Chapter 3: Income or Loss from an Office or Employment Flashcards
What types of income are considered part of employment income for income tax purposes in Canada?
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
What is the source concept in relation to employment income?
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.
How does the source concept affect the deduction of employment expenses?
You are not allowed to deduct employment expenses from one source of employment income against a different source of employment income.
What additional employment-related expenses can employees who earn commissions deduct compared to those who do not?
Employees who earn commissions can deduct a broader range of expenses than employees who do not earn commissions.
How are employment income and employment expenses reported on the T1 income tax return?
Employment income amounts are reported on lines such as:
10100, 10120, and 10400 for income
20700, 21200, and 22900 for employment expenses
How does the ITA treatment of employment income differ from the T1 income tax return?
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.
What sections of the ITA define employment income and its related deductions?
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.
What is defined as employment income under ITA 5(1)?
Employment income includes salary, wages, and other remuneration, including gratuities, received by the taxpayer from employment.
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.
How does deferral of income work in tax planning?
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.
What is an example of deferring income for tax purposes?
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.
What does ITA 78(4) say about the deferral of unpaid remuneration?
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.
What happens if an unpaid bonus is not paid within the 179-day limit?
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.
How does a salary deferral arrangement (SDA) differ from a standard bonus deferral?
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.
What is the income tax consequence for a “standard bonus”?
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
How are EI Premiums paid by employees treated for income tax purposes?
EI premiums paid by employees are treated as a personal tax credit.
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
What is the Maximum Amount of EI premiums deductible for the employer in 2024?
The maximum amount is $1,469.
What is the Maximum Amount of CPP contributions deductible for the employer in 2024?
The maximum amount is $4,056.
What is the Maximum Amount of EI premiums eligible for personal tax credit for the employee in 2024?
The maximum amount is $1,049.
What is the Maximum Amount of CPP contributions eligible for personal tax credit for the employee in 2024?
The maximum amount is $3,218.
What is the Maximum Amount of CPP contributions eligible for other deductions for the employee in 2024?
The maximum amount is $838.
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
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.
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.).
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
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.
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.
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.
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.
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.
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
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
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%.
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.
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.
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
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.
