Employment Income Chapter 3 Part I

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Employment IncomeChapter 3(Part I)
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Part IDivision B Computation of Income

• 3(a) Income from office, employment, business,
  property,other income
• 3(b) Net taxable capital gains (excluding
  Allowable Business Investment
  Losses)
• - 3(c) Other deductions
• -3(d) Losses from office, employment, property
  and ABIL
• Income for Tax Purposes (Cannot be Negative)
• Minus Division C Deductions
• (For individuals Employee Stock option, Home
  relocation loan, Capital gain exemptions, loss
  carryover, etc.)
• (For corporations Loss carryover, dividends,
  donations)
• Taxable Income (if any)

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Income for Tax Purpose

• Income for tax purpose is commonly called
  Division B income since it is computed under
  Division B of Part I of the Act
• Taxable income Division B income Division C
  deductions

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Employed vs. Self-Employed

• Type of income earned by individuals
• Are you an employee earning employment income?
• Are you an independent contractor earning
  business income?
• Why do you and your employer care?

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Employed vs. Self-Employed

• Differences between employment and
  self-employment income
• Deductibility of expenses
• Withholding of tax
• Cash basis vs. accrual basis
• Other non-tax issues ie. EI/CPP premiums, WCB
  payments, severence/holiday/sick pay

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Employed vs. Self-Employed

• Generally, both employer and employee would
  prefer self-employment, hence the tax angle is
  vital when planning the provision of services.
• Self-employed individuals costs less
  administrative work and money for the employers

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Employed vs. Self-EmployedCriteria

• Entrepreneur Test
• Control of Service Provider
• Ownership of Tools (computers, software, and
  cars)
• Chance of Profit/Risk of Loss
• Integration Test
• Economically dependant on the organization from
  individuals point of view since the Wiebe Door
  Case
• Specific Result Test
• Contract for specific project for indeterminate
  period of time self-employed
• Contract for continual service - employee

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Employed vs. Self-Employed

• See CRA IT-525R, which discusses performing
  artists
• Paragraph 6 and 7 of the IT give practical
  examples of factors which matter, although they
  do not explicitly use the 3 tests above.

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ExampleText Book Chapter 3 Problem 1

• Based on the fact situation of Wiebe Door
  Services Ltd. V M.N.R. (F.C.A.) 87 DTC 5025

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Office or Employment IncomeBasic Principle

• Amounts paid by the employer are either taxable
  or not taxable amounts paid by the employee are
  either deductible or not deductible

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Office or Employment Income

• Determined under Division B, subdivision a
• Section 5 Salary wages and other remuneration
  (includes gratuities) received in the year (cash
  basis)
• Section 6 Specific Inclusions (benefits)
• Section 7 Stock Option Benefits
• Section 8 Deductions Allowed

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Office or Employment Income

• Section 5
• Cash amounts
• Includes tips
• received (i.e., cash accounting rather than
  accrual accounting)

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Office or Employment Income

• Par.6(1)(a) worded generally, and would tax
  virtually any benefit
• IT-470R much more generous
• Rely on IT, even though it could be changed at
  any time, recall the bulletins are the CRAs
  administrative practice, not the law

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Office or Employment Income

• Par.6(1)(e)
• Standby charge and operating benefit of an
  automobile
• Example
• Text book Chapter 3, Problem 3

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Comprehensive Example

• Textbook Chapter 3 Problem 4

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Other Fringe Benefits

• Look to court cases and IT-470R
• Note In general, for benefits not specifically
  listed under section 6 and IT-470R, if a benefit
  provided to an employee is to the employers
  advantage, benefit is not required to be included
  in income (i.e. Professional courses)

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Allowances for Personal Living Expenses

• Allowances ssec. 6(1)(b)
• All allowances received by an employee must be
  taken into income except
• Reasonable allowances for travelling expenses
• Reasonable allowances for use of a motor vehicle
• Other miscellaneous
• What is reasonable?
• Based on facts of case
• Compare allowance to actual expense
• Deemed not reasonable
• Any motor vehicle allowances not based on km
  driven

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Employee-ownedAutomobile Operating Expense
Benefit par. 6(1)(l)

• If employer pays all operating costs of vehicle
  owned by employee, personal use portion of
  operating costs included in employees income
• Employee must keep a log to keep track of
  personal and business kilometres

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GST Benefit ssec. 6(7)

• The GST benefit is included with the calculation
  of the taxable benefit in section 6 be adding the
  GST to the amount of the benefit
• Applies to all income inclusions under section 6
• Excludes zero-rated or exempt supplies and PST
• Applied to benefit before any reimbursement

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Taxation of Stock Options

• Subsection 7(1)
• Corporation (or related corporation) must have
  agreed to sell or issue shares
• The individual that is a party to the agreement
  must be an employee of the corporation (or a
  related corporation)

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Taxation of Stock Options

• Paragraph 7(1)(a)
• Employee must have acquired the shares
• Calculation of benefit
• FMV at date of acquisition less the amount paid
  for the shares under the agreement benefit
  received from employment

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Taxation of Stock Options

• Paragraph 7(1)(b)
• Employee transfers or disposes of rights under
  the agreement to an arms length person
• Calculation of benefit
• FMV of consideration received less amount paid by
  employee to acquire the rights

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Taxation of Stock Options

• Paragraph 7(1)(c) and (d)
• Rights under the agreement have become vested in
  a non-arms length person and that person
  acquires shares or transfers the rights to an
  arms length person
• Benefit continues to be received by employee
  unless he or she is deceased

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Taxation of Stock Options
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Section 7 - Tax Treatment of Employee Stock
Options

• Taxable Benefit included in Employment Income
• FMV at time of exercise minus exercise price
• Capital Gain or Loss
• Selling price ACB as adjusted below
• ACB of Shares
• Exercise price taxable benefit included in
  income i.e. FMV at exercise

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Tax Treatment of Stock Options

• Division C Deduction
• ½ deduction of taxable benefit if either
• Option shares are of a CCPC and have been held
  for two years, or
• The exercise price was greater than the FMV at
  the time the option was granted and the share is
  like a common share

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Tax Treatment of Employee Stock Options

• When to Report Taxable Benefit
• CCPC when the shares are disposed of
• Non-CCPC when the option is exercised
• CCPC ssec.125(7) Canadian Controlled Private
  Corporation
• Canadian corporation means it is resident in
  Canada
• Private corporation means resident in Canada, not
  a public corporation nor controlled by a public
  corp.
• Canadian controlled if not controlled by
  non-residents
• Private if not listed on prescribed stock
  exchange
• What about a private corporation 50 owned by
  non-resident and 50 owned by resident of Canada?
  Is it a CCPC?

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Tax Treatment of Stock Options

• Deferral of Taxable Benefit ssec. 7(8) 7(16)
• Deferral of up to 100,000 of options annually
• On options exercised after February 28, 2000
• Must file a form to get a deferral
• Eligible Employees
• Must deal at arms length with employer
• Are not specified shareholders (own gt 10)
• Eligible Options those entitle to par 110(1)(d)
• Option to acquire common shares
• Shares traded on prescribed stock exchange
• Amount payable to acquire the shares is not less
  than the FMV of the shares at the grant date