AFM362 Chapter Notes - Chapter 3: Capital Asset, Pension
SchoolUniversity of Waterloo
DepartmentAccounting & Financial Management
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Remuneration: Includes all items received as a result of the individual’s employment
whether direct or indirect, including items such as bonuses, tips, and commissions.
Cash Basis: Employment income is determined on a cash basis, meaning that only
amounts received in the year will be included in employment income, regardless of when
they are earned.
Voluntary Deferment: Remuneration that an employee has an unconditional right to
receive will be included in the employee’s income in the year the remuneration became
receivable, regardless of whether the employee chooses to receive or defer payment.
Taxable Benefit: A benefit is taxable if it is economically beneficial (increases net
Stock Options: An incentive offered to employees as part of their compensation
package, in which the employee has the right to purchase shares from the corporation at
an option price. Stock options create both employment income and capital gain (loss).
Stock Option Employment Income: Is the difference between the FMV of the
shares at the time the option is exercised and the option price the employee paid for
Stock Option Capital Gain (Loss): Is the difference between the proceeds of
disposition on the sales of the shares and the FMV of the shares at the time the
options are exercised.
Rules for Public Corporations: The employee is required to include the
employment income [# options * (FMV exe r cis e d a t e – Option Price)] in the year the
options were exercised.
Division C Deduction: If an employee is granted options that were not in the
money at grant date, there is an available Division C partial deduction, equal to
one-half of the employment income inclusion.
Rules for Private Corporations: The employee is required to include the
employment income [# options * (FMV exe r cis e d a te – Option Price)] in the year the
acquired shares are actually sold.
Division C Deduction: If one of two criteria are met, there will be a deduction
equal to one-half of the employment income inclusion:
(1) If the options are not in the money at grant date
(2) If the options were in the money at grant date, but the employee held the
shares for at least 24 months
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