How does deferral of income work in tax planning?
A
Employers may defer payments (such as bonuses) to the next tax year, allowing the business to claim an expense immediately while delaying the employee’s tax liability until the income is actually received.
20
Q
What is an example of deferring income for tax purposes?
A
A business declares a bonus to an employee in December 2023 but stipulates it will not be paid until January 2024.
The business claims the bonus as an expense in 2023, but the employee does not report the income until 2024.
21
Q
What does ITA 78(4) say about the deferral of unpaid remuneration?
A
ITA 78(4) allows deferral of unpaid remuneration (such as bonuses) as long as it is paid before the 180th day of the employer’s tax year-end.
If not paid by the 179th day, the employer loses the ability to deduct it in the earlier tax year and can only deduct it in the year it is paid.
22
Q
What happens if an unpaid bonus is not paid within the 179-day limit?
A
If an unpaid bonus is not paid within the 179-day limit, the employer cannot deduct the bonus in the earlier year and must instead deduct it in the year in which the bonus is actually paid.
23
Q
How does a salary deferral arrangement (SDA) differ from a standard bonus deferral?
A
An SDA involves deferring remuneration for services beyond three years after the services were rendered. The employee must include the deferred amount in income for the year the services were rendered, and the employer deducts the same amount.
24
Q
What is the income tax consequence for a “standard bonus”?
A
The employer deducts the bonus when accrued, and the employee includes the bonus in income when it is received, provided the bonus is paid within 179 days after the end of the employer’s taxation year.
25
What are the income tax consequences for a bonus paid more than 179 days after the employer's tax year-end?
If the bonus is paid more than 179 days but less than three years after the end of the tax year, the employer deducts the bonus when it is paid, and the employee includes the bonus in income when received.
26
What are the tax consequences for a bonus under a salary deferral arrangement (SDA)?
For an SDA, the employer deducts the bonus when it is accrued, and the employee includes it in income in the year the services were rendered, even if the payment is deferred for more than three years.
27
What happens to an employer’s deduction if a bonus is not paid within 179 days of the tax year-end?
The employer cannot deduct the bonus in the earlier year but must deduct it in the year it is actually paid.
28
What does ITA 5(2) state about employment losses?
ITA 5(2) allows for employment losses to occur, meaning that if allowable employment deductions exceed employment income, the excess deductions are considered a loss.
These employment losses are calculated in the same way as employment income.
29
Can employment losses be applied against other sources of income?
Yes, employment losses under ITA 5(2) can be applied against other sources of income, such as property income or capital gains, to reduce total net income.
30
How is net income calculated when there is an employment loss and other sources of income?
Net income is calculated by subtracting the employment loss from other sources of income, such as income from property.
Example formula:
Net Income = Income from Property - Employment Loss
31
What happens if an individual only has an employment loss and no other income?
If an individual has an employment loss with no other income, their net income would be nil, and they would have a non-capital loss equal to the employment loss, which can be carried forward to future years.
32
What is a non-capital loss under ITA 3(d)?
A non-capital loss occurs when allowable employment deductions exceed income in a given year.
The loss can be carried over to offset income in future taxation years.
33
What is the key distinction between an employee and an independent contractor?
The key distinction is whether the individual is in an employment relationship or carrying on a business for themselves.
Employees work for an employer under a contract of service, while independent contractors operate a business as a sole proprietor or as a member of a partnership.
34
How does the ITA treat the term "self-employed"?
The term "self-employed" is not used in the ITA but is commonly used in the Canada Pension Plan Act and Employment Insurance Act.
In tax discussions, it refers to an independent contractor, implying someone carrying on a business on their own.
35
Why is the distinction between employee and independent contractor important?
This distinction impacts the tax treatment for both the individual worker and the payer.
It determines how income is reported, whether deductions for Employment Insurance (EI) and Canada Pension Plan (CPP) contributions apply, and which expenses are deductible.
36
What are the differences in expense deductions between employees and independent contractors?
Employees have limited deductions for employment expenses compared to independent contractors, who can deduct a wider range of business-related expenses under ITA 8(2).
37
How does ITA 8(2) limit employment expense deductions for employees?
ITA 8(2) restricts employees from deducting expenses unless specifically permitted by the ITA.
Independent contractors have more freedom to deduct costs associated with their business activities.
38
Can employees deduct travel expenses between their home and work location?
Generally, employees cannot deduct travel expenses between their home and their regular place of employment unless their home is also their primary place of business.
39
What is the formula for calculating the Employee's EI Premium for 2024?
Employee EI Premium = (Insurable Earnings up to $63,200) * 0.01661
For 2024, the maximum EI premium for employees is $1,049.
40
What is the formula for calculating the Employer's EI Premium for 2024?
Employer EI Premium = (Employee EI Premium) * 1.4
For 2024, the maximum EI premium for employers is $1,469.
41
What is the Total Maximum EI Premium for both employee and employer in 2024?
Total EI Premium = Employee EI Premium + Employer EI Premium
The total maximum EI premium is $2,518.
42
What is the formula for calculating CPP Contributions for employees in 2024 based on the first CPP ceiling?
First CPP Ceiling Contribution = (Pensionable Earnings - $3,500) * 0.0595
For 2024, the first CPP ceiling is $68,500, and the maximum contribution for the first ceiling is $3,868.
43
What is the formula for calculating CPP Contributions for employees in 2024 based on the second CPP ceiling?
Second CPP Ceiling Contribution = (Pensionable Earnings over $68,500 up to $73,200) * 0.04
The maximum contribution for the second CPP ceiling is $188.
44
What is the Total Maximum CPP Contribution for employees in 2024?
Total Employee CPP = First CPP Ceiling Contribution + Second CPP Ceiling Contribution
For 2024, the total maximum CPP contribution is $4,056.
45
How is the Employer's CPP Contribution calculated for 2024?
Employer CPP Contribution = Employee CPP Contribution
For 2024, the maximum CPP contribution for the employer is $4,056.
46
What is the Total Maximum CPP Contribution for both employee and employer in 2024?
Total CPP Contribution = Employee CPP Contribution + Employer CPP Contribution
The total maximum CPP contribution for 2024 is $8,112.
47
What is the Income Tax Treatment for EI Premiums paid by employers?
EI premiums paid by employers are treated as business expenses and are fully deductible.
48
What is the Income Tax Treatment for CPP Contributions paid by employers?
CPP contributions paid by employers are treated as business expenses and are fully deductible.
49
How are EI Premiums paid by employees treated for income tax purposes?
EI premiums paid by employees are treated as a personal tax credit.
50
How are CPP Contributions paid by employees treated for income tax purposes?
CPP contributions are split as follows:
**Personal Tax Credit**: Contributions based on the first CPP ceiling
**Other Deduction**: Contributions based on the second CPP ceiling
51
What is the Maximum Amount of EI premiums deductible for the employer in 2024?
The maximum amount is $1,469.
52
What is the Maximum Amount of CPP contributions deductible for the employer in 2024?
The maximum amount is $4,056.
53
What is the Maximum Amount of EI premiums eligible for personal tax credit for the employee in 2024?
The maximum amount is $1,049.
54
What is the Maximum Amount of CPP contributions eligible for personal tax credit for the employee in 2024?
The maximum amount is $3,218.
55
What is the Maximum Amount of CPP contributions eligible for other deductions for the employee in 2024?
The maximum amount is $838.
56
How are CPP Contributions for self-employed individuals taxed?
Self-employed individuals must pay both the employee and employer portion of CPP contributions. The tax treatment is as follows:
**Personal Tax Credit**: For the employee portion
**Other Deduction**: For the employer portion
57
What is the Total CPP Contribution for self-employed individuals in 2024?
Total CPP Contribution = $3,218 (Personal Tax Credit) + $4,894 (Other Deduction)
For 2024, the total CPP contribution is $8,112.
58
Can self-employed individuals participate in EI?
Self-employed individuals are not required to participate in the EI program but can voluntarily choose to participate.
However, they are not entitled to regular benefits like employees but may be entitled to special benefits (e.g., maternity, paternity, sickness, etc.).
59
What are the special benefits that self-employed individuals can access under the voluntary EI program?
Maternity benefits
Paternity benefits
Compassionate care benefits
Sickness benefits
Family caregiver benefits
60
How does participation in the voluntary EI program for self-employed individuals work?
Self-employed individuals who choose to participate in the EI program must pay the same EI premiums as employees but do not pay the employer-equivalent amount.
They must wait 12 months before making a claim and remain committed for life unless they are no longer self-employed.
61
How are CPP Contributions and EI Premiums paid by employees and employers?
Employees' CPP and EI contributions are withheld from their pay by the employer and remitted to the CRA, along with the employer’s portion of these contributions.
62
How are CPP Contributions and EI Premiums paid by self-employed individuals?
Self-employed individuals are required to make quarterly installment payments of CPP contributions and, if applicable, voluntary EI premiums to the CRA.
These form part of the quarterly income tax installments.
63
How are CPP Contributions calculated for individuals who are both employed and self-employed in the same taxation year?
CPP contributions made through employment are considered first, and any difference between the annual maximum and the amount already contributed through employment is calculated against the self-employed income.
This ensures that total CPP contributions do not exceed the annual limit.
64
What is the Total CPP Contribution for an individual who is both employed and self-employed in 2024?
Total CPP Contribution = Employee CPP + Employer CPP + Self-employed CPP
For 2024, the total maximum CPP contribution for individuals who are both employed and self-employed is $8,110.
65
What are the Employment CPP Contributions for individuals who are both employed and self-employed in 2024?
Employment CPP = (Pensionable Employment Earnings - $3,500) * 0.0595
For the example provided:
Employee CPP: $2,469
Employer CPP: $2,469
Total Employment CPP: $4,938
66
What are the Self-Employment CPP Contributions for individuals who are both employed and self-employed in 2024?
Self-Employment CPP = First CPP Ceiling + Second CPP Ceiling + Employer Equivalent Contribution
For the example provided:
First CPP ceiling: $1,398
Second CPP ceiling: $188
Employer Equivalent Contribution: $1,586
Total Self-Employed CPP: $3,172
67
What is a significant disadvantage of being classified as an independent contractor rather than an employee?
Independent contractors lose access to employment benefits such as:
Dental and prescription drug plans
Membership in a registered pension plan
Vacation pay, sick pay
Life insurance coverage
These benefits can significantly add value to an employee’s remuneration, sometimes by as much as 20%.
68
Why might independent contractors need significantly higher levels of remuneration compared to employees?
Independent contractors may need higher remuneration to cover the cost of benefits (e.g., extended medical coverage) that would otherwise be provided by an employer.
These benefits are often not available to contractors at a reasonable cost and can be a significant expense.
69
How does the underground economy affect self-employed individuals?
The underground economy offers increased opportunities for income tax evasion for self-employed individuals, as it allows for income to be received without reporting to the CRA.
This is typically done by accepting payments in cash without issuing receipts or invoices.
70
Why is conducting business in the underground economy risky?
Engaging in the underground economy, such as paying in cash to avoid GST/HST, can lead to several non-income tax concerns, including:
**Warranty issues
Building code violations
Liability concerns for workers' compensation**
71
What is the CRA's stance on cash transactions that are not reported?
The CRA warns Canadians to avoid participating in cash transactions to evade taxes, such as hiring independent contractors to perform work for cash payments.
This type of transaction can lead to legal issues and the avoidance of taxes like GST/HST.
72
What are the potential advantages of being classified as an independent contractor?
Advantages include:
The ability to deduct large amounts of expenses for tax purposes
Flexibility in work hours and the type of work accepted
Freedom to work for multiple clients
73
What is a major disadvantage for individuals with limited deductible expenses who choose to be independent contractors?
For individuals with limited deductible expenses, being classified as an independent contractor may not be economically advantageous compared to being an employee, as they may not be able to deduct enough to offset the lack of employment benefits.
74
Why is it difficult to change from employment to self-employment with the same employer?
The CRA often challenges individuals who switch from employment to self-employment with the same employer, especially when the relationship between the individual and employer remains unchanged.
Employers may also be reassessed for withholding CPP contributions and EI premiums.
75
What are some non-tax advantages of being an independent contractor?
Non-tax advantages include:
Ability to set your own schedule
Freedom to choose the amount and type of work
Flexibility in accepting clients or contracts
76
What is the GST/HST threshold for an independent contractor in Canada?
An independent contractor must register for GST/HST if they are not a small supplier.
A small supplier is defined as an individual who earns less than $30,000 in gross sales over a 12-month period.
77
What are the advantages of using independent contractors from an employer's perspective?
Employers benefit by avoiding the costs associated with:
CPP and EI contributions
Workers' compensation
Provincial health care (where applicable)
Additionally, employers are not liable for legal claims related to negligence or other employee-related issues.
78
How do CPP and EI obligations affect employer costs?
CPP and EI contributions add to wage costs, and employers must also account for provincial and territorial payroll taxes.
Employers avoid these costs when using independent contractors, which reduces the administrative burden of withholding and remitting taxes.
79
What is a less measurable benefit of using independent contractors?
Employers avoid long-term commitments to independent contractors, as these individuals are typically hired on a contract basis.
This provides flexibility in staffing and labor costs.
80
Why might a taxpayer want to treat an employee as an independent contractor?
Taxpayers may attempt to treat employees as independent contractors to reduce costs related to CPP, EI, and employment benefits.
This can also simplify tax reporting and reduce administrative burdens.
81
What challenges arise when treating employees as independent contractors?
Reclassifying employees as independent contractors is challenging, particularly if the relationship and duties between the individual and employer have not changed.
Contracts alone cannot determine employment status, and legal tests will examine the nature of the work and relationship to determine if the individual is truly self-employed.
82
What are Personal Service Businesses (PSBs) under ITA 18(1)(p) & 125(7)?
A PSB refers to a situation where an employee resigns, creates their own corporation, and enters into a contract with their former employer to provide services through the corporation.
The CRA closely monitors PSBs as they attempt to re-characterize employment income as business income, which may result in tax avoidance.
83
What are the steps in creating a Personal Service Business (PSB)?
The individual resigns from their job.
The individual creates a new corporation controlled by themselves.
The individual enters into an employment agreement with their new corporation.
The individual's corporation enters into a contract with their former employer to provide the same services.
84
Why is the CRA concerned about the rise of PSBs?
PSBs are seen as a method of tax avoidance because they attempt to convert employment income to business income, reducing tax liability.
The CRA scrutinizes PSBs for improperly avoiding CPP and EI contributions, along with other employment-related taxes.
85
What are the consequences of being classified as a Personal Service Business (PSB)?
When the PSB rules apply, they have punitive results, including:
The corporation cannot benefit from the small business tax rate (9%) and is taxed at the higher individual rate (around 33%).
Deductible corporate expenses are limited compared to what employees could have deducted, leading to restrictive tax outcomes.
86
What is the general approach to distinguishing between an employee and an independent contractor?
The distinction is based on whether an employer/employee relationship exists, which is determined by intent, actions, and behavior.
This approach is guided by case law, such as the 2001 Supreme Court decision in Sagaz Industries and the CRA’s guidelines in RC4110.
87
What role does the intent of the parties play in determining the existence of an employment relationship?
Both parties must explain their intent, whether it was to create an employment relationship (a contract of service) or an independent contractor relationship (a contract for service).
However, intent alone is not sufficient—actions and behavior must support this intent.
88
Why is corroborative evidence required to support intent?
Intent may be self-serving, masking the true nature of the relationship.
Therefore, corroborative evidence (such as control, ownership of tools, and financial risk) is required to substantiate whether an employment relationship exists.
89
What are the factors that courts and the CRA examine to determine the existence of an employment relationship?
**Control**: The employer’s control over how and when work is done.
**Ownership of Tools**: Whether the employer provides tools and equipment.
**Ability to Subcontract**: Whether the individual can hire others to do the work.
**Financial Risk**: Whether the individual bears financial risks, such as fixed costs.
**Opportunity for Profit**: Whether the individual has an opportunity for profit, as opposed to earning a fixed salary or wage.
90
How does control factor into the existence of an employment relationship?
In an employment relationship, the employer typically controls the work and how it is done.
The level of control over tasks and work methods is a strong indicator of employment.
Independent contractors usually have greater autonomy in completing tasks.
91
What is the significance of ownership of tools and equipment in determining an employment relationship?
Employees generally use tools provided by the employer, while independent contractors typically supply their own tools and cover related costs such as insurance and transport.
92
How does the ability to subcontract or hire assistants affect the classification?
If an individual can subcontract work or hire assistants, this is generally indicative of an independent contractor relationship.
If the individual must personally perform the work, this points toward employment.
93
What is the role of financial risk in determining an employment relationship?
Employees generally do not bear financial risk, while independent contractors assume the risk of losses and fixed costs related to their business, such as office space or equipment.
94
How does the opportunity for profit distinguish an independent contractor from an employee?
In an employment relationship, the employer assumes the risk and reward of profit.
An employee typically receives a fixed wage or salary.
Independent contractors have the potential for profit based on the success of their business, with a corresponding risk of loss.
95
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
96
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.
97
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.
98
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.
99
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).
100
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.
101
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?
102
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).
103
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.
104
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.
105
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.
106
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.
107
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.
108
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.
109
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.
110
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.
111
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.
112
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.
113
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.
114
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.
115
How does ITA 6(4) handle group term life insurance?
It establishes the dollar amount that must be included in income when an employer makes contributions to a group term life insurance policy for an employee.
116
What does ITA 6(6) define regarding employment at special work sites or remote locations?
It provides an exception to ITA 6(1)(a), allowing for the exclusion of certain employee benefits (such as board, lodging, and transportation) from taxable income if the employee works in special or remote locations.
117
What does ITA 6(7) require for the cost of property or service?
It mandates that the amount required by ITA 6(1)(a) for a benefit includes the applicable GST/HST/PST for the cost of the property or service.
118
What does ITA 6(9) determine regarding the interest on employee debt?
This provision determines the dollar amount of a benefit where an employee has received a low-interest or interest-free loan because of their employment.
119
How does ITA 6(15) and 6(15.1) handle the forgiveness of employee debt?
These provisions establish the dollar amount of the benefit when an employee's debt is forgiven or canceled by the employer.
120
What do ITA 6(16) through 6(18) provisions on disability-related employee benefits define?
They define circumstances under which certain disability-related benefits, which would otherwise be taxable, can be excluded if specific conditions are met.
121
What does ITA 6(19) through 6(23) determine regarding housing loss and eligible housing loss?
These provisions determine the dollar amount that must be included when an employer compensates an employee for a housing loss incurred as a result of an eligible relocation.
122
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 a related party) the primary beneficiary?
What is the value of the benefit?
Is the benefit excluded?
123
How are automobile benefits determined for an employee provided with a company car?
The taxable benefit is largely attributable to the extent the automobile is used for personal purposes.
The exact dollar amount of the benefit will depend on the proportion of personal use.
124
What is the taxable benefit for employer-provided board and lodging?
The benefit is generally the fair market value (FMV) of the board and lodging, reduced by any amounts paid by the employee.
If board or lodging is subsidized, the economic advantage is the FMV minus the subsidy.
125
What are the major exceptions to taxable benefits for board and lodging?
**Special work sites**: Locations where employees perform temporary duties and maintain a self-contained domestic establishment elsewhere.
**Remote work sites**: Work sites that are at least 80 km from the nearest established community with a population of at least 1,000 people.
126
How are cell phone and internet benefits treated under administrative concessions?
If the employer provides a cell phone or internet service for work purposes, it is generally not considered a taxable benefit, even if there is incidental personal use.
However, CRA guidelines emphasize that the primary use must be employment-related.
127
How are discounts on merchandise treated under administrative concessions?
Employee discounts on merchandise are not considered a taxable benefit if they are available to all employees and the discounted price is not below the employer's cost.
Discounts on services or high-ticket items do not qualify for this concession.
128
How are education-related benefits treated for tax purposes?
If an employer pays tuition for a course related to the employee's work, it is not considered a taxable benefit.
If the course is not related to the employee's work, it is a taxable benefit.
If an employer pays for an employee’s children's education, the allowance must be included in the employee’s income.
129
What are the CRA rules regarding gifts, awards, and long-service awards?
Cash or near-cash gifts are always taxable.
Non-cash gifts are not taxable if their combined FMV is less than $500 annually.
A separate long-service or anniversary award valued at $500 or less is not taxable if awarded at least every five years.
Performance-related rewards are always taxable.
130
How is the taxable benefit of employer-provided child care treated?
Employer-provided child care is not considered a taxable benefit if the services are available to all employees and not to the general public.
This is an administrative concession by the CRA.
131
What is the CRA’s position on loyalty and other points programs?
Loyalty points earned while carrying out employment duties are not considered taxable as long as:
The points are not converted to cash.
The plan is not an alternative form of remuneration.
The plan is not used for tax avoidance purposes.
132
What are the administrative concessions for meals provided to employees?
Reimbursing employees for overtime meals does not create a taxable benefit if the overtime is infrequent and at least 2 hours.
If the meals are subsidized, the employee must pay a reasonable amount to avoid the taxable benefit, except in special or remote work sites.
133
How does the CRA handle parking as a taxable benefit?
Parking is a taxable benefit unless provided to employees with disabilities, for employees who need a car for work, or in specific "scramble parking" situations where no reserved spaces are provided.
134
How are employer-paid premiums for private health service plans (PHSPs) treated for tax purposes?
These premiums are excluded from employment income under ITA 6(1)(a), and no amount is required to be included for employees who access these benefits.
135
What is the administrative concession for recreational facilities and club dues?
The CRA allows this benefit to be excluded from taxable income if:
The facility is available to all employees.
The employer contracts with a facility and makes it available to all employees.
136
How are gifts and awards treated under the CRA's administrative concessions?
Non-cash gifts are not taxable if their combined FMV is less than $500 annually.
Cash or near-cash gifts are always taxable.
Non-cash long-service awards are not taxable if their FMV is less than $500 and are given every five years.
137
How are stock options treated for tax purposes?
Stock options are considered taxable benefits but are subject to complex rules that are discussed under ITA 7.
138
How are uniforms or special clothing treated as a taxable benefit?
If an employer supplies uniforms or special clothing necessary for the job, the cost of these uniforms or clothing and their cleaning is not a taxable benefit, as the primary beneficiary is the employer.
139
What is the benchmark for tax planning regarding salary and benefits?
Salary is the benchmark because it is fully deductible by the employer and fully taxable to the employee.
All other forms of compensation are measured against this benchmark for tax planning purposes.
140
What is the tax implication of rewarding an employee with a holiday trip instead of salary?
The cost of the holiday trip will be fully deductible by the employer and fully taxable to the employee, similar to salary.
There is no income tax advantage, except for potential timing differences.
141
Why are non-salary benefits such as contributions to PHSPs attractive for tax planning?
These benefits are deductible for the employer and tax-free for the employee, making them a more tax-efficient form of compensation compared to salary.
142
How does income tax deferral work as a tax planning strategy?
Income tax deferral allows the employer to deduct costs immediately while deferring the employee's tax liability until a later year.
An example is employer contributions to a registered pension plan (RPP), where the employee is not taxed until pension benefits are received in retirement.
143
What are the tax planning challenges with recreational facilities and club dues?
While these benefits may not be taxable to the employee, the employer cannot deduct the cost, which offsets the tax-free benefit provided to the employee.
144
What are the two problem benefits where the cost to the employer may exceed the taxable benefit to the employee?
Employer-provided automobiles: The taxable benefit is based on the FMV of personal use, but the cost of the automobile may be higher.
Employer-provided loans:
The taxable benefit is based on the interest savings to the employee, which may be lower than the employer’s cost.
145
How does GST/HST or PST apply to taxable benefits?
When a taxable benefit includes goods or services on which an employee would have to pay GST, HST, or PST if purchased personally, these taxes must be included in the value of the benefit.
For example, if an employer provides a reward of a domestic airline ticket, the value of the taxable benefit must include the relevant GST or HST.
146
What does ITA 6(7) require when calculating taxable employee benefits?
ITA 6(7) requires that the value of taxable benefits must include any GST, HST, or PST paid by the employer on goods or services provided as part of the benefit.
147
How is the GST/HST amount determined if the employer is exempt from taxes?
If the employer is exempt from GST/HST/PST, a notional amount is added based on what would have been paid if the employer were not exempt.
This notional amount is included in the taxable benefit value.
148
In the case of a two-week vacation awarded as a reward for outstanding sales, how is the GST calculated on the taxable benefit?
The taxable benefit includes the cost of the trip ($4,500) and the GST ($225) paid by the employer, making the total taxable benefit $4,725.
149
What are the three types of vehicles defined by the ITA in determining automobile benefits?
**Motor Vehicle**: A broad term referring to vehicles designed for use on highways and streets, excluding vehicles like trailers and boats.
**Automobile**: A motor vehicle, often referring to cars, trucks, and SUVs used for both personal and business purposes. Restrictions on Capital Cost Allowance (CCA) apply.
**Passenger Vehicle**: Defined as automobiles purchased after June 17, 1987, often considered luxury vehicles when exceeding $37,000 or $61,000 for zero-emission vehicles.
150
What vehicles are not considered 'automobiles' under the ITA?
Examples of vehicles that are not classified as automobiles include:
Ambulances
Fire trucks
Clearly marked police cars
Motor vehicles primarily used as buses or taxis
Vans or trucks used for transporting goods or passengers as part of a business
Vans or trucks used more than 90% of the time in the year for transporting goods or passengers in business activities.
151
What is the significance of the classification of a vehicle as an 'automobile' under the ITA?
Classifying a vehicle as an 'automobile' affects how employment benefits and CCA deductions are calculated.
Automobiles have restrictions for CCA purposes, particularly for high-cost vehicles or those used personally by employees.
152
What is the capital cost limit for luxury vehicles under the ITA?
For 2024, the capital cost limit for luxury vehicles is $61,000 for zero-emission vehicles and $37,000 for non-zero-emission vehicles. These limits are applied before adding GST, HST, or PST.
153
How does the ITA treat vehicles that are not classified as 'automobiles' but are still provided to employees for business use?
Vehicles that are not classified as 'automobiles' may still provide taxable benefits to employees.
However, the benefit calculation differs from that of an automobile, and specific benefit provisions for automobiles do not apply.
154
Why does the ITA exclude certain vehicles from the definition of 'automobile'?
The exclusion of certain vehicles like ambulances, fire trucks, and vehicles used for commercial transportation recognizes their specialized use.
These vehicles are considered essential for business operations, and different tax treatment prevents unfair limits on deductions.
155
In Exercise 3-7, what factors determine whether a vehicle is considered an 'automobile'?
Key factors include:
The seating capacity of the vehicle
The percentage of time it is used for business purposes
Whether the vehicle is used to transport goods or passengers
Whether the vehicle is used in a transportation or delivery business
156
What is the general rule when a motor vehicle is provided by an employer and it is not classified as an 'automobile'?
When a motor vehicle that is not an automobile is provided by an employer for personal use, it is still considered a taxable benefit, and the fair market value (FMV) of the benefit is determined based on reasonable allowance rates.
157
What are the CRA's reasonable allowance rates for motor vehicles provided by an employer for personal use?
The CRA's reasonable allowance rates for 2024 are:
$0.70 for the first 5,000 kilometers
$0.64 for any additional kilometers
158
How is the benefit calculated for personal use of a non-automobile motor vehicle provided by an employer?
Benefit = (First 5,000 km × $0.70) + (Additional km × $0.64)
159
What is the administrative concession offered by the CRA for non-automobile motor vehicles under certain conditions?
In some cases, the CRA allows the benefit to be reduced to $0.33 per personal-use kilometer if the vehicle is required for on-call service or other similar conditions.
160
How do automobiles provided by employers impact employment income?
Employer-provided automobiles create a taxable benefit for employees, as they are used for both personal and business purposes.
This benefit must be included in the employee's income and is subject to specific taxation rules.
161
What are allowances in the context of employer-provided automobiles?
Allowances are amounts paid by employers to employees for the use of their own automobiles for employment-related purposes.
These allowances are generally taxable unless they meet specific criteria set by the ITA.
162
What is the difference between an allowance and deductible travel expenses for employer-provided automobiles?
**Allowance**: Paid by the employer and potentially included in the employee's taxable income.
**Deductible Travel Expenses**: Can be claimed by employees when they use their own automobile for employment purposes, provided they meet ITA requirements.
163
What are the personal and employment-related uses of automobiles, according to the CRA
**Personal use**: Driving from home to a regular work location and back.
**Employment use**: Driving from home to a client or supplier and then to a work location or driving between work and clients/suppliers during the day.
164
Why is maintaining a logbook important for employees using employer-provided vehicles?
The CRA and courts require a logbook to track personal and employment-related kilometers accurately.
Without a logbook, employees may not be able to claim deductions or justify the appropriate tax treatment of vehicle benefits.
165
What are the two types of costs associated with employer-provided automobiles?
**Standby Charge:** Reflects the fixed cost of owning an automobile, assessed under ITA 6(1)(e).
**Operating Cost Benefit**: Reflects the operating expenses, assessed under ITA 6(1)(k), based on the employer's actual expenses.
166
What is the formula for calculating the standby charge for employer-owned automobiles?
Standby Charge = [2% × (Cost of Automobile) × (Periods of Availability)]
Cost of Automobile includes all related GST, HST, and PST amounts.
Periods of Availability is the number of months the automobile is available to the employee.
167
What is the 'made available' rule for employer-owned automobiles?
An automobile is considered "available for use" if it is made available to an employee, even if it is not actually used.
For example, if the automobile is parked but available, it still counts towards the periods of availability for the standby charge calculation.
168
What is the formula for calculating the standby charge for employer-leased automobiles?
The standby charge for employer-leased automobiles is calculated as:
Standby Charge = [(2/3) × (Lease Payments for the Year Excluding Insurance) × (Availability Factor)]
Where:
Lease Payments include the total lease payments for the year, including GST, HST, or PST.
Availability Factor is the fraction of the number of days the automobile was available divided by the number of days in the year.
169
What is the reduced standby charge and how is it calculated?
The reduced standby charge applies if the personal use of the automobile is less than half the time, or if the employee drives less than 1,667 kilometers per month.
The reduced standby charge is calculated by multiplying the regular standby charge by the following fraction:
**Personal-Use Kilometres ÷ (1,667 km × Number of Months of Availability)**
This reduction applies if the employee's personal use is minimal and the automobile is primarily used for employment purposes.
170
What is the operating cost benefit for employer-provided automobiles?
The operating cost benefit reflects the expenses of operating the automobile, such as fuel, repairs, and insurance. The operating cost benefit for personal use is determined by multiplying a prescribed amount by the number of personal kilometers driven:
**Operating Cost Benefit = Prescribed Amount × Personal Kilometers Driven**
For 2024, the prescribed amount is $0.33 per kilometer.
171
What is the difference between 'cost' and 'expenses' in the context of employer-provided automobiles?
**Cost**: Refers to capital costs, such as the purchase price of the automobile.
**Expenses**: Refers to recurring amounts like fuel, repairs, and insurance.
The operating cost benefit is based on these recurring expenses.
172
What are the conditions that must be met for the operating cost benefit to apply?
The operating cost benefit under ITA 6(1)(k) applies if the following conditions are met:
A standby charge has been applied due to the use of an employer-provided automobile.
The employer has paid for the operating expenses.
The employee has not reimbursed the employer within 45 days of the year-end for the portion of the operating expenses related to personal use.
173
How can payments by employees reduce the standby charge or operating cost benefit?
Under ITA 6(1)(e), the standby charge and operating cost benefit can be reduced if employees make payments to the employer specifically for personal use of the automobile.
These payments must be made in the same year for the use of the automobile or within 45 days after year-end for operating costs.
174
How is the standby charge calculated for an employer-owned automobile?
Standby charge = (2%) × (Cost of Automobile) × (Periods of Availability ÷ 12)
Example:
If the cost of the automobile is $40,680 and the employee has use of it for 310 days (rounded to 10 months), the standby charge would be:
Standby charge = (2%) × $40,680 × (10 ÷ 12) = $8,136
175
What conditions must be met for a reduced standby charge?
A reduced standby charge is available if:
50% or more of the kilometers driven were for employment purposes.
The average monthly personal kilometers driven are less than 1,667.
176
How is the operating cost benefit calculated?
Operating cost benefit = Prescribed Amount × Personal Kilometers Driven
or 2024, the prescribed amount is $0.33/km.
Example:
If the personal kilometers driven are 16,000 km, the operating cost benefit would be:
Operating cost benefit = $0.33 × 16,000 km = $5,280
177
What is the total taxable benefit for an employer-owned automobile when no payments are made by the employee?
The total taxable benefit is the sum of the standby charge and the operating cost benefit:
Total taxable benefit = Standby charge + Operating cost benefit
Example:
Total taxable benefit = $8,136 + $5,280 = $13,416
178
How is the standby charge for an employer-leased automobile calculated?
For an employer-leased automobile, the standby charge is calculated as:
Standby charge = (2/3) × (Lease Payments) × (Periods of Availability ÷ 12)
Example:
If the monthly lease payment is $822 and the employee has use of the automobile for 310 days (rounded to 10 months), the standby charge would be:
Standby charge = (2/3) × $822 × (10 ÷ 12) = $5,480
179
How is the total taxable benefit calculated for employer-leased automobiles?
The total taxable benefit is the sum of the standby charge and the operating cost benefit:
Total taxable benefit = Standby charge + Operating cost benefit
Total taxable benefit = $5,480 + $5,280 = $10,760
