[CHP 1 and 2: Introduction and Liability for Tax]
Liability of individuals for income taxes in Canada
You are liable for tax in Canada only if you are considered to be a Resident (Not a citizenship issue)
The 4 types of Residency:
1) Full-time Resident
-in order to be considered in this category, the tax payer should demonstrate a continuing state of relationship with Canada
-(Significant ties): Has a house / Spouse and kids live in Canada / Dependants in Canada.
-(Secondary residential ties): personal property in Canada / social ties or economic ties with Canada / appropriate work permits or
landed immigrant status / medical insurance coverage from Canada / vehicle registration in Canada / CDN passport / membership in
CDN org (union or professional) / G2 / Seasonal dwelling place in Canada.
-(Other ties of limited importance): retention of CDN mailing address / CDN post office box / CDN Safety deposit box / business card
showing CDN address / telephone listing in Canada / CDN newspaper and magazine subscription
-(Nature of absence from Canada): evidence of intention to permanently sever ties with Canada / regularity and length of visits to
Canada / residence ties outside of Canada
-They are taxed on Worldwide Income
-Entitled to full amount of non-refundable credits (eg Personal amounts)
2) Deemed Resident
- A person is deemed to be Full time resident of Canada if he/she sojourned in Canada for 183 days or more
- Part day stay is also counted towards the 183 days by CRA
- Taxed on Worldwide Income
- Entitled to full amount of the non-refundable credits (eg. Personal amounts)
3) Part-time Resident
- There must be evidence of “Clean break” or “Fresh Start”
- only taxed on the worldwide income earned in Canada during the time he/she was considered to be a resident
- For the non-residency period only taxed on CDN source income (Not wwi)
- Entitled to prorated amount of non-refundable credits (eg. Personal amount)
- Note individual can make “fresh start” in Canada and live for more than 183 days but still considered part-time resident not deemed
resident because the stay is not temporary one.
- (Clean break have been made when):
-The individual leaves Canada
-The individual’s spouse and or dependants leave Canada
-The individual becomes a resident of the country to which he or she is immigrating
- Pays tax under part 1 of the income tax act on certain types of income only (Per Ssec 2(3) earned in Canada
Per Ssec 2(3): Where a person who ius not taxable under subsection (1) for a taxation year
(a) was employed in Canada ; (b) carried on a business in Canada, or ; (c) Disposed of a taxable Canadian Property
at any time in the year or a previous year, an income tax shall be paid, as required by this act on the person’s taxable income earned in
Canada for the year determined in accordance with Division D.
- Not entitled to non-refundable credits unless report >90% of the income to Canada
- Also liable for withholding tax @ specificed rate (Generally 25% but reduced based on tax treaty) on interest, dividend, etc.
- The payer withholds the amount and remits to CRA. Thus, non-resident does not have to file any tax return with CRA for passive income
(interest, dividend etc.)
Liabilities of Corporations for Income Taxes
-Corporations are either residents or Non residents (No concept of part-time since corporations do not have to have a calendar year end).
Ssec 2(1) is also the charging provision for corporate tax liability as individual corporations = Persons
Corporation is Resident in Canada:
1)If incorporated after April 26th 1965 (Deemed to be resident)
2)If incorporated before April 27th 1965 and it has the central management and control in Canada, then deemed to be
resident of Canada (using common-law principles)
-Corporations who are resident in Canada will pay income on its Worldwide Income.
Nonresident Corporation in Canada: pays tax in Canada on its Canadian source of business income if it is considered to have a
permanent establishment in Canada.
-have to refer to tax treaties to determine what activity is constituted as permanent establishment
-non treaty countries have to pay taxes on Canadian source income regardless of the permanent establishment.
-They will also have to pay withholding taxes on passive income such as interest income like individuals
[CHP 3: Employment Income Part I]
Employed vs Self-Employed
Canadian Tax system: Self employed Status BETTER than Employee status: Self-employed person is entitled to deductions under MANY
different sections of the act when computing the income (Because they’re treated like a business). Employed person generally finds the
deductions in section 8
How do you define Self-Employed?
The court uses 3 primary tests to determine employed vs. self-employed status:
Economic Reality Test [Control, Ownership of Tools, Chance of Profit/risk of loss]
Control: determines whether the individual is directed by someone who is in a position to order or require not only what is to be done but
how it is to be done. (however highly professional individuals hired to work do not need to be told how to do the job)
Ownership of Tools: if the taxpayer doing the work supplies neither funds nor equipment needed to do the work takes no financial risk or
managerial responsibility and has no liability he/she is an employee (However, in today’s world, the most important tools are one’s expert
knowledge hence this test can’t be conclusive in many cases)
Integration or Organization Test: tests how dependent the individual is economically on the organization. The more dependent, the
more chance he/she is an employee.
Specific Result Test: If the results of the work is not specific, the person may be an employee however if you agree on a specific result
and get assistance from your worker an independent contractor relationship may arise. This is closely related to integration or
Employment Income computation
A person has to include as employment income:
- Salary, wages, other remuneration including gratuities received by the taxpayer This should be in cash basis (When it is rcvd)
- Also include value of benefits derived by virtue of employment as income from employment (eg. Auto benefits, imputed interest on low
interest loan, etc.)
You have to exclude benefits derived from virtue of employment of the following:
- contributions of the taxpayer’s employer to or under a registered pension plan / group sickness / accident insurance plan, private
health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy.
-Under a retirement compensation agreement, an employee benefit plan or an employee trust
-That was a benefit in respect of the use of an automobile
-Derived from counseling services in respect of
the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to
an outlay or expense to which paragraph 18(1)(l) applies, or
The re-employment or retirement of the taxpayer.
Imputed interest Calculation
This is the amount of interest expense saved by employee by not paying FMV interest to an employer on loans
-You need to calculate the interest payments according to the FMV interest rate set out by CRA every quarter. Than, subtract the
loan interest amount from this total amount to get the imputed interest benefit.
-For home purchase loans, there is a choice for prescribed interest rate:
Lesser of: (a) Prescribed rate at the time loan was issued
(b) the prescribed rate in effect for a particular quarter
If home purchase loan’s term is >5 years, then every 5th year, formula (a) will change.
If the new purchased home is 40km closer to the work compared to old home, then there is an exemption on imputed interest benefit
on the first $25,000 of the loan. This amount is deductible under division C
Employer owned Auto – [Stand By Charge]
Stand by charge arise when an employee uses company’s owned or leased automobile
A/B x [2% x (C x D) + 2/3(E – F)]
A* is the lesser of: (a) total personal use km driven during the available time period and;
(b) the value determined for B (as defined below) during the days the automobile is available;
B is 1667km x (Total available days / 30);
C is the full original cost of an employer owned vehicle including both PST and GST
D is [the total available days when the employer owned the automobile/30]
E is the lease payments, including both PST and GST made by the employer;
F is the portion of the lease payments which pertains to insurance for loss or damages and any liability in using the automobile.
* Note that A is deemed to be equal to amount B unless:
(i) the taxpayer is required by the employer to use the automobile in respect of his or her duties of employment “AND”
(ii) the automobile is used primarily (>50%) in his or her duties of employment
Employer owned Auto – [Operating Cost Benefit]
A taxpayer is supposed to calculate operating cost benefit whenever stand by charge>0 as this implies he/she used for personal
If he/she does not reimburse the employer for personal use KM within 45 days this benefit has to be included in taxable income.
Two methods to compute operating cost benefit
1) Benefit = (Total personal KM x $0.24) – Amount reimbursed to employer
2) Benefit = (50% * Standby Charge) – Amount reimbursed to employer
To qualify for 2), employee must have used car primarily (>50%) for employment purposes AND employee has to notify the employer in
writing before the end of the year as he/she is electing to use this method.
Employee is free to choose which one to use between two methods, WHICHEVER that is LOWER
Employee owned Auto – [Operating Cost Benefit]
-Prorate the operating benefits received by the employer between employment and personal km.
Stock Option Benefit
[‘08]Stock option of $10 granted, at the time FMV was $10[‘09] exercised option when FMV was $15 [‘10] Sold for $25
For CCPC (Canadian Controlled Public Corporation): $5 profit will be included in the 2010 employment income (stock sale year) not
exercise year. Also get 50% deduction under Division C since option price was Equal to or greater than FMV on Grant date (If Option
price<FMV at time of grant, the 50% deduction available only if CEO holds the share for more than 2 years) Also there is $10 capital gain
in year 2010 that will be 50% taxable.
For Public Corporation: $5 profit is included in 2009 income (Option exercise year). Unless employee makes election for
deferral of income until the year of sale (2010) (This is desirable for taxpayer). Election is only possible if person is eligible for
S110(1)(d) deduction (ie., option price =>FMV). Also limit of $100000 of income per year from stock option benefit can be
deferred (No limit for CCPC.) Taxpayer also get 50% deduction under division C in 2010 since option price=>FMV. Also, a capital
gain of $10 exist
[CHP 3 Employment Income Part II]
Deductions from Employment Income
Section 8 is the only provision of the Act which allows employees to deduct CERTAIN expenses required to earn emp. Income.
It is important to know if an employee is Commission Employee OR regular employee in order to use S8 Deductions. [8(1)(f) Only
available to commission employees.
8(1)(f) Available to commission employees
-Employee must be involved in sales or negotiating contracts. Employment contract must require employee to pay his/her expense (No
reimbursements from employer and not included in income pursuant to 6(1)(b)(v))
-Maximum deduction is limited to commissions earned by the employee
-Type of expense deductible isn’t lim(i.e., can deduct client ent., property taxes and house insurance for 8(1)(f) – home office)
-If 8(1)(f) is chosen, you CANNOT use 8(1)(h) or 8(1)(h.1). However, can still use 8(1)(i) and 8(1)(j). You HAVE TO DECIDE WHICH
PROVISION TO CHOOSE TO MAXIMIZE THE DEDUCTION.
8(1)(h) Travel expenses deduction for all employees
- Available to all employees not just to sales employees, however employment contract must require employees to pay for these
expenses and employee was not reimbursed and reimbursement was tax exempt under 6(1)(b)
-Can deduct travel expenses such as meals, accommodation, air travel, etc. subject to limitation. Cannot deduct client entertainment
expenses. Automobile expenses not deducted here but in 8(1)(h.1).
-Deduction is not limited to commission income of the taxpayer.
8(1)(h.1) Auto expenses deduction for all employees
- Employee is required to pay for car expenses per employment contract.
- 8(1)(h.1) is available even if 8(1)(h) is used. However its not available if 8(1)(f) is used
- can also deduct the lease expense subject to limitation of:
Lesser of: (a) [(A x B)/30] – C – D – E
(b) [(F x G)/0.85*H] – D – E
where A is a dollar monthly maximum, as prescribed ( $800 plus PST and GST on the $800 After year 2000)
B is the aggregate of the number of days the vehicle was leased for all years to the end of the present year;
C is the aggregate of the lease cost deducted in all preceding years;
D is the imputed interest at the prescribed rate, on refundable amounts (ex., deposits) over $1000
E is the total reimbursement receivable in respect of the lease in the year;
F is the total lease charges payable (including PST and GST) for the year
G is the dollar maximum capital cost prescribed**
H is the greater of : (a) a dollar maximum prescribed amount, *** and (b) the manufacturer’s list price
-Prorate the total expenses for employment versus personal use.
-Unlike 8(1)(f) expenses under this section is not limited to commission.
8(1)(j) CCA and interest expense for all employees
-Available to all employees even if you use 8(1)(f) or 8(1)h and 8(1)(h.1), you can still use it
-Can deduct CCA and interest on auto loan and aircraft loan subject to limitation
-CCA is the only capital nature expenditure employees are allowed to deduct.
-Uses a 30% declining balance method to compute CCA.
-Aircrafts need to be required for work however automobiles just need to be used for work to qualify for deduction
-Interest expense on car loan is also deductible. However it is limited to lesser of actual amount paid and $10 per day. Note that any
imputed interest income included in employment income is deemed to be interest paid by the taxpayer
General limitation on deduction for 8(1)(f), 8(1)(h), 8(1)(h.1) and 8(1)(j)
- meals and entertainment is limited to 50% Meals for the taxpayer only deductible if away for more than 12 hours from ordinary work
place’s municipality (note under 8(1)(f) meals incurred while entertaining client is deductible without the 12 hours limit)
- Golf green fees or club dues not deductible
- Capital expenses are not deductible except CCA and interest expense as allowed under 8(1)(j)
- Lease cost of the car is limited as per formula above
Which section do you Use? (8(1)(f), 8(1)(h), 8(1)(h.1), 8(1)(j)
- If the commission income is lower than the total expenses deductible under 8(1)(h) plus 8(1)(h.1) do NOT use 8(1)(f)
- If commission income is sufficient & deduction under 8(1)(f) is higher than using 8(1)(h) plus 8(1)(h.1) then use 8(1)(f)
8(1)(i) various employment expenses including home office expenses
Annual professional membership fees deductible / Union dues deductible / Salary paid to assistants by employee is deductible however
must be required by contract of employment / Supplies expense deductible – contract must require / Home office expense deductible –
contract must require
exp under this sec not limited to commissions earned in the yr. This is available even if you use 8(1)(f) or 8(1)(h) plus 8(1)(h.1)
Home office expenses: Has to meet two conditions:
The home has to be (i) the place where the individual principally performs the duties of the office/employment, OR
(ii) used exclusively during the period in respect of which the amount relates for the purpose of earning income from the
office/employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of
performing the duties of the office or employment.
- can take home office expense deduction under 8(1)(f) and 8(1)(i)
- Cannot claim mortgage interest or CCA on home under any of the S8
- Home office expenses deductible by all the employees includes heating cost, utilities, cleaning materials, minor repair, rents,etc
- Property taxes and house insurance can only be deducted by commissions sales person under S8(1)(f)
- Can deduct telephone line only if its dedicated to business use. Can deduct long distance fees.
- Deduction cannot exceed gross employment income. If cannot deduct all the amount then unused portion can be a carry forward for
future years indefinitely
- prorate the home office expenses between personal and work related.
Taxation of Allowance
- If the employee received reasonable allowance such as car allowance, travel allowance etc, don’t include in income.
- If it is not reasonable as in actual expense was higher, then include allowance in employment income and take deduction for actual
expense. (i.e. car allowance not based on KM is not reasonable)
[CHP 4 Income from Business: General Concepts and Rules]
Computing Division B income for Business: Businesses do not have to use the Cash Basis of Accounting like individuals for tax
purposes. And can use the accrual basis as specified per GAAP. However the income tax act only endorses a selected GAAP and
therefore, a business has to include or deduct certain amounts to net income computed per GAAP to arrive at net income for
income tax purposes (Division B Income) *(note that division B income =/= Taxable income which includes some deductions in
- The starting point of division B income is the net income per Financial Statements
Gneral additions to the NI per F/S for computing Div B Income when these exp are already included on F/S: Income tax expenses
/ Income tax penalties for late filing and interest charges / political contributions / automobile expenses in excess of maximum allowed /
use of recreation facilities and club dues / prepaid expenses / accrued bonuses unpaid within 180 days after year end / reserve for
contingencies (ie., warranty, inventory, etc.) / 50% of meals and entertainment / fines and penalties / amortization;depreciation /
accounting losses / donations (Div C deductions) / Advertising in foreign media directed primarily to Canadians / Property taxes and
interest on vacant land greater than rental incomeNote excess may be added to the ACB of land / insurance premium on loans not
required as collateral for financing / net taxable capital gains (ie., taxable capital gain minus allowable capital losses) / reserves deducted
in prior years / accounting, legal expenses that are capital in nature / recapture on sale of depreciable properties / recapture on
cumulative eligible properties / group term life insurance / financial planning and tax prep fee / discount on debt obligations (ie., bond
amortization exp) / Reorganization Cost of Sharecapital
General deductions to the NI per F/S for computing Division B income when these are not already deducted on F/S: CCA /
Cumulative Eligible Expense (CEC) / 1/5 of expenses of issuing shares/borrowing money / Annual filing fee or similar fee for share
issuance / Interest paid/payable on funds borrowed to earn income / premiums on life insurance used as collateral / Allowable reserves /
Accounting Gains / Employers contribution to deferred profit sharing plan / cancellation of lease / landscaping fees for business income
producing premises / expenses of representation for license, permit, etc. / site investigation, utilities service connection, disability related
modifications and equipment, convention expenses, terminal losses, provincial capital and payroll taxes / group L-T disability insurance
Proceeds from sale of Tree vs Proceeds from sale of Fruit Concept determines whether Capital gain or business inc.
[CHP5 Depreciable Property and Eligible Capital Property]
- CCA is permissive deduction so taxpayer can choose to deducted desired CCA amount as long as it is less than maximum allowed for
-you need to know the UCC balance for each class of asset.
-Analyze the purchase and determine in which classes they should be included (Class 1? 3? 5?)
-Analyze the disposals and determine in which classes to include them. (For disposals, use Min(Original Cost, Actual Proceeds).
If proceeds > Actual Cost you have Capital Gain (Div B income) opposite is Loss which cannot be deducted as it is expected.
-Know the 1/2 rule applies for the first year to net purchases. (If negative, don’t even get 50% benefit on additions)
- If taxation year has >365 days, prorate total CCA for # of days in taxation year (ie., 200/365 x 10,000 CCA amt)
Recapture computation: min(proceeds, Original cost) – UCC >0 is recapture which is taxable income (this is regardless whether the
asset class terminates or not) Also don’t forget the Capital Gains being 50% taxable
Terminal Loss Computation: min(Proceeds, Original Cost) – UCC <0 tax deductible for this amount. Only takes place when asset
CEC – Cumulative Eligible Capital Deduction computation
Intangible assets (goodwill and franchise for ex) with unlimited life not eligible for CCA but eligible for CEC.