Professional Documents
Culture Documents
Income
from Employment
Prepared by
Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint
Distinction is important
Rules for determining income for tax differ for an employee
than as an independent businessperson
Control Test
Who determines what is done, where, when, and
how?
Employer-employee
relationship
Employer decides
Independent
contractor
Contractor decides
Employer-employee
Independent
relationship
Employer provide
Tools and pays for repairs
contractor
Contractor provide
Tools and pays for repairs
Employer-employee
Independent
relationship
contractor
Integration Test
A worker whose work is an integral part of the business is
probably an employee.
If the worker is an accessory to the business, he/she is
probably an independent contractor.
B. Employment Income
Fundamental Rules and Basic Formula
These rules determine what is included in employment
income, when they are included, and what items may
be deducted against that income:
1. All formal compensation income, with exceptions, are
taxable when received.
2. All benefits, with exceptions, are taxable when
received.
3. All allowances received, with exceptions, are taxable.
4. No deductions are permitted, except for a specific,
limited list of items.
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B. Salary Deferrals
Gap between the time that employment income is
earned and the time that it is received can influence the
rate of tax payable.
Delay may be beneficial to the employee if the tax rate in
the future will be lower.
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B. Salary Deferral
Significant abuses have led to two anti-avoidance rules:
1. If the employer wishes to deduct deferred
compensation on an accrual basis, it must be paid
within 180 days of the fiscal year end.
If it is not, employer delays deduction until the year paid
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A. Taxable Benefits
The general rule states that the value of all benefits
received or enjoyed must be included in the
taxpayers income.
Starting point is to assume all benefits are taxable
unless part of the exceptions that are not
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A. Taxable Benefits
Common forms of taxable benefits include:
Rent-free or low-rent housing,
Gifts in cash or in kind,
Group term life insurance policies,
Holiday trips, prizes, and incentive awards in
recognition of job performance,
Interest-free or low-interest loans,
Fitness, gym, or health club memberships, even if part
of an employee wellness program to increase job
performance.
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A. Taxable Benefits
Amount of Benefit included is the lower of:
Cost to employer of supplying the benefit, or
FMV of the benefit.
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Automobiles
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Operating Benefit
Alternative calculation is available where the
vehicle is used more than 50% for business:
= of the standby charge (coming up)
If employer pays portion of operating cost for
employee owned vehicle:
Personal portion is taxable benefit.
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Standby Charge
Employer provided vehicle
Removes the need to acquire a car.
BENEFIT
Standby Charge
If the employer owns the automobile, standby
charge =
Original cost
Number
of the
x 2% x of months
automobile
available
50%
or more
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Standby Charge
Employer leased automobile, standby charge =
Monthly
Lease
Cost
Number
2/3 x Of Months
Available
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Employee Loans
Low-cost or interest free loans provided by
employers are a taxable benefit
Taxable Benefit = CRA Prescribed Rate actual
interest paid.
Actual interest paid must be paid be Jan 30 of the
following year.
Reg. 4301 - Prescribed rate is set by the CRA every
quarter.
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Relocation Expenses
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1. In-The-Money Options
A taxable benefit must be included in income at
the time the option is exercised.
Benefit = FMV at Exercise Date Option Price
Any increase (or decrease) in value subsequent
to purchase date is a capital gain or loss.
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Tax-exempt Benefits
CRA has arbitrarily chosen to consider some benefits
non-taxable, including:
Discounts on merchandise.
Subsidized meals.
Cell phones and computers if primarily for business
purpose
Uniforms and special clothing.
In house recreational facilities
Club dues, which it is clearly to the employers advantage
to be a member of the club.
Internet at home if primarily to benefit the employer
Tuition/Training costs reimbursed if course primarily
benefits the employer.
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IV. Allowances
All allowances are taxable, subject to specific
exceptions.
Allowance refers to:
a fixed, specified amount that is paid on a regular
basis,
over and above a normal salary,
to cover certain expenses incurred.
Unique aspect: do not have to account for or provide
details of how it was spent.
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B. Exceptions
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Salespeoples expenses
Traveling expenses
Professional membership dues
Cost of supplies
Annual dues to a trade union
Contributions to RPP
Office rent or workspace in home
Legal expenses paid to establish right to salary or wages
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Travel Expenses
An employee can deduct travel expenses incurred in
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Travel Expenses
Travel expenses include:
Transportation, includes all methods including
automobile costs,
Meals limited to 50%,
Lodging, and
All other expenses created by the travel activity.
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Travel Expenses
Vehicle cost, subject to limitations, include:
Gas and oil,
General repairs,
Insurance,
Financing costs (interest), and
Capital cost or lease costs.
Limitations to Vehicle Costs
Vehicle cost limited to $30,000.
Lease cost limited to $800 per month.
Interest cost limited to $300 per month.
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Travel Expenses
No requirement that the travel costs be incurred
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C. Salespeoples Expenses
Employees who act in a selling capacity or who
C. Salespeoples Expenses
or golf course.
2. Membership fees or dues in a club,
main purpose to provide dining, recreational,
or sporting facilities to its members.
3. Expenditures of a capital nature that have a
long-term benefit.
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Salespeoples Expenses
Deductible items include:
Advertising and promotion
Telephone
Parking
Automobile
Supplies
Fees paid to assistants
Work space in home
Travel expenses
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costs.
Salespersons:
The preceding items, plus an appropriate
percentage of property taxes and house insurance
premiums.
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C. Deferred Compensation
1. Registered Plans
2. Non-Registered Plans
3. Stock-Based Plans
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II. Indirect
III. Deferred
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B. Indirect Compensation
Indirect forms of compensation provide
employees with specific benefits.
Usually fully deductible by the employer.
Taxation to the employee varies:
some benefits are fully taxable;
others are tax-free.
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C. Deferred Compensation
Two advantages from the employees
perspective:
1. Taxing income later may result in lower tax rates
especially if payments are delayed until
retirement.
2. If delayed payments are invested, investment
returns will be achieved on pre-tax income.
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C. Deferred Compensation
Three categories of deferred plans:
1. Registered Plans
2. Non-Registered Plans
3. Stock-Based Plans
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1. Registered Plans
Three specific registered deferred
compensation plans that provide preferential
tax treatment:
1. Registered pension plan (RPP)
2. Pooled registered pension plan (PRPP)
3. Deferred profit sharing plan (DPSP)
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1. Registered Plans
Contributions are deductible to employer:
- After-tax cost is the same as normal
compensations, i.e. salaries.
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Salary
$ 3,500
Tax
(1,575)
After-tax cash
$ 1,925
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2. Non-Registered Plans
Non-registered deferred compensation plans:
Employee profit sharing plans
Employee trusts
Salary deferral arrangements
Retirement compensation arrangements
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2. Non-Registered Plans
Seldom used because there is no tax relief for
the amounts deferred.
Payments to the plan are deductible from the
employers income but
Are taxable, along with any investment returns,
in the employees income in the year in which
they are received by the plan.
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3. Stock-Based Plans
Compensation plans that give employees
opportunities to purchase shares
Stock options (tax treatment discussed earlier in this
chapter)
Stock purchase plans
Employer lends funds to employee to purchase shares
Loan is returned to the employer in exchange for shares
If shares are not purchased at a discount, there is no taxable
benefit
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3. Stock-Based Plans
Stock Options
Employee: taxation from stock option benefits
was described earlier.
Taxation depends on type of corporation
Employer: this form of incentive is attractive
because it does not involve a cash payment
Does result in dilution of ownership.
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3. Stock-Based Plans
Stock Purchase Plans
Permits employees to purchase shares from the
corporate treasury at FMV using funds loaned by
the employer.
Funds loaned to the employees come back to the
company in exchange for the shares,
No cash cost to the employer.
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3. Stock-Based Plans
Stock Bonus Plans
Employer issues shares in lieu of a cash
bonus.
Full value of shares received as a stock bonus
is taxable:
As employment income in the year shares
are issued.
No cash cost to the employer
Result is a tax cost to the employee.
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3. Stock-Based Plans
Phantom Stock Plan
Does not actually provide shares;
it is an elaborate deferred bonus agreement.
Bonus tied directly to changes in the value of the
corporations shares.
Benefit to Employer: it preserves cash flow until the
end of the vesting period.
Benefit to Employee: The company shares its profits
with them on a tax-deferred basis.
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