Employment Income - PowerPoint Presentation

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Slide1

Employment Income

Chapter

3Slide2

Employment Income

General

Concept

Results From EmploymentWithout Regard To SourceIncludes Director’s Fees

2Slide3

Employment Income

Employment Income In The

Act

Section 5 – DefinitionsSection 6 – InclusionsSection 7 - Stock Options

Section 8 - Deductions

3Slide4

Cash Vs. Accrual

ITA 5(1)

- Income from office or employment — Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages, and other remuneration, including gratuities,

received by the taxpayer in the year.

4Slide5

Bonus Arrangements

Example

On July 25, 2015, Martin Ltd. declares a bonus of $100,000 in favour of one of its employees, Roger Jones. The Company’s year end is July 31.

5Slide6

Example - Case A

The Bonus

Is Paid After December 31,

2015But Before January 28, 2016Employer Deducts

In Year Ending July 31, 2015Employee Includes

In Income When Received In

2016

6Slide7

Example - Case B

The Bonus Is Paid After January 27,

2015

But Before July 31, 2016Employer Deducts When

PaidEmployee Includes When Received

7Slide8

Example - Case C

Salary Deferral

Arrangements

EmployerDeducts When AccruedEmployeeIncludes When Accrued

8Slide9

Employee vs. Self-Employed

Employee

Perspective

Availability Of DeductionsWithholding vs. InstalmentsCPP and EIFringe

BenefitsOpportunity For Tax Evasion

9Slide10

Employee vs. Self-Employed

Employer

Perspective

No CPP, Payroll Taxes, Or EINo Benefits PaidPay GST/HSTLess Of A Commitment Than To An Employee

10Slide11

Employee vs. Self-Employed

Determination

Basic Factor Is

IntentOther ConsiderationsControlOwnership Of ToolsAbility To Subcontract /Hire AssistantsFinancial Risk

Responsibility For Investment And ManagementOpportunity For Profit

11Slide12

Inclusions

Salaries And

Wages

The basic form of compensationFringe BenefitsNon-salary compensation

12Slide13

Non-Salary Compensation

ITA 6(1)(a)

requires any benefit received by employee to be included in income.

13Slide14

Non-Salary Compensation

ITA 6(1)(a) Exceptions (Excluded From Income

)

RPP Contributions By EmployerPremiums On Group Disability Insurance (If benefits are taxable)

Private Health CareDeferred Profit Sharing Plans

Supplementary Unemployment Benefits

Counselling – Re: Mental Or Physical Health

Counselling – Re: Re-Employment Or Retirement

14Slide15

Other Fringe Benefits: IT-470R

Taxable

Room And Board

Travel BenefitsUse Of Employer Provided AutomobilePrizes Or Awards (Some)

Provincial Health Care (Some )Reimbursement Of

Cost

Of Tools

Wage Loss Plans

Low Rate Or Interest Free Loans

Counselling Fees (Some)

Tuition (See Later Slide

)

Gifts From Employer

(See Later Slide)

15Slide16

Other Fringe Benefits: IT-470R

Loyalty programs

(frequent

flyer points resulting from employment travel)Not a benefit if:Not converted to cashNot an alternative form of compensationNot a tax avoidance scheme

16Slide17

Other Fringe Benefits: IT-470R

Employer paid

tuition

Specific employer related training (not taxable)General employment related training (not taxable)Personal interest training (taxable)

17Slide18

Other Fringe Benefits: IT-470R

Tax free gifts and awards

Must be non-cash

Any numberCannot be performance relatedIf total > $500, excess is taxableLong-service awardMust be non-cash

Once every 5 yearsIf total > $500, excess is taxable

18Slide19

Other Fringe Benefits: IT-470R

Non-Taxable

Merchandise Discounts

Subsidized MealsUniformsSchool Services In Remote AreasJob Transportation In Employer VehiclesUse Of Recreational Facilities

Moving Expense ReimbursementPrivate Health Care

Transportation Passes For Airline, Bus, Or Rail Companies

19Slide20

Tax Planning Considerations

Salary Is Benchmark

Deduct When Accrued

Taxed When PaidTax Reasons For Using AlternativesAvoidance Of TaxDeferral Of Tax

20Slide21

GST/HST/PST On Taxable Benefits

ITA 6(7)

Benefits Determined With GST/HST/PST Included

21Slide22

Board And Lodging

Excluded From Employment Income If

At a temporary special work site where commuting would not be practicalAt remote work site where establishing a domestic establishment would not be reasonable

22Slide23

Employer Supplied Automobiles

Current Rules – IT-

63R5

Fixed Costs - Standby ChargeVariable Costs - Operating Cost BenefitAmounts Reduced By Employee Payments

23Slide24

Standby Charge - ITA 6(2)

Less Than 50% Employment

Usage

Employer Owns Car[(2%)(Cost Of Car)(Months Of Availability)]Employer Leases Car[(2/3) (Lease Payments For The Year Excluding Insurance) (Availability Factor)]

GST/HST/PST Included

24Slide25

Primarily (50% Or More) Employment Usage

Multiply Regular Charge By

Numerator Cannot Exceed 1,667 Km. Per Month – This Means The Fraction Cannot Exceed 1

Standby Charge

25Slide26

Operating Costs - ITA 6(1)(k)

Less Than 50% Employment Usage

$0.27 Per

Kilometre Of Non-Employment Usage For 2015Primarily Employment UsageCan Substitute One-Half Of Standby Charge (If employment usage more than 50 percent)

26Slide27

Tax Planning For

Employer Provided Automobiles

Must Be Required To Return

The Keys And VehicleKeep RecordsLeasing Vs. BuyingMinimize Standby

ChargeAvoid Luxury CarsPay Employees To Use Own Cars

27Slide28

An amount paid to an employee to cover some type of

cost

Reimbursements (Reasonable Amounts)

Not in employee’s incomeEmployee cannot deduct any of the actual costsAllowances

28Slide29

Allowances

Taxable

Allowances

Included in employee’s incomeEmployee can deduct actual costs

Non-Taxable Allowances

Must be reasonable

Not in employee’s income

Employee cannot deduct actual costs

29Slide30

Allowances

Automobiles

30Slide31

Insurance Benefits

Life Insurance

A benefit

Health CarePrivate – Not a benefitProvincialIndividual Premiums – a benefitPayroll Tax – not a benefit

31Slide32

Disability Insurance

Premiums Paid By Employer

ITA 6(1)(a): Not A Taxable Benefit

(Benefits received are taxable)Premiums Paid By EmployeeNot Deductible When Paid

32Slide33

Disability Insurance

Benefits

Received

Employer Makes Contributions – TaxableCan be offset by deducting cumulative employee contributionsEmployer Does Not Make Contributions – Not Taxable

33Slide34

Loans To Employees

General

Rules

ITA 80.4(1) - Imputed interest at prescribed rateITA 80.5 - Allows deemed interest to be deducted if purpose of loan is to produce business or property income

34Slide35

Home Purchase

Loan

Benefit cannot exceed annual amount using original prescribed

rateIf prescribed rate goes down – can use lower rateRule applies for first 5 years of loanLoans To Employees

35Slide36

Loans To Employees

Home Relocation

Loan

Moving closer to work locationDeduction available in calculating Taxable Income (see Chapter 4 for details)

36Slide37

Tax Planning – Employee Loans

Cash Flow

Analysis

Cash flows associated with granting loanCash flows associated with providing salary to cover loan from third partySee Paragraph 3-162 example

37Slide38

Stock Options

Defined:

An option to buy shares at a specified price for a specified period of time

.Provides incentive for employee performanceA tax effective form of compensation

38Slide39

Stock Options

An employee receives options to purchase 100 shares at $10.

39Slide40

Granting

No Effect

Exercise [(100)($15 - $10)]

Employment Income $ 500

Sale [(100)(1/2)($25 - $15)]

Taxable Capital Gain

500

Net Income

1,000

Employer Is A Public Company

40Slide41

Issue - No Effect

Exercise - No Effect

Sale

Employment Income

[(100)($15 - $10)] $ 500

Taxable Capital Gain

[(1/2)(100)($25 - $15)]

500

Net Income

$1,000

Employer Is A CCPC

41Slide42

ITA 110(1)(d) and (d.1) deduction

One-half of employment income

inclusion

A deduction from Net Income to get Taxable IncomeAvailable if:At issue: option price ≥ market price; o

rIf CCPC – Available if shares held for two years without regard to option price.

42Slide43

Other Inclusions

Payments by employer to

employee

Forgiveness of employee loansHousing loss reimbursement (if a moving expense – see Chapter 9)Discounts on employer merchandise are tax free.

Club dues and recreational facilities – generally tax free

43Slide44

Deductions - ITA 8(1)(f)

Conditions

Required To Pay

ExpensesRequired To Work Away From OfficePaid At Least In Part By CommissionsIf An Allowance Received, Included In

IncomeHave Signed Form T2200

44Slide45

Accounting And Legal Fees

Advertising

Entertainment, Meals, And Lodging

ParkingSuppliesLicencesBonding, Insurance, And Medical FeesEquipment (if leased)Salaries, Rents (including home office)Transportation And Motor Vehicle Costs

Types Of Expenses - ITA 8(1)(f)

45Slide46

Limitations – ITA 8(1)(f)

Can’t exceed

commission

incomeCan’t use ITA 8(1)(h) or 8(1)(h.1) for excessThe basic trade-off

46Slide47

ITA 8(1)(h) – Travel

ITA 8(1)(h.1) – Motor Vehicle

Conditions

Required To Pay ExpensesRequired To Work Away From OfficeIf An Allowance, Included In Income

Signed Form T2200No ITA 8(1)(f)