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Midterm

MGAC50H3 Midterm: S - Chapter 4 textbook - P28.pdf

4 Pages
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Department
Financial Accounting
Course Code
MGAC50H3
Professor
Sathees Ratnam

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Introduction to Federal Income Taxation in Canada
104
Solution 28: New Job OfferEmployee and Employer
Explanation of Tax Implications
Note # Employee Benefit
Employee Tax Impact Employer Tax Impact
1Salary
Taxable to employee
Deductible as compensation expense
if paid within 179 days of year-end
Bonus
Taxable to employee
Deductible as compensation expense
if paid within 179 days of year-end
2Interest-free loan
Imputed interest taxable benefit
partially offset by deduction
No impact for employer
Moving cost reimbursement
Not taxable to employee Deductible as business expense
3Group life insurance plan premiums
Taxable benefit to employee Deductible as compensation expense
Private health, dental, and drug plan
premiums
Not taxable to employee Deductible as compensation expense
4Spouse's travel expenses Taxable benefit to employee May not be deductible by employer
5Automobile standby charge
$6,800 taxable benefit to employee
Lease cost deductible as business
expense to a specified limit
Automobile operating benefit
$3,360 taxable benefit to employee Deductible as business expense
6Fitness club access Not taxable to employee Not deductible for employer
7Physical health counseling services
Not taxable to employee Deductible as compensation expense
8RPP contributions
Not taxable to employee
Specified amount deductible by
employer if paid within 120 days of
year-end
9Yacht access Taxable benefit to employee Not deductible for employer
Salary and Bonus
The full amount of Valerie’s salary, wages, and other remuneration, including bonuses, received in the
calendar year are included in the computation of her income from an office or employment under
subsection 5(1) for that particular calendar year. A bonus tied to performance in respect of one calendar
year, but paid in the following calendar year, is taxed only in the year it is received.
Salaries, wages, and other remuneration paid to Valerie by Key are considered expenses incurred to earn
profit from the business under subsection 9(1) and not denied under paragraph 18(1)(a) as not incurred for
the purpose of gaining or producing income from the business. Therefore, it is deductible. These amounts,
including the bonus, must be paid to Valerie within 179 days after the firm’s taxation year to be
deductible by Key or they become deductible in the taxation year in which they are actually paid
[subsection 78(4)].
Interest-Free Loan
This creates a taxable benefit annually equal to the amount by which the prescribed interest on the loan
exceeds the actual amount of interest paid on the loan in respect of the year up to 30 days after the end of
the year [ssec. 6(9), 80.4(1)]. Because the loan is interest-free, the benefit is equal to the prescribed
interest.
Since the loan will be used by Valerie to buy a home, the prescribed rate used to calculate the taxable
benefit, for five years, will not exceed the prescribed rate in effect at the time the loan is made [ssec.
80.4(4)]. Subsection 80.4(6) deems the loan to be renewed every five years at the prescribed rate in effect
on that five-year anniversary date.
Since Valerie will have an eligible relocation, the loan qualifies as a home relocation loan and, thus,
Valerie will be entitled to a deduction in computing her taxable income for the first five years of the loan
effectively equal to the prescribed rate applied to a $25,000 loan [par. 110(1)(j)].

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Description
104 Introduction to Federal Income Taxation in Canada Solution 28: New Job Offer—Employee and Employer Explanation of Tax Implications Employee Benefit Employee Tax Impact Employer Tax Impact Note # 1 Salary Taxable to employee Deductible as compensation expense if paid within 179 days of year-end Bonus Taxable to employee Deductible as compensation expense if paid within 179 days of year-end 2 Interest-free loan Imputed interest taxable benefit No impact for employer partially offset by deduction Moving cost reimbursement Not taxable to employee Deductible as business expense 3 Group life insurance plan premiums Taxable benefit to employee Deductible as compensation expense Private health, dental, and drug planNot taxable to employee Deductible as compensation expense premiums 4 Spouse's travel expenses Taxable benefit to employee May not be deductible by employer 5 Automobile standby charge $6,800 taxable benefit to employee Lease cost deductible as business expense to a specified limit Automobile operating benefit $3,360 taxable benefit to employee Deductible as business expense 6 Fitness club access Not taxable to employee Not deductible for employer 7 Physical health counseling services Not taxable to employee Deductible as compensation expense RPP contributions Not taxable to employee Specified amount deductible by 8 employer if paid within 120 days of year-end 9 Yacht access Taxable benefit to employee Not deductible for employer Salary and Bonus The full amount of Valerie’s salary, wages, and other remuneration, including bonuses, received in the calendar year are included in the computation of her income from an office or employment under subsection 5(1) for that particular calendar year. A bonus tied to performance in respect of one calendar year, but paid in the following calendar year, is taxed only in the year it is received. Salaries, wages, and other remuneration paid to Valerie by Key are considered expenses incurred to earn profit from the business under subsection 9(1) and not denied under paragraph 18(1)(a) as not incurred for the purpose of gaining or producing income from the business. Therefore, it is deductible. These amounts, including the bonus, must be paid to Valerie within 179 days after the firm’s taxation year to be deductible by Key or they become deductible in the taxation year in which they are actually paid [subsection 78(4)]. Interest-Free Loan This creates a taxable benefit annually equal to the amount by which the prescribed interest on the loan exceeds the actual amount of interest paid on the loan in respect of the year up to 30 days after the end of the year [ssec. 6(9), 80.4(1)]. Because the loan is interest-free, the benefit is equal to the prescribed interest. Since the loan will be used by Valerie to buy a home, the prescribed rate used to calculate the taxable benefit, for five years, will not exceed the prescribed rate in effect at the time the loan is made [ssec. 80.4(4)]. Subsection 80.4(6) deems the loan to be renewed every five years at the prescribed rate in effect on that five-year anniversary date. Since Valerie will have an eligible relocation, the loan qualifies as a home relocation loan and, thus, Valerie will be entitled to a deduction in computing her taxable income for the first five years of the loan effectively equal to the prescribed rate applied to a $25,000 loan [par. 110(1)(j)]. Solutions to Chapter 4 Assignment Problems 105 The loan to Valerie will be a “home relocation loan” [ssec. 248(1)], because:  Valerie will commence work at a new work location in Canada;  she will move from a former residence to a new one;  the move will bring her at least 40 kilometres closer to her new work location (measured as the difference between the distances travelled from the new work location to each of the old and new homes);  the loan will be received in her capacity as an employee;  the loan proceeds will be used to buy a home to be occupied by her;  the loan will be designated by her as a home relocation loan; and  there will be no other “home relocation loans” in connection with the move or outstanding at the time. The home relocation loan deduction for Valerie is calculated under paragraph 110(1)(j) as the least of:  the imputed interest benefit on the home relocation loan  $25,000 x the prescribed rate  the imputed interest benefit on all loans from her employer The deduction is available for the first five years of the loan, or for the period to the date the loan is extinguished, if shorter. The home loan results in no tax implications to the employer, since it neither paid nor received interest on the loan. If the company had to borrow to fund the loan then the interest expense would be deductible as a compensation-related expense. Reimbursement of Moving Costs This is not considered to be a taxable benefit by administrative policy [IT-470R]. Typically, a reimbursement allows an employee who paid an expense to recover an amount that is the business expense of the employer. The reimbursement would reduce the amount the employee can claim as a moving expense under section 62. Group Life Insurance and Health Services Employer-paid premiums to group term life insurance and health services plans (including health, dental, and drug plans) are specifically exempted from inclusion as a fringe benefit in calculating income from an office or employment under subparagraph 6(1)(a)(i). However, this exemption is overruled for group term life insurance premiums by subsection 6(4), which states that the full amount of these specific premiums paid on an employee’s behalf is to be included in the income calculation as a taxable benefit. Key will be able to deduct the full amount of premiums paid as compensation expense. Spousal Travel Amounts paid in respect of Matt’s travel are considered a taxable benefit to Valerie under the general rule that benefits of any kind are taxable as employment income, unless otherwise exempted [par. 6(1)(a)]. Expenses
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