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Lecture 3

AFM362 Lecture Notes - Lecture 3: Capital Gain, Health Policy, Kpmg


Department
Accounting & Financial Management
Course Code
AFM362
Professor
Andrew Bauer
Lecture
3

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Mod 3: Employment Income
1
Under Part I, Division B, subdivision a:
Inclusions
Sec. 5 Salary, wages, and gratuities
Sec. 6 Other income inclusions arising from employment
Sec. 7 Stock option benefits
Deductions
Sec. 8 Deductions allowed against employment income
What Does the Act Say?
5(1) Income from office or employment Subject to this Part, a taxpayer's income for a
taxation year from an office or employment is the salary, wages and other remuneration,
including gratuities, received by the taxpayer in the year.
6(1) Amounts to be included as income from office or employment There shall be included in
computing the income of a taxpayer for a taxation year as income from an office or employment
such of the following amounts as are applicable:
(a) Value of benefits the value of board, lodging and other benefits of any kind
whatever received or enjoyed by the taxpayer in the year in respect of, in the course
of, or by virtue of an office or employment, except any benefit…
(b) Personal or living expenses all amounts received by the taxpayer in the year as an
allowance for personal or living expenses or as an allowance for any other purpose,
except…
8(1) Deductions allowed In computing a taxpayer's income for a taxation year from an office
or employment, there may be deducted such of the following amounts as are wholly applicable
to that source or such part of the following amounts as may reasonably be regarded as
applicable thereto…
8(2) General limitation Except as permitted by this section, no deductions shall be made in
computing a taxpayer's income for a taxation year from an office or employment
Employment Income Rules of Thumb
Generally, any income or benefit is added to employment income except for specific items
Generally, any expense is not deductible except for specific items
Employment income is calculated on cash basis
Starting point is 0 and add all inclusions on gross basis and take away permitted deductions
Amounts withheld by employer are generally not deductible but rather credits taken in other
parts of the tax return
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2
Stock Option
Total income to be accounted for is difference between proceeds of disposition on the sale of
the shares and the original price paid for the shares
Two issues
Nature of income
Timing of inclusion
Three different dates/transactions
Grant date: Granting of the option
Exercise date: Exercise of option and obtaining actual shares of the company
Sale date: Sale of shares
Nature of income
Employment income difference between FMV of shares on exercise date and the
price paid for the shares (aka the exercise price)
Capital gain difference between the proceeds from the sale of the shares and the tax
cost of the shares
Note the tax cost of the shares is the sum of the price paid on exercise +
employment income amount above
Timing of inclusion
Employment income
Recognize at time of exercise for all but CCPC’s
CCPC’s recognition as income deferred until the time the shares are sold
Note that the actual employment income is always the same, just the timing of
the recognition varies by type of issuing company
Capital gain - Recognize at time of sale of actual shares in all cases
Division C deduction
½ of the employment income inclusion
Small CCPCs if shares are owned for more than 2 years, this deduction is available
regardless of relationship between FMV of shares on grant date and exercise price
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