Chapter 3 - Employment Income

Why does it matter if someone is employed or self-employed?

Employees have more restricted expense deductions, and employers must remit income tax, EI, and CPP for employees.

What is the control test?

It asks who determines what work is done, where, when, and how. If the employer controls this, it suggests employment.

What is the ownership of tools test?

If the employer provides tools and pays for repairs, it suggests employment. If the worker provides tools and pays for repairs, it suggests self-employment.

What is the chance of profit or risk of loss test?

If the employer takes the risk and rewards, it suggests employment. If the worker takes the risk and rewards, it suggests self-employment.

What are the four fundamental rules of employment income?

Formal compensation is taxable, benefits are taxable, allowances are taxable, and deductions are denied unless specifically allowed.

What is the basic formula for employment income?

Employment income = salary/wages/commissions/gratuities + benefits + allowances − permitted deductions.

When is formal compensation included in income?

Formal compensation is included on a cash basis, meaning when received, not necessarily when earned.

What are examples of formal compensation?

Salary, wages, commissions, gratuities, bonuses, honoraria, and director’s fees.

What is the general rule for employee benefits?

Assume benefits are included in income unless there is a specific exception.

What are examples of non-taxable employer benefits?

Employer contributions to RPP/PRPP, private health services plans, DPSP, counselling services, employer-benefit education, and group sickness or accident insurance.

How is the taxable benefit amount usually measured?

The benefit is usually the lower of the cost to the employer or the FMV of the benefit.

What benefits have special calculations?

Stock options, employee loans, and employer-provided automobiles.

How is the taxable benefit for an employee loan calculated?

Taxable benefit = interest at the CRA prescribed rate − actual interest paid by the employee.

When must actual interest be paid to reduce the employee loan benefit?

Actual interest must be paid by January 30 of the following year.

What is the special rule for home purchase loans?

The rate used is the lesser of the prescribed rate while the loan is outstanding or the prescribed rate when the loan was granted.

What happens if an employer forgives an employee loan?

The forgiven amount, net of any payments made by the employee, is included in employment income.

How is reimbursement for loss on sale of a home taxed?

The first $15,000 is not taxable. One-half of any amount above $15,000 is taxable.

What are the three stock option events to consider?

Granting of the option, exercise of the option, and sale of the shares.

When is there usually no tax effect for stock options?

There is usually no tax effect when the option is granted.

What is an in-the-money option?

An option where the option price is below FMV at the grant date.

What is a not-in-the-money option?

An option where the option price is equal to or greater than FMV at the grant date.

What is the employment benefit formula for stock options?

Employment income = FMV at exercise − price paid for the shares.

What is the capital gain/loss formula for stock options?

Capital gain or loss = proceeds on sale − FMV at exercise.

When is a public company stock option benefit included in income?

At the time the option is exercised.

When is a CCPC stock option benefit included in income?

At the time the shares are sold.

Why is FMV at exercise used for the capital gain calculation?

To avoid double taxation, because the increase up to FMV at exercise was already treated as employment income.

When can the 1/2 stock option deduction apply for public companies?

When the option was not in the money at the grant date.

When can the 1/2 stock option deduction apply for CCPC shares?

If the shares were held for 24 months, or if the options were not in the money at the grant date.

When does an automobile taxable benefit arise?

When an employer-provided automobile is used for personal use.

What are the two automobile benefit components?

Standby charge and operating cost benefit.

What is the standby charge for?

It is the taxable benefit for having the employer’s automobile available for personal use.

What is the basic standby charge formula for an owned automobile?

2% × cost of automobile × number of 30-day periods available.

What is the basic standby charge formula for a leased automobile?

2/3 × annual lease cost, excluding insurance included in the lease.

When can the standby charge be reduced?

When business use is more than 50% and personal use is less than 20,004 km for the year.

Why is a logbook important for automobile benefits?

A logbook verifies business and personal kilometres.

What is the operating cost benefit?

A taxable benefit for the employer paying operating costs related to personal use of the vehicle.

What is the alternate operating cost benefit calculation?

If the vehicle is used primarily for work, the operating cost benefit can be 1/2 of the standby charge.

What happens if an employee uses their own car and receives a reasonable allowance?

There is no taxable benefit.

What happens if an automobile allowance is unreasonable?

The allowance is included in income, and reasonable expenses may be deductible.

What is the general rule for allowances?

All allowances are taxable unless a specific exception applies.

What is an allowance?

A fixed amount paid regularly, over salary, to cover expenses, with no need to account for how it was spent.

Are reimbursements usually taxable?

No. Reimbursements are generally not taxable.

What are the three common tax-free allowance exceptions?

Travel allowance for salespersons, travel allowance for other employees, and motor vehicle allowance for ordinary employees.

When is a salesperson’s travel allowance tax-free?

The allowance must be reasonable, only for travel expenses, and the employee must sell property or negotiate contracts.

When is a travel allowance for other employees tax-free?

It must be reasonable, for travel expenses excluding motor vehicle expenses, and the employee must travel away from the employer’s area.

When is a motor vehicle allowance tax-free?

It must be for travelling in employment duties, reasonable, and based only on kilometres driven.

What are examples of common taxable benefits?

Rent-free housing, cash gifts, group term life insurance, holiday trips, prizes, low-interest loans, club dues, and business trips with a spouse.

What is the CRA rule for non-cash gifts?

Non-cash gifts to an arm’s length employee are non-taxable if the total combined value is $500 or less annually.

What happens if non-cash gifts exceed $500?

The excess amount is taxable.

What is the rule for long-service awards?

A separate award may be non-taxable up to $500 if it is for at least 5 years of service, then every 5 years after.

What is the general rule for employment deductions?

No deductions are allowed unless specifically listed in ITA section 8.

What conditions usually need to be met for employment expenses?`

The expense must be incurred to earn employment income, and the employer generally must sign the required form.

What are common employment deductions?

Salespeople’s expenses, travel and motor vehicle expenses, professional/union dues, supplies, CCA on vehicles, RPP contributions, work space in home, and eligible tradesperson tools.

What is special about salespeople’s expense deductions?

Salespeople may claim a broader range of expenses, but some are limited to commission income.

What must a salesperson choose between?

They must choose either the salesperson rules under 8(1)(f), or the ordinary travel/motor vehicle rules under 8(1)(h)/(h.1).

What salespeople’s expenses are limited to commission income?

Advertising, promotion, travel, telephone used exclusively for employment, some home office costs, and automobile costs.

What salespeople’s expenses are not limited to commission income?

CCA on automobile, automobile financing costs, utilities, maintenance, repairs, office supplies, and long-distance calls.

What expenses are specifically not deductible?

Yacht, camp, lodge, golf course costs, club dues for dining/recreation/sports, and capital expenses unless specifically allowed.

When can ordinary employees deduct travel expenses?

When they are required to work away from the employer’s place of business, pay their own travel costs, and do not receive a non-taxable allowance.

What do travel expenses include?

Transportation, meals, lodging, and other expenses caused by travel.

What is the meal deduction limit?

Meals are generally limited to 50%.

What vehicle costs may be deductible?

Gas, oil, repairs, insurance, financing costs, capital cost, or lease costs, subject to limits.

What are the vehicle cost limits from the slides?

Vehicle cost is limited to $37,000, lease cost to $1,050/month, and interest cost to $350/month.

When can work space in home expenses be deducted?

When the workspace is the principal place duties are performed, or it is used exclusively and regularly to meet customers or clients.

What does “principal place duties are performed” mean?

More than 50% of duties are performed there for at least 4 consecutive weeks in the year.

What home office expenses can commission and other employees deduct?

Rent, repairs and maintenance, supplies, telephone, and utilities.

What extra home office expenses can commission employees deduct?

Home insurance and property taxes.

Is mortgage interest deductible for home office employment expenses?

No. Mortgage interest is not deductible for either commission or other employees.

What dues and other expenses may be deductible?

Professional dues, union dues, office rent, salary paid to an assistant, supplies, tradesperson tools, employee RPP contributions, and some legal expenses.

What professional dues are deductible?

Annual dues paid to maintain standing in a profession recognized by statute.

What are the two types of registered pension plans?

Defined benefit plans and money-purchase/defined contribution plans.

What is a defined benefit pension plan?

A plan that guarantees a predetermined retirement income, with investment risk on the employer.

What is a defined contribution pension plan?

A plan where pension income depends on the contributed funds and investment results, with investment risk on the employee.

Are employee RPP contributions deductible?

Yes, employee contributions to an RPP are deductible within specified limits.