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Employment Income
Type 1 Problems
Solution 1: Auto BenefitsCompany-Owned Versus Leased
Driving the car more than 50% for business purposes entitles Lisa to a reduced standby charge and the
alternative operating benefit of 50% of the standby charge.
Business Driving
40%
60%
Personal kilometres
14,400
9,600
Business kilometres
9,600
14,400
Total
24,000
24,000
Reduced standby and operating benefits
A = personal use kilometres =
B = 1,667 km x (365/30) =
C = original cost including HST = $35,000 x 1.13 =
D = available days/30 =
E = lease payments including HST = $750 x 12 x 1.13 =
F = insurance portion of lease payments =
Option 1 Company-Owned
Standby Charge:
40% Business (<50%)
A/B x [2% x (C x D) + 2/3 (E F) = 20,004/20,004 x [2% x ($39,550 x 12)] =
60% Business (>50%)
A/B x [2% x (C x D) + 2/3 (E F) = 9,600/20,004 x [2% x ($39,550 x 12)] =
Operating Benefit:
40% Business (<50%)
Personal kilometres x $0.27 = 14,400 x $0.27 =
60% Business (>50%)
Lower of 50% of standby charge (50% x $4,555 = $2,278) or per km
benefit ($0.27 x 9,600 = $2,592)
Total benefit =
Cost at a tax rate of 46% =
Difference
No
Yes
14,400
20,004
$39,550
12
$10,170
0
9,600
20,004
$39,550
12
$10,170
0
$9,492
$4,555
3,888
2,278
$13,380
$6,833
$6,155
$3,143
$3,012
29
30
$6,780
$3,254
3,888
1,627
$10,668
$4,881
$4,907
$2,245
$2,662
Based on this analysis, Lisa would prefer that the company lease the car regardless of whether she uses it
60% or 40% for business.
32
A salary of $90,000 per year, payable by direct deposit on the last day of each month.
a. Taxed on the cash basis as the income is received [5(1)]
2.
A bonus payable based on the year-end results of the company. The bonus would be up to $10,000.
a. Taxed when received as long as not artificially delayed.
b. There is a benefit to receiving it in the next calendar year if there is a lower tax rate in the
following year. Tax is withheld at source.
3.
Motion Tech has a defined contribution registered pension plan where Rishma and the company each
contribute 6% of her salary.
a. Rishmas contribution is specifically allowed as a deduction [8(1)(m)]
b. The companys contribution is not a taxable benefit specific exclusion [6(1)(a)(i)]
c. All payments out of the RPP will be taxed later, when she receives them
4.
Since she will have to move to Waterloo to take up this position, the company will pay her an allowance
of $15,000 to cover her moving expenses.
a. Allowances must be included in income unless there is a specific provision to exclude. No
exclusion for allowance for moving expenses. [6(1)(b)]
b. She can deduct her moving expenses against her employment income in the new location. [62]
5.
Motion Tech will cover the annual dues for a fitness club up to a cost of $2,000 per year.
a. If it is primarily for Rishmas benefit, then it is taxable.
b. If it is primarily for the benefit of Motion Tech, then it is not taxable.
c. Who benefits most from having a healthy employee?
6.
The company will pay for Rishma to have her personal tax return prepared at a cost of up to $1,000.
a. Taxable benefit [IT-470R]
7.
The company provides a group health plan administered by Manulife, including glasses. Rishma will
pay about $200 per month and the company will pay about $800 per month.
a. Rishmas payment is not deductible but it will be eligible for a medical expense credit
[118.2(2)(q)]
b. The companys portion is not taxable to Rishma specific exclusion [6(1)(a)]
34
7% $15,000 90/365 =
6% $15,000 91/365 =
8% $15,000 92/365 =
7% $15,000 92/365 =
$259
224
302
265
$ 1,050
$1,726
1,496
1,764
1,764
$ 6,750
$173
150
202
176
$ 701
7% $100,000 90/365 =
6% $100,000 91/365 =
7% $100,000 92/365 =
7% $100,000 92/365 =
7% $10,000 90/365 =
6% $10,000 91/365 =
8% $10,000 92/365 =
7% $10,000 92/365 =
$8,501
Less amounts paid(2)
(a) 6% $15,000 365/365 . . . . . . . . . . . . . .. .
(b) 4% $100,000 365/365 . . . . . . . . . . . . . .. .
(c) 7% $10,000 365/365 . . . . . . . . . . . . . .. .
$ 900
4,000
700
5,600
$ 2,901
The Act would deem $150 of the car loan interest ($1,050 - $900) to be paid in the year and,
therefore, eligible for an interest deduction, since the interest was deemed to be paid within 30
days of the year-end, as required.
An Interpretation Bulletin indicates that the deemed interest expense must be prorated for
employment use.
27,000 km
45,000 km
ITA: 80.5
ITA:8(1)(j), 80.4(1)(c)
IT-522R, par. 27
$150 = $90
The interest deduction provision would deny a prorated deduction of the $900 paid on January
15 of the following year, since it was not paid in the taxation year in question. However, this
amount would be eligible for a deduction in the following taxation year to the extent of the
business use.
The interest limitation restricts the interest to the lesser of (a) $90 and (b) $300 365/30
27,000/45,000 = $2,190.
ITA:8(1)(j)
ITA:67.2
35
NOTES TO SOLUTION
(1)
If this loan had been as a consequence of an employment relocation, Division C of the Act
would have provided a deduction for five years, equal to the imputed interest benefit on the
first $25,000 of the home relocation loan, as defined. As a result, in this particular case, the
overall benefit on the housing loan would have been reduced by $1,688 (i.e.,
$25,000/$100,000 of $6,750). See Chapter 10 for a complete discussion of this provision. The
lesser of comparison is made on a quarter-by-quarter basis.
ITA:110(1)(j), 248(1)
(2)
The interest benefit is calculated on an aggregate basis. Any excess interest payment on one
loan effectively reduces the deemed interest benefit on the other loans.
ITA:80.4
37
$12,000
2,250
$ 9,750
The car expenses are deductible since she meets the conditions of this paragraph which are quite similar to
paragraph 8(1)(h), described above, to the extent of the following calculations:
Gas
Maintenance
Capital cost allowance (1/2 30% $30,000 1.13)
Insurance
Licences
Interest lesser of:
(a)
$4,000
(b)
$300
361 days
30
= $3,610
$1,500
500
5,085
1,200
90
$3,610
$11,985
X $11,985
= $8,561
39
40
42
$59,000
0
6,000
7,000
(3,000)
$69,000
Notes:
1. The CRA states at paragraph 41 of IT-470R that public health care premiums for a provincial hospital
insurance plan or a provincial medical care insurance plan that the employer is required to pay by law are not
a taxable benefit. A provincial employer health tax is not considered to be a taxable benefit either.
2.
=
=
$19 1,000
$12 1,000
=
=
$19,000
(12,000)
$ 7,000
Since Erin exercised her option after March 4, 2010, she is not able to elect to defer the recognition of the
income until she disposes of the shares. Therefore, she must report the stock option benefit in 2014.
3.
4.
5.
6.
7.
8.
The charitable donations, CPP, and EI are personal credits and not deductions.
The private dental plan is specifically excluded from income.
The reimbursement of moving expenses will reduce her moving expense claim; a reimbursement of actual
costs is not a taxable benefit.
The club membership dues are primarily for the benefit of her employer.
The bonus declared and not paid will be taken into income when received.
The hard hat and safety glasses are not for personal use.
44
$100,000
(ii)
$100,000
46 days
365 days
365 days
365 days
6%
$756
6%
$6,000
46
48
ITA Reference
5
6(1)(a)
6(1)(a)
6(1)(f)
7
8(1)(m), 147.2(4)(a)
8(1)(i)
(B) (i) Private health plans such as those offered by Sun Life and Liberty Mutual are statutory exemptions
[par. 6(1)(a)]. In addition, Health Services tax levies, such as those in Manitoba, Ontario, and
Newfoundland, are not taxable benefits.
(ii) Membership fees paid by the employer for social clubs may not be included in the income of the
employee if the membership was principally for the employers advantage rather than employees [IT470R, par. 34].
(iii) There is no stock option benefit when the option is granted. The sale of shares in December results in a
capital gain of $0.50 per share (i.e., $5.00 $4.50), which is not employment income.
(iv) Registered retirement savings plan Subdivision e, not Subdivision a deduction.
(v) Income tax not deductible Subsection 8(2).
(vi) Charitable donation Division E tax credit,
(vii) CPP contributions and El premiums are tax credits deductible under Division E.
(C) HST rebate
$92
$92
13
50
$32,000
23,500
1,200
700
$57,400
( 1,150)
( 1,780)
( 1,800)
( 280)
ITA: 5(1)
ITA: 5(1)
ITA: 6(1)(a)
ITA: 7(1)
ITA: 8(1)(f)
ITA: 8(1)(f)
ITA: 8(1)(f)
ITA: 8(1)(i)
( 5,010)
$52,390
Notes:
1. Stock option benefit = ($2.50 - $1.80) 1,000 = $700.
2.
3.
Stock option deduction = $700 benefit. This is not a deduction from employment income. Rather, it is a
subsection 110(1) deduction from net income for tax purposes in the computation of taxable income.
4.
EI and CPP qualify for a non-refundable tax credit against taxes payable.
52
90,000
1,250
424
1,000
2,000
200
308
3,000
9,240
4,320
400
112,142
Sec. 5
Par. 6(1)(f)
Par. 6(1)(a)
Par. 6(1)(a)
Par. 6(1)(c)
Par. 6(1)(a)
Ssec. 6(9); 80.4
Par. 6(1)(b)
Par. 6(1)(e); 6(2)
Par. 6(1)(k)
Par. 6(1)(a)
(B) Omissions
(i) Income taxes are not deductible under section 8 [ssec. 8(2)].
(ii) CPP and El provide tax credits under Division E.
(iii) Group accident disability insurance premiums are not deductible under section 8 [ssec. 8(2)].
(iv) Employer-paid group accident disability insurance premiums are not a taxable benefit [par. 6(1)(a)].
(v) The employer-paid retirement planning advice is not a taxable benefit [clause 6(1)(a)(iv)(B)].
(vi) The employer-paid tuition for the two-day computer workshop is not a taxable benefit [IT-470R, par. 19].
(vii) A 30% employee discount which is available to all employees is not a taxable benefit, since the price is
not below cost [IT-470R, par. 27].
(viii) According to ITTN No. 40, frequent-flyer points are not considered to be taxable benefits. (See
3,125.70 of the text.)
(C) If there was no company-owned car provided to Anita, there would be no standby charge ($9,240) or
operating cost benefit computed under paragraph 6(1)(k) ($2,400). Instead, paragraph 6(1)(l) would apply to
compute Anitas operating cost benefit as:
16,000km
$2,920 $1,869
25,000km
NOTES TO SOLUTION
(1) These issues are discussed in Interpretation Bulletin IT-470R, paragraphs 10, 14, 18, 19, and 26.
(2) To meet the administrative exception, the gift cannot be cash or near cash. This was a cash gift.
(3) 7% $8,000 76/365 .................................................................................................................. $ 117
6% $8,000 9l/365 ...................................................................................................................
8% $8,000 92/365 ..................................................................................................................
7% $8,000 92/365 ..................................................................................................................
120
161
141
$ 539
(231)
$ 308
20,004km
2% 12 $38,500 $9,240
20,004km
Operating cost including HST benefit [par. 6(1)(k)]: 16,000 km $0.27 = $4,320
Anita is not eligible for either the standby charge reduction or the subparagraph 6(1)(k)(iv) election method since she
does not use the automobile more than 50% for business purposes, which is required for these provisions.
53
55
5,000
800
1,200
9,816
$
$
115,000
10,800
12,500
1,800
118
8,620
$148,838
16,816
132,022
Reference
Sec. 5
6(1)(a)
Sec. 5
Par. 6(1)(b)
Ssecs. 6(9), 80.4(1)
Par. 6(1)(f)
Par. 8(1)(m)
Spar. 8(1)(i)(iv)
Par. 8(1)(h)
Pars. 8(1)(h.1), (j)
Excluded items
(i) The 25% of the monthly rent on Anitas home in Toronto that she reimburses to the company does not
form part of the taxable benefit calculation as it is not paid by her employer.
(ii) Income tax withheld is not an allowable deduction under section 8 by virtue of subsection 8(2).
(iii) CPP and El premiums paid are not an allowable deduction under section 8 by virtue of subsection 8(2),
but these amounts will be allowed as tax credits under Division E.
(iv) Contributions to the company group RRSP are not deductible under section 8 by virtue of
subsection 8(2) but are deductible under section 60 of the Act subject to the applicable limits.
(v) Group accident income protection insurance premiums are not deductible under section 8 by virtue of
subsection 8(2).
(vi) The monthly rent reimbursed by Anita to the company is not deductible under section 8 by virtue of
subsection 8(2).
(vii) The company payment of the board and lodging costs when Anita is out of town is not a taxable benefit
as it meets the condition for exemption set out in subsection 6(6) because:
her duties at these locations are temporary;
she maintains a principal place of residence at another location (Toronto) that is available to her
throughout her period of stay at these out-of-town locations and her principal place of residence is
not rented to any other person during these periods;
due to the distances involved, she could not reasonably be expected to return to her principal place
of residence in Toronto from these out-of-town locations on a daily basis; and
she is never at an out-of-town location for less than 36 hours.
(viii) The provision of boots and company uniform is not a taxable benefit by virtue of IT-470R,
paragraph 29.
(ix) The company contribution to a registered pension plan is not a taxable benefit by virtue of
paragraph 6(1)(a)(i).
(x) The fitness club membership dues paid by the company would not be taxable by virtue of
paragraph 6(1)(a) if the membership is principally for the employers advantage than for Anitas
personal enjoyment [IT-470R, par. 34]. If the membership was determined to be principally for Anitas
personal enjoyment, the taxable benefit is $805.
HST rebate
13
/113 of section 8 deductions excluding zero-rated and exempt items:
Car expenses deducted under pars. 8(1)(h) and (j) (see Note (3)) ...............................................
Less:
Acquired car costs with no HST, and CCA:
Insurance (exempt) .......................................
Licence (exempt) ..........................................
Interest
CCA (see below)
1,333
90
118
1,207
2,748
35,000km
40,000km
9,816
(2,405)
56
$
$
667
30
697
1,207
18,000km
20,000km
(627)
6,784
$
$
1,056
7,840
902
35,000km
40,000km
Leased car
$
2,668
1,440
667
240
30
N/A
N/A
$
5,045
5,275
$
$
4,541
9,816
Leased car
18,000 km
$5,045
20,000 km
Note (a): The car lease costs are subject to the restrictions in section 67.3.
Lease cost Lesser of:
(a)
(b)
=$
3,676
=$
2,668
Note (b): The imputed amount of interest is deductible by virtue of section 80.5. The amount is subject to the
restriction under section 67.2 that is the lesser of $900 (i.e., $300 90/30) and the $118 deemed paid.
The lesser amount is $118.
59
61
Type 2 Problems
Solution 27: Employed Versus Self-Employed, Resident
Issue
To determine whether Sherry should object to her notice of assessment that claims that she is a resident of Canada
for tax purposes. Is she an employee or an independent contractor? How should the fringe benefits be treated?
Residency
If Sherry were to go to court, the judge would consider the facts that would indicate that her continuing state
of relationship is with Canada. Facts to support residency:
stored furniture at mothers;
kept health care card, Visa, and bank account in Canada;
cheques deposited in Canadian bank account;
boyfriend visited her for six months and then returned; and
letters indicated that she wanted to come home.
Based on the above facts, it is obvious that Sherry did not sever all of her ties and, during her absence, her
intentions to return home were obvious.
Employer vs. Independent Contractor
Sherry was employed with TSE prior to going overseas and considered herself as part of the TSE team. For
example, she used TSE letterhead and business cards.
The Iraq government contracted with TSE, and not directly with Sherry.
Therefore, it would follow that Sherry conducted herself more like a TSE employee by not incurring any
financial risk. She also went to Iraq under the direction of TSE (Control and chance of profit/risk of loss tests).
Conclusion
Sherry is a resident of Canada between the period of March 2012 and October 2013; therefore, she must
pay tax on her worldwide income.
Since Sherry is also considered a full-time employee of TSE, her income would include the $12,000
received from TSE, together with the value of fringe benefits. Some of the personal living expenses may
not be considered a taxable benefit, because Sherry is living in a remote location. However, the length of
stay may prevent her from being viewed as living in a remote location.
Sherry may be entitled to an overseas employment tax credit, which would essentially allow $80,000 of
employment income to be tax exempt if certain conditions are met. This credit is discussed further in
Chapter 10. Assuming that she was granted the overseas employment tax credit, it is recommended that a
notice of objection not be filed. This avoids professional legal fees and administration costs. Interest and
penalties will continue to accrue during the period of objection, unless the income tax is not outstanding.