AFM362 Lecture Notes - Lecture 2: Term Life Insurance, Pension, Constructive Receipt
28 Jun 2018
School
Department
Course
Professor
Employment income is reported on a calendar basis, so the taxation year of an individual always ends Dec 31•
Primary goal is to gain access to less restrictive expense deductions of a self
-
employed contractor and the
beneficial tax rates of a corporation
○
However, special rules governing PSB eliminate the advantages in this type of situation
○
Personal Services Business (PSB) is when an employee attempts to circumvent the mandatory calendar year
reporting by incorporating his "business"
•
Defining the taxation year
e.g. bonuses, tips, honoraria, and commission paid to employees.○
Includes direct (salary) or indirect (employers pays an employee's rent) benefits received○
Remuneration includes all items received as a result of the individual's employment.
•
A tax equalization payment made to an employee to compensate for the higher Canadian taxes○
A trip incentive paid to a sales person by the employer's supplier○
Examples of remuneration
•
Gratuities are amounts received from an employer's customers and must be included in employment income •
Salary, wages, and other remuneration including gratuities
Employment income is determined on a cash basis
•
Only amounts received in the year will be included, regardless of when they are earned•
Given the ability to defer income by paying a bonus at a later date, the Act has outlined situations where the
deferral of payment of tax will not be accepted
•
A voluntary deferment of remuneration that the employee had an unconditional right to receive will be included
in the employee's income in the year the remuneration became receivable- principle of constructive receipt
•
Amounts received
3,100 Employment benefit inclusions
Employment benefits that must be included in income from employment are outlined in section 6 and 7 of the
Act.
•
Overview
3,105 General rules
The general wording in the preamble of paragraph 6(1)(a) indicates that all benefits
received
and
enjoyed by
virtue of an individual's employment will be included as part of the employee's remuneration and will be taxable
•
According to the supreme court of Canada, to be taxable as a "benefit", a receipt must confer an
economic
benefit. A receipt must increase the recipient's net worth to be taxable. If not, then its not taxable.
•
Good starting point is to assume that all benefits received or enjoyed that fit the definition above will result in a
taxable benefit to the employee. Then we review subsection 6(1) for any exceptions
•
3,105.10 concept of a benefit
This indicates that an individual can include the value of a benefit in employment income regardless of who
provides the benefit.
•
It would also indicate that if a related person receives a benefit as a result of the individual's employment, an
amount will be included in the employee's employment income for the year
•
In terms of taxable benefits, it should not matter who provided the reward, since the reward was received by
virtue of employment.
•
3,105.20 Indirect benefits
All benefits must be included in employment income at a specific value. •
The employer must determine or make a reasonable estimate of the value
It could equal to the cost the employer pays for the benefit
One of valuation○
We have learned that a "benefit" is a receipt must increase the recipient's net worth to be taxable
One relating to the definition of a benefit○
Two issues
•
3,110 definition and valuation of the benefits
A
registered pension plan
or pooled registered pension plan
○
A group sickness or accident insurance plan which includes all types of income protection plans
○
Private health service plan premiums and provincial health tax levies, but not provincial health plan
premiums
○
A supplementary unemployment benefit plan, including both public and private plans
○
A deferred profit sharing plan
○
A group term life insurance policy (except for the plans referred to in ITA 6(4))○
Employer's contribution to•
Benefits under a retirement compensation arrangement, an employee benefit plan or an employee trust, already
included in income under other provisions
•
Benefits in respect of the use of an automobile, already included in income under another provision. The
calculation of which will be discussed later in the chapter
•
Benefits from counselling service in respect of mental or physical health and reemployment or retirement of the
employee
•
Benefits under a salary deferral arrangement already included in income by reason of subsection 6(11)•
if the taxpayer deals with the employer at arm’s length
○
It is reasonable to conclude that the benefit is not a substitute for salary, wages, or other remuneration of
the taxpayer
○
Education assistance that is received by an individual other than the employee under a program, provided by the
employer, that is designed to assist individuals further their education if:
•
3,115 exceptions to income inclusion
3,125 stock options
The employee has the right to purchase shares of the corporation at an option price •
This aligns the employee's interests with those of the shareholders
•
The nature of the income inclusion, is it employment income or capital gain, or both?
○
The timing of the inclusion
○
Two income tax issues for the employee•
Employment income is the difference between the fair market value of the shares at the time the option is
exercised and the option price the employee paid for the shares
○
Capital gain/loss is the difference between the proceeds of disposition on the sale of the shares and the fair
market value of the shares at the time the options are exercised
○
Conceptually, the stock option will create both employment income and capital gain (loss)
•
Type of corporation issuing the options (public vs CCPC)
○
Whether the employee and the corporation are dealing at arm's length
○
The relationship of option price to the fair market value of the shares when the option is granted. This refers
to if the option is "in the money" at the time of grant date meaning the fair market value of the shares is
greater than option price at grant date.
○
Timing of inclusion will depends on the following factors:•
Note that only stock options received by virtue of an individual's employment are included. If not e.g. received of
an individual's shareholdings, it's not included
•
Overview
Three important date related to stock options received from a public corporation and there are tax implications
for each date
•
Option grant date: the employee is granted the option to purchase a certain number of shares at specified price,
known as the option price. Most options have an expiry date. There are no tax implications to an employee at the
time the options are granted
•
Number of shares exercised x (fair market value
(FMV)
of shares when exercised
-
option price)
○
Exercise date
: an employee of a public company will include an employee benefit when he exercises the option to
purchase the shares at the option price equal to
•
Selling date
: the employee will include in their net income for tax purposes a capital gain or loss equal to:
•
3,125.10 rules applicable to public corporations
Subsection 6(4) clarifies that the full employer
-
paid premium for group term life insurance should be
included in an employee's income
Adjusted cost base
Chapter 3
-
Employment income
January 7, 2018 2:38 PM
AFM 362 Page 1
Document Summary
Employment income is reported on a calendar basis, so the taxation year of an individual always ends dec 31. Personal services business (psb) is when an employee attempts to circumvent the mandatory calendar year reporting by incorporating his business Primary goal is to gain access to less restrictive expense deductions of a self-employed contractor and the beneficial tax rates of a corporation. However, special rules governing psb eliminate the advantages in this type of situation. Remuneration includes all items received as a result of the individual"s employment. e. g. bonuses, tips, honoraria, and commission paid to employees. Includes direct (salary) or indirect (employers pays an employee"s rent) benefits received. A tax equalization payment made to an employee to compensate for the higher canadian taxes. A trip incentive paid to a sales person by the employer"s supplier. Gratuities are amounts received from an employer"s customers and must be included in employment income. Employment income is determined on a cash basis.
