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Chapter 3

Chapter 3 - Employment Income.docx

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Tao Zeng

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Chapter 3: Employment Income The benefits of hiring short term contractors rather than full time employees are that a corporation has a reduction in EI, CPP and benefit payments. Distinction between Contractor and Employee The distinction between a contractor and employee is important for the following reasons: - Typically contractors are able to claim more expense deductions than employees - Employers have to remit income tax, EI, and CPP for employees only Contractors are treated like businesses and can deduct reasonable expenses incurred for producing business income expect capital outlays There are a series of tests used to determine the distinction between an employee and a contractor Economic Reality or Entrepreneur Test There are three factors in the economic reality/entrepreneur test 1. Control - Determines who is in the position to give orders or dictate how the work must be done - Typically management of the project or work being done means - Management infers evidence supporting an employee 2. Ownership of tools - The taxpayer performing the work doesn’t supply the funds or equipment in order to complete the job - They take on no financial risk or managerial responsibility - Typically if there is no/little risk and tools are supplied, evidence supports an employee 3. Chance of profit/risk of loss - The taxpayer has a chance of making profit or risk of incurring a loss from bad debt, damage to assets, or delivery delays - If there is little risk of profit or loss from the work, evidence supports an employee Integration or Organization Test How economically dependent the individual is on the organization for providing work. The more dependent, they would be considered an employee. If they receive any time of benefits, consider an employee. Economic dependency would be considered a large portion of income coming from the work provided by the organization. Specific Rule Test The specific rule test runs on the basis that if a specific work agreement is made between the payer and worker, it can be inferred that they are an independent contractor. This is because usually the employer/employee relationship has less specific results and based more on accomplishments. *Note: No one test can determine the distinction of whether a tax payer is a contractor or employee. The tests need to be used together in supporting evidence of the final decision. Employment Income Employment income is reported based on a calendar year, year ending December 31 . It is the income remaining after benefits, allowances, stock option benefits, and deductions. Structure: - Section 5 – Basic Inclusion - Section 6 – Benefits & Allowances (+) - Section 7 – Stock Option Benefits (+) - Section 8 – Deductions Allowed (-) Basic inclusion (Sec. 5) is defined as salary + wages, and remuneration (tips, bonuses, commissions) Section 6 – Benefits & Allowances (added back) Employment Benefits – [6(1)(a)] All benefits are to be included in employment income (added back) except employer’s contributions to: - Retirement Plans – RPP & DPSP - Employee life and health trust - Group sickness or accident insurance plan - Private health services - Employer paid counselling of mental, physical health, re-employment or retirement - Board and lodging at special work site or remote locations The above are not added back to employment income – they are tax free Taxable Benefits Housing loss/cost Benefits [6(19 – 23)] Usually a housing loss/cost benefit can be claimed when a taxpayer is forced to relocate due to work. In order to make this claim the taxpayer must move 40+ km closer than the previous location. If satisfied, one half of any amount above $15,000 is included (added back) to employment income. If the loss incurred is less than $15,000 it is tax free and thus not added back into employment income. Ex. Incurred a loss of $50,000 which the employer paid for the taxpayer to move closer to work. = ½ X ($50,000 - $15,000) = $17,500. Therefore $17,500 must be added back to employment income. *Note: the $15,000 limit is subtracted from amount received from the employer and then multiplied by ½ Automobile Taxable Benefits If the employer provides an automobile, there is a taxable benefit. The benefit includes a standby charge and operating cost. Standby Charge [6(1)(e) & 6(2)] If the employer owns the automobile: Standby Charge = A/B X [2% X (CXD)] Where: A = B IF the vehicle is used ≤ 49% for work A = Lessor of personal kilometers or B if vehicle is used ≥ 50% for work B = 1667km X # of available months the vehicle is provided to the employee C = Cost of the car (Original cost – no depreciation) D = # of available months the vehicle is provided to the employee If the employer leases the automobile: Standby Charge = A/B X [2/3 X (E-F)] Where: A = B IF the vehicle is used ≤ 49% for work A = Lessor of personal kilometers or B if vehicle is used ≥ 50% for work B = 1667km X # of available months the vehicle is provided to the employee E = Lease payment (including insurance) F = Insurance payment Operating Cost Benefit [6(1)(k)] If the vehicle is used primarily for personal use (≥50% for personal travel): Operating Costs = Prescribed Rate ($0.26) X personal km If the vehicle is used primarily for work use (≥50% for work), choose the lessor of: Operating Costs = Prescribed Rate ($0.26) X personal km OR ½ of the standby charge Employee Loans [6(9) 80.4] Low interest or interest-free loans provided by employers to employees are taxable benefits Taxable benefit = (prescribed rate – Actual Interest Rate paid) X Loan *IN EACH QTR and SUM* *Note: amount is added back to employment income Employee Loans – Home purchase/relocation loans To find the prescribed rate that is used to determine the interest benefit we use the lessor of: - The prescribed rate in each quarter the loan was outstanding OR - The prescribed rate at the time the loan was granted Est Q1 = 3%, Q2=4%, Q3=5%, and Q4=2%. The loan of $10,000 was provided at a rate of 1% on March 1 . Since we were loaned the money at Q1 the prescribed rate at the time of the loan was 3%. We compare this with all the quarters and take the lowest percentage. We see that Q4 has a rate of 2%, we would use the prescribed rate of 2% when calculating interest benefit since it is the lower of the two conditions. Therefore interest benefit = (prescribed rate – actual interest rate paid) X loan = (2% - 1%) X $10,000 = $1,000. Therefore the $1,000 would be added back to employment income Fringe Benefits & Administrative Practice [IT470R] If paid social club benefits the company it is tax free (deductible/not added back) If paid social club benefits the individual it is a taxable benefit and therefore added back to employment income Employer paid financial counselling & tax return preparation is taxable benefits and added back to employment income. Note: retirement/unemployment/mental/physical health counselling are tax free. Non-cash gifts under $500 are tax free. Non-cash gifts greater than $500 must be claimed and are taxable benefits. Any cash gifts are also taxable benefi
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