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.