ADMN 3710 taxation ch 4

Chapter 4: Income from Employment

  • Copyright: © 2024 McGraw Hill Limited. Prepared by Daniel Mahne, CPA, MTa RSM Canada

I. Income from Employment Overview

  • Key Topics:

    • Scope and Structure of Employment Income

    • Cash Basis

    • Employee Benefits

    • Allowances

    • Deductions from Employment Income

    • Sample Calculation of Employment Income

    • Efficient Management of Employee Compensation

II. Scope and Structure of Employment Income

  • Definition of Employed:

    • Common law decisions define employment status.

    • Generally considered employed when services are provided at the employer's direction for a salary or wage.

III. Distinction Between Employee and Independent Contractor

  • Independent Contractor:

    • Provides services with less control and paid via fees.

    • Income considered business income, not employment income.

IV. Factors Determining Employment Status

  • Employed: Defined by four tests:

    • Control Test:

      • Determines who decides on work conditions.

    • Ownership of Tools Test:

      • Who provides tools?

    • Chance of Profit or Loss Test:

      • Who bears the risk?

    • Integration Test:

      • Integral to business versus accessory work.

V. Employment Income

  • Formula:

    • Employment income = (A + B + C) - D

    • A = Salary, wages, commissions, and other remuneration

    • B = Benefits received or enjoyed

    • C = Allowances received

    • D = Specific deductions allowed

VI. Cash Basis of Income

  • Inclusion on Cash Basis:

    • Includes formal compensation arrangements when received (e.g., salary, wages, bonuses).

    • Allows for deferred salary arrangements based on tax rate trends.

VII. Employee Benefits

  • Indirect Compensation:

    • Includes pension plans, insurance, stock options, and more.

    • Benefits are generally taxable unless specified otherwise.

    • Examples: Rent-free housing, gifts, low or interest-free loans.

VIII. Taxable Benefits

  • All benefits considered taxable unless specifically exempted.

  • Common taxable benefits include:

    • Group life insurances

    • Holiday incentives, gifts, living expenses.

IX. Automobiles as Benefits

  • Standby Charge: Taxable when employee has personal use of employer vehicle.

  • Operating Cost Benefit: Calculated based on personal kilometers driven.--

X. Employee Loans

  • Low or interest-free loans as taxable benefits.

  • Special provisions for loans taken to purchase a home.

XI. Reimbursement for Relocation Expenses

  • Generally not taxable except for specific conditions and limits.

XII. Stock Options

  • Opportunity to Purchase Ownership:

    • Differences between in-the-money and not-in-the-money options.

XIII. Non-Taxable Benefits

  • Some benefits explicitly excluded from taxation and certain that are deferred.

XIV. Allowances

  • All allowances are generally considered taxable unless specifically exempted.

  • Exceptions: Overtime meals, travel expenses for employees who sell property.

XV. Deductions from Employment Income

  • No deductions allowed unless explicitly listed (e.g., legal fees, sales expenses, and necessary supplies).

XVI. Taxation and Employee Compensation

  • Basic Objectives:

    • Provide maximum satisfaction with minimal costs, while ensuring tax efficiency for both employer and employee.

    • Different forms of compensation have varying tax implications.

XVII. Overall Summary

  • Understanding all aspects surrounding the scope and taxation of employment income is vital for effective tax planning and maximizing benefits.