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3520-2- updated JF-revised.doc

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York University
Administrative Studies
ADMS 3520

3520-2: Last updated on 9/17/2008 1-12 1 Lecture 2: Residency and Employment income Selected parts of Chapters 1, 2 and 20 Web links are included to provide more information to those who are interested to learn more about particular topics Recommended exercises and self-study problems in chapter 2: Exercises 1-3, 7-8, 10-11, 13-16, 18 Self-Study Problem 2-7: As you are not responsible for the standby charge and the operating cost benefit, you can assume that the total of the automobile benefits (standby charge plus operating cost benefit) is $9,671 2 Residency [ch. 1 and ch. 20] 2.1 ITA 2 is the charging provision [1-73 to 1-76] It defines who the taxpayer is and what the base is = who is liable for tax on what taxable income For residents of Canada for tax purposes The base is worldwide taxable income in Division C of the Act For non-residents of Canada for tax purposes The base is certain Canadian source taxable income in Division D of the Act if they were employed in Canada, carried on a business in Canada, or disposed of a taxable Canadian property (e.g., Canadian real estate) at any time in the year or a previous year Read ITA 2(1), 2(2), 2(3) 2.2 Definitions [1-74] Person = individuals, corporations, and trusts Resident unless an individual severs all significant residential ties with Canada upon leaving Canada See also 2.3 Computation of Income [1-95 to 1-100] 2.3.1 Division B of Part I of the Act- Computation of Net Income for Tax Purposes Taxable income = Net income for tax purposes minus Division C deductions Division B has subdivisions for each source of income a = employment b = business or property c = taxable capital gains/allowable capital losses d = other income (e.g. spousal support received and pension income) e = other deductions (e.g. RRSP contributions, moving expenses, spousal support paid, child care expenses) 2.3.2 Computation of Income ITA 3 [1-95 to 100] See Fig 1-3 ITA 3 brings together all the different sources of income to form Net Income for Tax Purposes Taxable capital gain (TCG) = 1/2 of a capital gain Jason Fleming [[email protected]] 3520-2: Last updated on 9/17/2008 2-12 Allowable capital loss (ACL) = 1/2 of a capital loss One key point in ITA 3 is that if allowable capital losses are greater than taxable capital gains, they cannot be deducted in computing net income (i.e., they are set equal to 0 for the year) Excess ACLs are available for deduction in other years (carried over"). They can be carried back to the preceding three years and deducted against TCGs in those years (if any) and/or carried forward indefinitely and deducted against future TCGs. If not deducted before death, they can be deducted in the year of death (and the immediately preceding year) against any type income See Example 1-120 3 Income or Loss from Employment [ch. 2] 3.1 General Rules [2-1 to 2-7] ITA calculates income by source Rules for computing employment income are in ITA 5, 6, 7 and 8 of subdivision a of Division B of Part I of ITA ITA 5 = salary, wages, other remuneration, including gratuities received (gratuities = tips) ITA 6 = taxable benefits ITA 7 = stock option benefits ITA 8 = deductions It is possible to have an employment income loss but it is very rare Read ITA 5(1) 3.2 Bonus Arrangements [2-8 to 2-12] ITA 5 taxes employment income on a "received" or "cash" basis rather than an accrual basis See examples in 2-9 and 2-10 See Figure 2-1 3.3 Net Concept [2-13 to 14] Employment income = ITA 5, 6 and 7 inclusions minus ITA 8 deductions 3.4 Employed v. Self-Employed [2-15 to 2-37] Self-employed = business person = consultant = independent contractor earning business income Over the last few years, many firms have "contracted out" different services, hiring independent contractors to do work previously done by employees See 2-34 3.4.1 Employee's perspective First, deductions for employees are limited by ITA 8 and are very limited Commissioned employees enjoy more deductions than salaried employees but self-employed taxpayers get the most deductions Second, payroll withholdings must be made for employees Tax [ITA 153] Jason Fleming [[email protected]]3520-2: Last updated on 9/17/2008 3-12 No tax is withheld on business income; tax instalments are made instead (if required, as discussed in lecture 1) and there is some ability to defer tax here because instalments can be based on prior year's taxes EI Both employees and employers must pay; no EI for a self-employed CPP Both the employee and employer make CPP contributions The rate for self-employed persons is double the rate for employees (because there is no employer making contributions) Third, fringe benefits/job security Only employees get fringe benefits such as medical plans & pensions and can get severance if they are terminated (advantage) Fourth, employees are unable to save tax by incorporating (disadvantage) Business income can be incorporated and taxed at a low rate (with the small business deduction) However, if employment income (as opposed to business income) is incorporated, the income will be considered to be a "personal services business" and taxed at the top corporate tax rate Fifth, self-employed consultants must register for GST purposes if their revenues exceed $30,000 (i.e. not a small supplier) This means that they must charge GST on their business income, but they can apply for input tax credits for the GST that they have paid (in order to earn business income) 3.4.2 Employer's perspective An employer prefers to hire consultants because it is less cos
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