TOPIC 2 - INCOME/LOSS FROM AN OFFICE OR EMPLOYMENT

Employed vs. Self Employed

• starting point of employment income is figuring out if you’re an employee

• some unusual scenarios where it’s not straight forward if you’re employed

  • ex. employed vs. contractor

Court on The Definition of “Employee” - Question

• is the person who has engaged himself to perform these services peforming them as a business on his own account?

• basically is the person doing the services on his own and not behalf of a company

Court on The Definition of “Employee” - If “Yes”

• you’re a contractor

• you’re running your own business and you’re the one providing services

Court on The Definition of “Employee” - If “No”

• you’re on a contract to provide a service to someone else

• this is what we see with an employee

• employee is usually a subordinate to the employer

3 Factors To Determine If You’re An Employee

• trying to figure out of the job is one more of service to a company, or services provided to a customer

3 Factors To Determine If You’re An Employee - First Factor

• Control

• who controls what work has to be done, how its done, when its done

3 Factors To Determine If You’re An Employee - Second Factor

• Ownership

• who owns and provides the tools and equipment for the work

• does the worker have the ability to hire helpers

• financial risks being taken?

3 Factors To Determine If You’re An Employee - Third Factor

• Opportunities

• what are the indvs. opportunities to profit from the work they’re doing

What Do Modern Case Laws Look At When Determining Employment/Self-Employment?

• what intention did the parties intend to create

• i.e employment relationship or something else

• involves a 2 step process

Determining Intention - Step 1

• subjective intention

• relationship doesn’t have to be written contract but factors suggest that these parties were coming together as employer-employee

Determining Intention - Step 2

• factors surrounding the agreement need to support your intention

• ascertain whether an objective reality sustains the subjective intent of the parties

Determining Individual Employment Status

• requires a binding rule which can be requested from the CRA

• provide CRA with necessary information and ensure nothing changes within the period

The Canadian Pension Plan (CPP)

• pension plan that you contribute you; meant to support you in retirement

• can take it out as early as 60 unless you delay payments

CPP Options Available

• can contribute from 18-70 but once you hit 65 the contributions to CPP become optional

CPP Contributions - Employee and Employer Contributions

• both must contribute 5.95% of pensionable earnings up to $74,600

• less: annual basic exemption of $3,500

• each must contribute 4% of pensionable earnings above $74,600 to $85,000

CPP Contributions

• once pensionable earnings exceed $85,000, you don’t have to keep contributing

  • can be good bc your paycheck goes up

• remitt every 15th of the month

  • failure to remit = penalty from 3% to 20%

CPP Contributions and Independent Contractors

• effectively employee and employer all at once

• have to send in the employee side of CPP and the matching contribution from the employer

• no employer to withhold CPP so they can figure out how much tax owed and tag on the CPP

CPP Contributions and Independent Contractors - Tax Returns?

• could get deduction on tax return

• not an employment expense though

• gets split up between other deductions and calimed as a non-refundable tax credit

  • lowers your overall liability to the feds

Employment Insurnace (EI)

• meant to support tax payers in moments of unemployment

• no entitled to access or participate

Exceptions to Participating in EI

• owner managers who control more than 40% of a corps. voting shares

  • not required to participate

• non arms length employees

  • ex. having a company and hiring your spouse and kids

  • not required to participate unless they are arms length/contract is no different than that of a strangers

EI Contributions - Employee and Employer Conrtibution

• employees contribute 1.63% of insurable earnings up to $68,900

• employer contributes 1.4 times the employee amount

  • employer pays a larger share

EI Contributions

• not required to participate in EI

• remitt by the 15th of every month

EI Contributions and Independent Contractors

• self employed indvs. considered owner managers effectively

• only need to send in the employee portion, not the employer portion

EI Contributions and Independent Contractors - Tax Returns?

• not an employee expense

• you can only claim as a non-refundable tax credit

Other Payroll Requirements Examples

• withholding tax → sending payments of tax from your paycheck as an employee

• for self employed indvs → pay installments depending on how much money they make

  • if you owe more than $3K in tax, you make quarterly installments to the CRA

T4 Statement of Remuneration Paid

• reports your gross employment income

  • salaries and taxable benefits, CPP and EI remitted

T4 - Self Employed Indvs.

• don’t get a T4

• get a T4A slip depending on the type of work they do

T4 - Issues

• ex. trucking industry

• issues between identifying employees vs. contractors

• perhaps there were contractors that are supposed to be employees

Employment Income - Section 5 of Income Tax Act

• that a tax payer’s income for a taxation year from an office or employment is the:

  • salary, wages and

  • other remuneration like gratuities

• can report loss from employment

Employment Income - Taxing Amounts Once Paid

• employment income generally taxable once received

  • if you work in Dec. your paycheck won’t arrive until Jan

  • means you won’t pay tax on that paycheck until the following year

• problematic in that you could get over taxed

Employment Income - Exception to The Rule On Taxing Amounts Once Paid

• constructively receive a paycheck

  • should receive a paycheck effectively but you defer it

  • employer gives you option to receive Dec. pay within the month or in Jan. in the next year

• still accepting the payment even though you defer it

Accruals: Taxing Employment Income on A Cash Basis - Independent Contractors

• usually calculating business income → accrual calculation

• once amounts become receivable from customers, you’re taxed on those amounts

• once amounts become payable from supplies, you can expense or deduct it

• employees don’t operate like this

Accruals: Taxing Employment Income on A Cash Basis - Bonuses

• once payable to employee, company gets to deduct it as an expense

• say the bonus isn’t receiv. until next year in 2027

  • this is a tax deferral; no tax paid until employee gets paid

Accruals: Taxing Employment Income on A Cash Basis - Issue With Declaring Bonuses

• if company never actually pays the bonus and defers it indefinitely

Accruals: Taxing Employment Income on A Cash Basis - Section 78.4

• deals with unpaid amounts, section 4 relates to unpaid remuneration

• if unpaid for 180 days after the end of the taxation year for this employer, this employer is not allowed to deduct this expense

• deduction will be deferred until the employe includes the amount in their income

Salary Deferral Arrangement

• arrangement that both employee and employer enter into a deferred payment of salary

• purpose is to defer paying tax

Salary Deferral Arrangement - Unfavorable Rule Applied In Employee POV

• not bound by the 180 day deferral rule but:

• employer will continue to deduct the salary once it becomes payable to the employee

• employee not allowed to use the cash basis for that salary

  • have to include the arrangement on thier income

• employee will only include that amount once its receivable

• doesn’t include bonuses that have been outstanding for a 3 year time frame

Fringe Benefits

• benefits additional to salaries and wages; taxable

• ex. receiving salaries but also getting health and dental plan

• recognize that the benefits are replacement for traditional salary and wage

• should be included in your employment income

Fringe Benefits - Lowe v. R Case

• court established that even though the employee was going on a fun trip, the purpose was to network for the company

Fringe Benefits - How To Determine If Its A Benefit

• is there a benefit and does it improve your economic position

• who is primarily benefitting

• can you measure that benefit

Taxing Taxable Benefits

• has to go on your T4

• can reduce the amount of taxable benefits by paying amounts back to your employer

• ex. employer got you a cruise vacation for funsies → you pay them back so now there’s no taxable return

Fringe Benefits - Exceptions

• statutory exemptions

• ex. counselling services → not a taxable benefit to the employee

CRA Admin Policies

• note that the CRA isn’t the law

• administrative body so by no means do you have to rely on these policies

• but these policies override what the law would otherwise say

  • could be problematic

CRA Admin Policies - Gifts and Rewards Portion Expempt from Tax

• policies that exempt a portion of a gift from taxation such that the gift:

  • was given for a special occasion

  • award for employment related accomplishment (not performance based)

  • must be given to an arm’s length employee

  • needs to be non-cash/not a near cash thing

CRA Admin Policies - Gifts and Rewards When Conditions Are Met

• the first $500 inclusive of sales tax in gifts and rewards given in a year is exempt from tax

• employees can get a non-cash reward up to $500 tax free once every 5 years

• trivial items never taxable (mugs, jackets)

CRA Admin Policies - Loyalty and Other Points Programs

• employer didn’t pay for amounts but employee gets points to use

• points aren’t considerd a taxable benefit provided that you need certain conditions

CRA Admin Policies - Conditions Where Points Considerd Taxable Benefit

• employer owns/holds the credit card that earns the points

• points can be converted to cash

• the points program is an alternative form of remuneration

  • points being used as part of employee’s compensation

• arrangement is a form of tax avoidance

Automobile Benefits Section 6

• where an employer provides the employee with the company vehicle,

• taxable benefit if the employees use the company vehicle for personal travel

Automobile Benefits - Personal: Taxable or Not?

• subject to taxes

Automobile Benefits - Personal 1

• driving to conduct personal activies like running personal errands or vacation trips

Automobile Benefits - Personal 2

• travel between home and a regular place of employment

  • regardless if the employee has to take the vehicle home

Automobile Benefits - Employment: Taxable or Not?

• not subjected to taxes

Automobile Benefits - Employment 1

• driving to do employment activities like business errands

Automobile Benefits - Employment 2

• travel between regular place of employment and a point of call

  • ex. client’s workplace

Automobile Benefits - Employment 3

• travel between home and point of call

Automobile Benefits - Employment 4

• travel between regular places of employment

Automobile Benefits - Employment 5

• for employees who work at remote or special work sites

Automobile Benefits - Employment 6

• transportation from a pickup point to a work site where public and private vehicles are neither allowed

What’s the Automobile Standby Charge?

• taxable benefit when a company-owned or leased automobile is made available to an employee

• assesses the taxable benefit

Automobile Standby Charge - Step 1

• do you have access to the keys?

• automobile is available if the employee has access to the keys

• autombile isn’t available only when the employer requires that the vehicle and its keys be returned

Automobile Standby Charge - Step 2

• do you have a motor vehicle?

• seating requirements

  • school bus or ambulance aren’t considered automobiles

• taxable benefit assessed by kilometers travelled

Automobile Standby Charge - The Charges Itself if Owned

• if the company owns the vehicle, the charge is 2% times the cost of the vehicle for each month the vehicle is available to the employees

  • note all months considered to be 30 days, only use whole numbers

• take the days of availability and divide it by 30 → round down if <0.5

Automobile Standby Charge - The Charges Itself if Leased

• take 2/3 of total lease payments and pro-rate it by the time the vehicle is actually available to said employee

Standby Charge Reduction - Requirements

• the employers requires that the vehicle be used for work purposes

• ensure that the distance in kilometers are primarily employment related

Standby Charge Reduction - Formula

• personal use kilometers / i,667 km per month available

• 1,667km assumes you’ll travel 20km in a year

• if the charge goes up, it means your monthly use of the vehicle exceeds 1,667km per month

• can further reduce the charge by paying employer back per month

Automobile Operating Expense Benefit

• a taxable beenfit when the employer pays for operating costs of the vehicle

  • ex. fuel, oil changes, repairs and maintenance

• taxable benefit is a per km charge

Automobile Operating Expense Benefit - Alternative Calculation

• the benefit may be calculated as 50% of the standby charge if:

  • you primarily (>50%) use the automobile for employment purposes

  • notify the employer in wrting that you wish to have the alternative calculation

Employee Owned or Leased Automobile

• when employee uses their own personal vehicle for employment related purposes

• no standby charge

• taxable benefit when employer covers the operating costs

  • only to the extent those costs relate to personal use

Employee Owned or Leased Automobile - Automobile Allowances

• employer will pay the employee a reasonable motor vehicle allowance rather than reimburse operating costs

Employee Owned or Leased Automobile - Automobile Allowances Conditions

• the allowance is based solely on your employment kilometers travelled

• only being reimbirsed for motor vehicle travel and not anything else

Employee Owned or Leased Automobile - Why Are Automobile Allowances More Preferable?

• simple and not a taxable benefit

• CRA won’t question the reasonability of an allowance if you’re using a prescribed rate under the ITA

Employee Owned or Leased Automobile - Automobile Allowances Calculation

• $0.73/km on the first 5,000 employment related km + $0.67/km for each additional employment related km

Allowances

• generally considered taxable benefits

• you get a motor vehicle allowance and a reasonable travel allowance

  • flights, hotels, meals for work purposes

  • only considers what a reasonable person would need to spend when going on a work trip

• if not taxable, you cain’t claim expenses on your returns or motor vehicle costs

Allowances - Deductions

• if you argue the allowance wasn’t reasonable, you can deduct expenses associated with that travel

• if it was reasonable, you can’t deduct anything

Elaborate on What An Allowance Is

• set arbitrarily rather than tied to actual costs

• provided for a specific purpose like travel

• used at the employee’s discretion

• resonable cost of what you’re incurring without requiring reciepts

Reimbursements

• reflects actual incurred costs

• supported by an invoice or receipt

• not considered a taxable benefit for as long as you’re buying things for your employment

  • business expense on behalf of the employer

Interest Free and Low Interest Loans

• employers may lend money to employees for the purpose of buying shares in the company

  • prolly bc employers couldn’t pay their employees

Interest Free and Low Interest Loans - Issue

• the interest rate on the loan

• if rate is lower than the prescribed rate, the employee gets a taxable beneft equal to the shortfall between interest calc. at prescribed and interest actually paid

Interest Free and Low Interest Loans - The Interest Rates

• wanna make sure the interest rate being assessed is equal to or greater than the prescribed rate

• currently 3%

Interest Free and Low Interest Loans - The Taxable Benefit

• amount of interest to the extent it exceeds the actual amount of interest you paid on that loan by Jan. 30

Interest Free and Low Interest Loans - Exceptions

• CRA generally won’t assess an imputed interest benefit if the loan is small and the term is short (ex. 2 months

• no taxable benefit if you’re entering into a loan with a financial institution under commercial terms

Interest Free and Low Interest Loans - Including Interest in Your Return As Income

• ITA will consider you have paid that interest amount

• important for figuring out employment deductions

Home Purchase Loans and Relocation Loans

• look at the prescribed rate that’s in effect for the relevant quarter that the loan is outstanding or;

• use the prescribed rate that was in effect when the loan was entered in to provided that the rate is lower

  • basically lock the original rate on the loan and pdate every 5 yrs

Employee Stock Options

• allows employees to buy shares in the company, subject to terms and conditions

• employee will exercise if its in the money or not

  • seeing if we can get a good deal on the option

Employee Stock Options - When They Become A Taxable Benefit

• when the options are in the money and exercised

• considered an employment benefit

  • therefore taxable benefit

Employee Stock Options - The Taxable Benefit Is:

• the difference in the FMV vs. what they’re paying for the shares

  • exercise price treated as employment income

• you also get a deduction that offsets the benefit

  • deduction isn’t an employment deduction

Employee Stock Options - Division C Deduction

• deduction equal to ½ of the taxable benefit

• can only get this deduction if the exercise price was not in the money when the option was granted

  • exercise price > FMV

Capital Gains

• when you sell or deem to sell a type of asset and the asset is appreciated in value more than what you paid for

• proceeds of disposition > adjusted cost base + disposal costs

Capital Gains - Calculating the Gain

• when selling shares, use the FMV of the shares the day you acquired them

• purpose to avoid double tax

Capital Gains - Formula

• capital gain * 50% = taxable capital gain

• subject to inclusion rate which is 50%

  • so only half of the benefit is included in your tax return

Canadian Controlled Private Corporations (CCPC)

• ITA has tax luxuries for CCPC

• these CCPC’s can refer to mom and pop shops

Canadian Controlled Private Corporations (CCPC) - Stock Option Benefits

• if shares come from a CCPC, you don’t have to include a taxable benefit or Division C Deduction on your return until you sell the shares later in the future

Canadian Controlled Private Corporations (CCPC) - Division C Deduction

• applicable when the options are in the money

  • compared to bigger companies where they have to not be in the money

• must hold on to those shares for at least 2 years following purchase

Other Conditions for Publicly Traded Companies

• limited availability of the Division C Deduction with respect to stock option benefits

  • applicable to those with a FMV of $200,000 or less

• designed to restrict preferential tax treatment for employees of large firms

Donation of Securities Acquired Through An Employee Stock Option - Donating To A Charity

• technically taxable

  • treated as a disposition → under ITA, gifts are deemed to be dispositions at FMV

Donation of Securities Acquired Through An Employee Stock Option - Publicly Traded To Charity

• donating publicly traded shares to a charity creates a capital gain

  • don’t have to include it in your tax return

Donation of Securities Acquired Through An Employee Stock Option - Inclusion Rate?

• inclusion rate becomes 0% (rmbr usually its 50%)

• tries to get people to donate bc they can avoid tax consequences

Cash Payments in Lieu of Shares

• some stock options allow employees to get cash instead of shares

• still a taxable benefit present and can claim Division C Deduction

  • but the employer needs to elect not to deduct the cash payment as a business expense

Employment Deductions

• amounts you’re paying for as an employee without being reimbursed

  • can claim expenses on your tax return

• anything the employee pays for is not deductible for tax purposes

  • limited list of what you can deduct but less advantageous to te employee

Employment Deductions - Must Be Self Reported

• different than your employment income and taxable benefits on your T4