RSM 324H1F

Canadian Income Taxation I

Week 1

Todays Agenda

Introduction

Sources of tax law

Tax rates & integration
Section 2
Section 3

Income from employment

Employee vs. contractor

Taxable benefits
Non-taxable benefits
Employer provided automobiles
Stock options

Sources of Tax Law

Income Tax Act (ITA)

Tax treaties

Income tax regulations

Interpretations act
Income tax application rules
Income tax conventions
Interpretations act

Case law
Administrative positions and analysis

Canada Revenue Agency (CRA)

commentaries
Income tax folios

Tax Rates & Integration

Two tiered tax system:
Mr. S.:

Earns dividend income and pays

personal tax LEVEL 2 TAX
Sell shares, pays tax on capital gain
LEVEL 2 TAX

Corpco:

CORPCO

Earns business income

Pays corporate tax LEVEL 1 TAX
Distributes after-tax funds as dividends

Tax Rates & Integration cont

2015 top Federal + Ontario tax

rates (income > $220,00)
Corporation

Employment income
Dividends
Business income - first
$500,000 (2)
Business income (general)
Personal services business

n/a

Individual

Combined

Savings (cost)
n/a

n/a

Part IV tax

49.53%
33.82% or
40.13% (1)

n/a

n/a

15.5% (3)

49.53%

49.41%

0.12%

26.5%

49.53%

51.36%

(1.83%)

39.5%

49.53%

59.96%

(10.43%)

Investment income

46.17% (4)

49.53%

51.80%

(2.27%)

Capital gains

23.08% (5)

24.77%

25.90%

(1.14%)

(1) higher dividend rate on corporate income taxed at lower corporate rates
(2) applies to Canadian controlled private corporations earning active business income
(3) In 2016, the rate will decrease by 0.5% per year until 2019 (i.e. 13.5% rate for 2019 and beyond)
(4) reduced to 19.5% when corporation pays out taxable dividends
(5) reduced to 9.75% when corporation pays out taxable dividends

Section 2

s.2(1): An income tax shall be

paid, as required by this Act, on
the taxable income for each
taxation year of every person
resident in Canada at any time in
the year

Section 2
Person

Person = individual, corporation

(s.248(1)), trust (s.104(1))
Other business structures (flowthrough entities):

Proprietorships
Partnerships
Joint ventures
Income trusts

Section 2
Resident
Individual

Corporation

Factual Resident

Deemed Resident

Question of fact
Continuing state of
relationship with
Canada

"Sojurns" in
Canada for more
than 182 days [ss.
250(1)]

Central management
and control in Canada

Incorporated in
Canada
[ss.250(4)]

Section 2
Resident

Determining factual residency of

individuals (not an exhaustive list):

Significant residential ties location

of home/dwelling, dependants,
spouse, or common law partner
Moderate residential ties Location
of personal property, social and
economic interests, drivers
license/passport
Minor residential ties mailing
address, phone number

Section 2
Resident

Deemed residents are generally

resident for the entire taxation
year
Part-year resident:

Year of immigration/emigration
Year that residency ties are
established/severed
Treated as resident for part of year
and non-resident for rest of year

Section 2
Resident

Ss. 2(1) - Residents of Canada pay tax

on worldwide income
Ss.2(3) - Non-residents may be subject
to Canadian tax if they:
Were employed in Canada;
Carried on business in Canada; or
Disposed of taxable Canadian
property (e.g. real estate in Canada)
Non-residents may also be subject to
withholding tax (Part XIII tax) on most
passive sources of income

Section 2
Taxation Year

s.249(1): Definition of taxation year

Individuals = calendar year

Corporations = fiscal period

s.249.1(1): any time period not

exceeding 53 weeks

Trusts depends on type of trust

Partnerships / Professional
Corporations depends on members /
owners

Section 2
Taxable Income

s.2(2): the taxpayers income for the

year plus the additions and minus the
deductions permitted by Division C
Types of Income:
1.
2.
3.

4.
5.

Employment (s.5-8) = salary, wages (earned

from an employer)
Business (s.9-37) = enterprise with intention to
profit
Property (s.9-37) = return on invested capital
(dividends, interest, rent, royalties), passive
income
Capital gains / losses (s.38-55) on dispositions of
capital property
Other (s.56-66) = pension, spousal support,
RRSP

Section 3
Income For a Taxation Year

Income is determined under the rules

found in Division B of Part I (i.e.
sections 3 to 108)
Textbook refers to this amount as net
income for tax purposes
Section 3 contains the statutory formula
for net income for tax purposes
Four step formula with starting point =
net income for accounting purposes

Section 3
Aggregating Formula
+

3(a): net income from all sources (must be > 0)

+
+
+
+

Employment
Business
Property
Other

3(b): Taxable capital gains (TCG) less allowable capital

losses (ACL) (must be 0, excess can be carried forward or

3(c): Other deductions (s.60-66) (cannot exceed 3(a)+3(b))

3(d): Current year losses from employment, business,
property, ABILs (cannot exceed 3(a)+3(b)-3(c), excess can be

back)

carried forward or back)

Net income for tax purposes (Division B income )

Division C deductions (special deductions including loss

Taxable Income (Division C income )

carryforwards/carrybacks)

KC 3-4, P 3-4, KC 3-6

Employee vs. Contractor

Question of fact
Factors CRA will consider:
1.
2.
3.

4.
5.

6.

Payers level of control over Worker

Ownership of tools and equipment
Ability for Worker to subcontract/hire
assistants
Financial risk
Responsibility for investment and
management
Opportunity for profit

Employee vs. Contractor

Employee-Employer relationship

Worker

Reports income as employment income

Payer

Obligated to withhold Canada Pension

Plan (CPP) and Employment Insurance
(EI) contributions, as well as income tax,
on remuneration

Employee vs. Contractor

Contractor-Client relationship

Worker
Reports income as business income
(chapter 5)
May be required to charge and remit
GST/HST(chapter 5)

Payer
1.

No CPP/EI or income tax source

deductions

Employee vs. Contractor

What if worker incorporates? Does

the worker-payer relationship still
matter?

Find out in RSM424!

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Employment Income

Net income from employment =

+

+
-

s.5: salaries, wages and other

remuneration, including gratuities,
received
s.6: benefits received by virtue of
employment, and allowances
s.7: stock option benefits
s.8: specific deductions

Determined on a cash basis

Taxable Benefits

s.6(1)(a): any benefit received or enjoyed

by the taxpayer in the year from an office
or employment

General assumption = all benefits are taxable

unless specifically excluded
Generally, value of taxable benefit = lower of
cost to employer and FMV (including GST)

Other specific inclusions:

s.6
T4130 Employers' Guide Taxable Benefits
and Allowances
CRA administrative policies

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Non-Taxable Benefits

s.6(1)(a): Specific exclusions from

taxable benefits:

Employer contributions to RPP, DPSP, PRPP,

private health services plan, supplementary
unemployment insurance plans
Counseling paid by employer for mental or
physical health of employee or relative, reemployment of retirement

Other specific exclusions:

s.6
T4130 Employers' Guide Taxable Benefits
and Allowances
CRA administrative policies

Group Term Life Insurance

Taxable or Non-taxable Benefit?

Common area of confusion for students

Specifically excluded under subparagraph

6(1)(a)(i)

However, specifically included under subsection

6(4)

Reason for this is the benefit is first excluded

from income and then a prescribed amount is
calculated under the Income Tax Act Regulations
and included in income

Bottom line: group term life insurance premiums

paid by an employer are a taxable benefit. Do
not mistakenly include amounts paid by the
employee

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KC 4-1, 4-2, 4-3

Employer Provided Automobiles

Where a company provided automobile

is available to an employee for
personal use

s.6(1)(e): income inclusion for a

reasonable standby charge, less any
amounts reimbursed to the employer
Calculated based on availability, not use
s.6(2): reasonable standby charge =

Owned car = (A/B) * 2% * cost * # of

months available for use
Leased car = (A/B) * 2/3 * lease payments
made insurance portion
A/B reduction ONLY where car used primarily
(>50%) for employment purposes

A = personal km
B = 1,667 * # of months available for use

13

Employer Provided Automobiles

s.6(1)(k): income inclusion for

operating expense benefit = $0.27 *
personal use km less amounts
reimbursed to the employer within 45
days of year-end

Calculated based on personal use

Option to use * standby charge if car
used primarily (>50%) for employment
purposes, and employer notified in writing

Employer Provided Automobiles

Common mistake: students calculating

standby charge and operating benefit in
questions where the taxpayer provided
his or her own car

Only need to calculate these benefits

when employer is providing a car, not
when taxpayer uses his or her own car

Read case facts carefully!!

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KC 4-4

Stock Options

s.7(3): grant date

s.7(1): exercise date

No taxable benefit
Employment income = FMV at time of exercise
exercise price (potential Division C deduction
s.110(1)(d)), OR
CCPC: s.7(1.1) no taxable benefit

s.38: date of disposal

Capital gain/loss (1/2 taxable) = FMV at time of

disposal FMV at time of exercise, AND
CCPC: Employment income = FMV at time of
exercise exercise price (CCPC) and potential
Division C deduction s.110(1)(d.1)

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Stock Options
Division C Deduction

Division C deduction from income =

taxable employment income benefit
under 7(1) reduced by where:

Non-CCPC (s.110(1)(d)):
Shares acquired are prescribed shares
(defn. Reg 6204)
Exercise price FMV at grant date
Employee is dealing at arms length (defn.
s.251(1)) with the corporation

CCPC (s.110(1)(d.1)):
Employment income inclusion deferred
until date of disposal
Shares held for at least 2 years
No s.110(1)(d) deduction claimed

Stock Options
Division C Deduction cont

If the s.110(1)(d.1) deduction is not

available because the holding period
test is not met, the shares may qualify
for the s.110(1)(d) deduction
A capital gain on the disposition of
CCPC shares may be eligible for the
capital gains exemption if the
corporation is a qualified small business
corporation (s.110.6) Chapter 8 topic

16

Stock Options
Summary
Grant date

Exercise date

Date of disposal

Non-CCPC
where
exercise $
< FMV at
grant date

N/A

Employment income
inclusion

Capital gain/loss

Non-CCPC
where
exercise $
FMV at
grant date

N/A

Employment income
inclusion
110(1)(d) deduction

Capital gain/loss

CCPC

N/A

N/A

Employment income
inclusion
110(1)(d) or (d.1)
deduction
Capital gain/loss (may
be eligible for CGE)

Employment income inclusion (+ or zero) = FMV @ exercise exercise $

Capital gain/loss = FMV @ disposal FMV @ exercise

KC 4-6, KC 4-7, P4-5

Time permitting

17

Homework

Finish reading chapter 4

KCQ 6-12 and problem 6 from
chapter 4

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