3 Categories for Canadian corporations

1. Public corporations [89(1)]

* Resident in Canada
* Shares are traded on a stock exchange.

2. Private corporations [89(1)]

* Resident in Canada
* Not a public corporation or controlled by public corporations

3. Canadian-controlled private corporations (CCPCs) [125(7)]

* Resident in Canada
* Not a public corporation, and
* Not controlled by non-residents of Canada

CCA Classes & Schedules

Tax treatment of Depreciable properties:
Depreciable Capital properties will be placed in appropriate Class and
appropriate Capital Cost Allowance (CCA) will be deducted

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partners

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partners
cs/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes-depreciable-property.htm

cs/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes.html
Chapter - 4: Income from Employment

Employee vs. Independent Contractor

CH-4, Review Question: 1

Why this distinction is important?

** Impacts income calculation for tax purposes: Business Income Vs. Salary/Wages
* Employee is limited to what can be deducted from income
* Independent contractor can claim more expenses than an employee
** Employer's obligation on employee:
* Employer will pay salary/wages, make source deductions and will incur additional CPP & EI expenses
* Subject to Labour laws

4 Test factors when the relationship is unclear:

1. Control test:
Who determines what is done, where, when, and how?

(For an employee: Employer tells what to do and how to do)

(For a Contractor: Contractor decide how a particular task should be done)

2. Ownership of tools:
Who supplies the tools required for the tasks?
(For an employee: Employer provides tools )
(For a Contractor: Contractor needs to have all tools required for the tasks)

3. Chance of profit or loss test:

Who assumes the risks of profit/loss of particular task?
(For an employee: No risks for employee. Employer assumes all risks of realizing loss)
(For a Contractor: Contractor assumes all risks of realizing loss )

4. Integration test:
How integral the particular task for the business?
(For an employee: the tasks are integral part of business for employer)
(For a Contractor: If the tasks were accessory to the business)

Decision: All tests should be considered and weighted against each other
 Determined by relationship (and not by the nature of task)
See the sub questions on Pg# 65
- Planning the task
- Time frame for completion
- Hours of work
- Training
- Liability insurance
- Warranty
- etc.

Role of Employment Income in Sec. 3 Calculation

3(a) Employment Income (+ amount)

3(d) Employment Loss (- amount)

Refer to Week-2: material for Sec. 3 calculation

Calculating Employment Income

What is included in income & permitted deductions from income

4 Fundamental rules:
1. + All remuneration received should be included in income (*** cash basis)
eg: Salary, Wages, commissions, gratuities, bonus, honoraria, .....
(there are exceptions........)

2. + All benefits received or enjoyed should be included in income

eg: Use of company's cottage, vehicle,.....
(there are exceptions........)

3. + All allowances received should be included in income

eg: for personal expenses
(there are exceptions........)

4. - Deductions are limited to the items in the list

Notes: Employee reports on cash basis

Employer reports on accrual basis

CH-4, Review Question: 4

20X0 = Nil
 20X1 = $3,000

CH-4, Key Concept Question: 1

Current Year: $60,000 + $15,000 = $75,000

Following Year: $10,000

Salary deferrals: (Anti-Avoidance Rules)

1. 180 day rule:

Expenses claimed by employer for remuneration should be paid to
employee within 180 days of the fiscal year end.
(otherwise, the expense will be denied)

2. Employer/Employee arrangement:

Payment deferred with an agreement: Employee deemed have received

it in the year that it was earned and employer claimed expense in the
same year on an accrual basis

Employee Benefits
Fringe Benefits: Indirect form of compensation
eg: Pension plans
Insurance programs
Stock options
Automobile benefits

* Taxed now
Can be * Taxed later
* Not taxable at all
Taxable Benefits:
Benefits received/enjoyed......by virtue of an office or employment...
must be included in employee's income

See Pg# 68 for examples of taxable fringe benefits

* Board or lodging provided to employee - free or at a reduced price

* Personal use of employer's vehicle
* Gifts - cash
Not taxable if a non-cash gift, maximum of $500 as anniversary awards for minimum of
5 yr service, to an arm's-length employee.
* Group Term life insurance policies
* Reimbursement by employer for cost of tools required to perform employment
* Loans - at low rate or interest free
* Fitness gym, health club membership

Note: Should add applicable GST/HST to taxable benefits CH-4, KCQ-3

*** Automobile Benefits:

Employer's automobile is available for employee for personal use

Taxable benefit for employee. An amount for this should be included in income

Components of Automobile Benefits:

1. Standby charge:
This is for having automobile available for employee

Employer owned vehicle given to employee

= Cost of Auto X 2% X No. of months Auto was available for employee

(includes GST/HST) Correct way: # of days

30 days
 Employer leased vehicle given to employee
2
= Monthly lease cost X X No. of months Auto was available for employee
3
(includes GST/HST)

When the employee used the Auto primarily (>50%) for business:
Reduced Standby Charge
Personal Km
= Standby Charge X
1,667 Km X No. of months Auto was
available for employee
(20,000 Km/Yr)

2. Operating cost benefit:

This is for use of automobile

= Prescribed Rate X Personal Km

($0.28/Km in 2019, $0.26/Km in 2018)

Alternative method:
When an employee uses Auto primarily (>50%) for employment duties:
1
= X Standby Charge
2

Note-1:
Travel expenses for commuting from employee's home to place of business is personal use.

CH-4, Key Concept Question - 4:

*** Employee Loans

Low-interest or interest-free loans provided to employees by employers
Results in taxable benefits. Must be included in employee's income

Taxable Benefit = ( CRA Prescribed Rate - Actual Interest Rate ) X Loan Amount

(CRA publishes this every 3 months (Quarterly))

* Different rule for loan is used to acquire a house or to repay an existing house loan
 * Benefits calculated based on the prescribed rate at the time loan was made
* Prescribed rate at the time the loan was made is valid for 5 years
Within the 5 year period:
* If prescribed rate increases, the prescribed rate at the time loan was made will be used
* If prescribed rate declines, the lower rate can be used

CH-4, Key Concept Question - 5:

***Employers
Relocation Loansemployees
may reimburse for all or part of costs to permanently relocate to a new work location

* reimbursement of moving expense is not taxable.

Taxable benefits from reimbursements of relocation expenses

* Reimbursement of cost of financing a residence
* Reimbursement of loss on sale of home (should be 40km closer to work location)
* First $15,000 - not taxable, but
* one-half of any amount above $15,000 is taxable.

*** Stock Options

-- Employee is given
No cash outlay an opportunity
required to purchase ownership in company at a set price
by employer

Allows employee to purchase the shares at a price that is lower than FMV
Results in taxable benefits. Must be included in employee's income

1. Public Corp, Option Price < FMV, at the date the option was granted (In-the-money)
How much is the Option-Benefit: No. of Shares x ( FMV of share - Option Price )
When to include in employment income: When option is exercised

2. Public Corp, Option Price = or > FMV, at the date the option was granted (Not In-the-money)
How much is the Option-Benefit: No. of Shares x ( FMV of share - Option Price )
When to include in employment income: When option is exercised
** However, Stock-Option-Deduction available (Div-C deduction in Taxable Income Calculation)
(50% of Benefit is deductible)

3. CCPC (Canadian Controlled Private Corporation)

How much is the Option-Benefit: No. of Shares x ( FMV of share - Option Price )
When to include in employment income: When the shares are sold by employee
 (Not when the option is exercised)

This is to stimulate employee participation

in small corporations

If employee sells the shares after two years

Stock option deduction available (Div-C deduction in Taxable Income Calculation)
(50% of Benefit is deductible)

If employee sells the shares within two years

Stock option deduction available only if,
Option Price = or > FMV, at the date the option was granted (Not In-the-money)

CH4- Problem - 4

Taxpayers who realize a capital gain upon disposition of the shares of a qualified small business
corporation are entitled to a deduction of up to (life time limit) $866,912. (taxable capital gain of
$433,456).

CCPCs rarely grant Stock-Options to their employees, Why? PG# 76

* Market Value of Shares on readily available
* Low marketability - Privately held shares
* Controlling S/Hs normally want to retain control

CH4- Key Review Question - 6 & 7

*** The following contributions by employer are not taxable benefits to employ
(non-taxable or deferred)
Pg#75
Tax deferral * registered pension plan (“RPP”)
* deferred profit-sharing plan (“DPSP”)
* pooled registered pension plan (“PRPP”)
* Insurance premium for group sickness or accident plans
Perm-Exclusion * private health service plan
* supplementary unemployment benefit plan
* counseling services relating to mental or physical health
or employment or retirement
* Scholarships, bursaries, and free tuition provided to
employee's family members. (this is scholarship income for
recipient, and not for the employee)
 Scholarships, bursaries, and free tuition provided to
employee's family members. (this is scholarship income for
recipient, and not for the employee)

Note: Premium for life Insurance - Taxable benefit

(unless stated that it was required by 3rd party such as lender. eg: bank)

** Tax Free Benefits - See Pg# 78

CH-4, Key Concept Question-2

Premium for Group Term life insurance $ 400

Fitness club membership 900
Public Transit Pass 800
$ 2,100

*** Allowances
Taxable Benefits: - If paid to employee on a regular basis, not part of Salary, to cover certain
expenses incurred by employee - taxable

Exceptions: - Overtime meals & allowances Not taxable

- Employees selling property or negotiating contracts But, must be reasonable
- Employees other than salespeople
2019 rate: $0.58/km for 5,000km
$0.52/km for excess of 5,000km

2018 Rate: $0.55/km for 5,000km

$0.49/km for excess of 5,000km
** For test/exam: we will use 2019 rate

Ch-4, Review Question - 8

** An allowance is money given ahead of time to cover expense
Allowance is not a reimbursement

** Reimbursement is repayment of specific expenses

*** Deductions from Employment Income

No deductions are permitted unless specifically listed in ITA
 * Legal expenses paid to collect salary or wages
* Sales expenses
** Traveling expenses Deductible from Employment Income for these
Expenses paid by employee.
* Car expenses
* Professional and union dues
* Supplies consumed ** Conditions may apply
* Office rent or workspace in home
* Interest & CCA on a car
* RPP Contributions
* Tradesperson’s Tools - $500 maximum

** Traveling expenses:
Deductible when an employee:
- is required to carry on duties away from employer's place of business
- is required to pay the travel costs
- has not received non-taxable allowance

Automobile limits:
Capital cost of automobile: * $30,000 + Tax, Class 10/10.1 - CCA @ 30%
Lease limits: * $800 + Tax
Interest on Loan to finance purchase: * $300/Mth

Meals & Entertainment limits: * 50% of actual cost during the travel
* Must be travelling away from metropolitan
area of employer for 12 hours

*** Work Space in Home

- The place the individual principally (mainly, primarily, means >50%) performs duties of employment
**
[or]
** - Used exclusively for (only to) earning employment income, and
- Used on a regular/continuous basis for meeting customers or clients.

If the employee is a sales person:

Can claim prorated portion of prop tax, insurance, maintenance & Utilities

If the employee is NOT a sales person:

Can claim prorated portion of maintenance & Utilities only
Note: - The cost cannot be greater than the employment income earned in that year.
- No Mortgage interest or CCA are permitted to deducted.

CH4- Key Review Question - 11

*** Stock based plans CH-2. Review Question - 20

Results in tax deferral

* Stock option plan: permits an employee to purchase shares directly from the corporation at a
specified price for a certain time period
Why: Incentive to employees, to motivate, to enhance profitability.

* Stock purchase plan: is simply a funding program of the employer permitting the employee to
purchase shares in the employer's corporation by providing a loan
Why: Employees may not have funds to purchase shares.
Investment opportunity without financial burden.
Loan amt comes back to corp when employee purchases the shares.
Corporation become attractive.

* Stock bonus plan: means that an employer issues shares to an employee at no cost in lieu of a
cash bonus
Why: Bonus is for employees' performance.
Instead of cash the corp issued bonus in shares.
No immediate cash impact to Corp.

*** Review - Sample Calculation of Employment Income - Pg# 86

------------------------------------ End --------------------------------------

CPP & EI expenses
r employee

hs Auto was
e for employee

Loan Amount
e will be used

new work location

ncome Calculation)
all business
apital gain of

enefits to employee
er certain

must be reasonable
ment Income for these
yee.

10.1 - CCA @ 30%

from metropolitan
2 hours

uties of employment
rporation at a

nce profitability.

mployee to
loan

e purchases the shares.

cost in lieu of a
CH - 4, Key Concept Question - 3:

Taxable
Yes/No
Golf-Shirt with employer Logo 15 No
Birthday Gift 75 Yes 75
Reward for meeting sales performance 400 Yes 400
10 yr anniversay award 275 No
Wedding Gift (cutlery) 300 Yes 300
Innovation & excellence award 250 Yes 250
Holiday season gift (artwork) 150 Yes 150
700
Max allowed -500 200
675

CH - 4, Key Concept Question - 4:

Employer owned car, used by employee:

Need to calculate Standby Charge & Operating Benefit
Watch for use of >50% for employment, then Reduced Standby Charge and Alternative method

a) (i) A Ltd. purchased the car for $48,000

(Total: 2,000Km, Employment: 200Km)

Standby charge: 48,000 x 2% x 4 mths = 3,840 Sept - Dec

Operating Benefit: 0.28 x 7,200km = 2,016 (2,000-200) x 4 = 7,200km

(1800 x 4 months)
5,856 Total Benefit that should be included i

(ii) A Ltd. leases the car for $950/mth

Standby charge: 2/3 x $950 x 4 months = 2,533 $950 includes GST/HST

Operating Benefit: 0.28 x 7200 km = 2,016

(1,800 x 4 months)
4,549 Total Benefit that should be included i

Employment use of car is not more than 50%, therefore, Alternative method doesn't apply

b) A Ltd. purchased the car for $48,000 and Terasa drives the car for >50% for employment
 (Total: 20,000Km, Employment: 12,000Km, Personal: 8,000km)

Standby charge: $48,000 x 2% x 12 mth x 8,000/ (1,667km x 12 mth) = 4,607

Operating Benefit: Lesser of,

50% x $4,607 = 2,304
$0.28 x 8,000km = 2,240 2,240
6,847

Note that since the car was driven more than 50% of the total km for employment
purposes, the standby charge is reduced and Teresa has the option of calculating the
operating benefit as 50% of the standby charge.

CH - 4, Key Concept Question - 5:

Employee Loan interest Benefit:

House Loan
$90,000
Mar 1 - Mar 31 31 days @ 4% 306 =90000*4%/365*31
Apr 1 - Dec 31 275 days @ 4% 2,712 =90000*4%/365*275
3,018

Less, Interest Paid

Mar 1 - Dec 31 306 days @ 1% - 755 =-90000*1%/365*306
2,264 (a)

The prescribed interest rate for the investment loan changed throughout the year whereas the
prescribed interest rate for the home loan remained at 4%, the rate at the time the loan was
received. Home loans benefit from this prescribed rate protection. If the prescribed rate declines,
the lower rate can be used. However, if it increases, the rate at the time the loan was made will be
used, for a maximum of five years.

Investment Loan
$10,000
Mar 1 - Mar 31 31 days @ 4% 34 =10000*4%/365*31
Apr 1 - Dec 31 275 days @ 5% 377 =10000*5%/365*275
411

Less, Interest Paid

Mar 1 - Dec 31 306 days @ 1% - 84 =-10000*1%/365*306
327 (b)

Employee Loan interest Benefit: 2,590 (a) + (b)

 Len will be entitled to deduct interest paid of $411 (actual interest paid $84 + low-interest benefit
$327 deemed to be interest paid in computing his investment income for tax purposes.

CH4 - Key Review Question - 6

Stock-Option provided by Public Corp

Year-1: When Option granted: No benefit to employee

Option: 100 shares @ $12.00, (Market price: $22.00)

In-The-Money

1. Public Corp, Option Price < FMV, at the date the option was granted (In-the-money)
Option Benefit: When option exercised

Year-2: Shares purchased:

Value of shares at date acquired: 4,000 =$40*100

Less, Option purchase price - 1,200 =$12*100
Employment Income 2,800 To be included in Year-2

Year-6: Shares Sold:

Proceeds of Disposition (sold for) 6,600 =$66*100

Less, Adjusted Cost Base (Cost at purchase) - 4,000 =$40*100
Capital Gain 2,600
Taxable Capital Gain (50%) 1,300

CH4- Key Review Question - 7

Stock-Option provided by a CCPC (Canadian Controlled Private Corporation)

Benefits are calculated but will be included in income when shares are sold by employee
Year-1: No Benefit to report by employee
Year-2: No Benefit to report by employee

Year-6: Shares Sold:

Value of shares at date acquired: 4,000 =$40*100
Less, Option purchase price - 1,200 =$12*100
Option Benefit 2,800 Will be included in employment Incom

Proceeds of Disposition (sold for) 6,600 =$66*100

Less, Adjusted Cost Base (Cost at purchase) - 4,000 =$40*100
Capital Gain 2,600
Taxable Capital Gain (50%) 1,300 Will be included as Taxable Capital Ga
 Employee sold the shares after two years
Stock option deduction available (Div-C deduction: Taxable Income Calculation)
(50% of Benefit is deductible)

Stock Option Deduction (taxable Income Calc.) - 1,400 =2800 * 50%

CH4- Key Review Question - 8

Year-1: Option granted: No benefit to employee

Option: 1000 shares @ $10.00, (Market price: $8.00)

Not-In-The-Money

2. Public Corp, Option Price >= FMV, at the date the option was granted (Not In-the-money)
Option Benefit: When option exercised
Stock option deduction available (Div-C deduction: Taxable Income Calculation)
(50% of Benefit is deductible)

Year 2: Shares purchased:

Value of shares at date acquired: 16,000 =$16*1000

Less, Option purchase price - 10,000 =$10*1000
Employment Income 6,000

Stock Option Deduction (taxable Income Calc.) 3,000 =6000 * 50%

Year-5: Shares Sold:

Proceeds of Disposition (sold for) 38,000 =$38*1000

Less, Adjusted Cost Base (Cost at purchase) - 16,000 =$16*1000
Capital Gain 22,000
Taxable Capital Gain (50%) 11,000

CH4- Key Review Question - 11

Employee is not a sales person. Therefore, can only deduct Maintenance & Utilities cost
 Mortgage 10% 1,200 No ok for business or property income
Prop Tax 10% 340 No ok for sales person or as part of business or prope
House Insurance 10% 120 No ok for sales person or as part of business or prope
Utilities 10% 420 Yes ok for sales person or as part of business or prope
Maintenance 10% 200 Yes ok for sales person or as part of business or prope
Telephone 40% 210 No Ok for long distance charges
Computer 100% 1,300 No Capital. CCA can be claimed on two capital items

Total deductible from Employment Income 620 = Utilities + Maint

CH4- Problem - 4

(a)
Jan 01, 20X0: Option granted: No benefit to employee

Option: 1000 shares @ $8.00, (Market price: $8.50)

Public Corp, Option Price < FMV, at the date the option was granted (In-the-money)
Option Benefit: When option exercised
Stock Option Deduction: Cannot be used

Dec 15, 20X0: Shares purchased:

Value of shares at date acquired: 10,000 =$10*1000

Less, Option purchase price - 8,000 =$8*1000
Option Benefit 2,000 Will be added to Employment Income

June 15, 20X3: Shares Sold:

Proceeds of Disposition (sold for) 14,000 =$14*1000

Less, Adjusted Cost Base (Cost at purchase) - 10,000 =$10*1000
Capital Gain 4,000
Taxable Capital Gain (50%) 2,000

(b) Option Price is not less than the market value on grant date
Not-In-The-Money
Stock Option Deduction Available:
1,000 =2000 * 50%., ie: 50% of 'Option-Bene

(c) If the Corp was a CCPC:

Employment income calculated in (a) will be included in income in 20X3 (year of disposition of
shares by employee)
 Because the employee held the shares for over 2 years, the employee can also deduct 'Stock
Option Deduction' as calculated in (b) in 20X3

** Employee may also apply 'life time Capital Gain Deduction' in 20X3 and pay no tax, if the shares are qu

CH4- Problem - 1

Whether a person is an employee or an independent contractor carrying on business is a question

of fact to be judged by the circumstances of each situation.

The four basic legal principles that are used to determine whether a worker is carrying on his/her
own business as an independent contractor, or is an employee working in his/her employer’s
business, are as follows.

1) Control:
2) Ownership of Tools:
3) Chance of Profit, Risk of Loss:
4) Integration:

In this case the relationship between Watkins, who provides the service, and Anthony & Anthony, who re
the service, is difficult to establish.

Factors supporting an employee/employer relationship and that the only business being carried on is th
Anthony & Anthony are:

• Watkins closed his professional practice and now provides service to only one entity.
• Public was informed that he is part of the Anthony & Anthony organization.
• Anthony & Anthony provides Watkins with an office and secretary similar to other employees.
• Watkins corresponds with Anthony & Anthony clients under the firm's letterhead.
• He works for several partners of the firm and charges time to their accounts as directed.
• He is not responsible for collecting fees. He is paid for client work even if the client fails to pay the firm.
• Participates in firm's social activities as if he is a member of the firm.
• Makes speeches as a representative of the firm.
• Holds business cards as a representative of the firm.
All of the above factors indicate that Watkins and Anthony & Anthony have an employer/employee relatio

Factors supporting an independent contractor relationship, earning business income:

• Watkins is not a partner, nor is he designated in any of the employee ranks with Anthony & Anthony
• He has committed only 600 hours of service but can do more at his option.
• Free to pursue other professional interests outside of the firm.
• Not required to report to work every day or at certain times as other employees do.
• Uses an office of the style normally designated to partners.
• Was paid in the form of a fee by providing an invoice indicating the hours of service and the related fee.
• Watkins pays for his own parking and subscriptions to several tax services.
All of the above factors indicate that Watkins has a different relationship than any employee of Anthony &
Anthony. We are not told if the contract clearly sets out the common intention as to the relationship.

Conclusion:

It is the opinion of the authors that Watkins is an independent contractor. His special relationship with An
& Anthony is sufficiently different from that of all other employees and this factor appears predominant.
However, it is recognized that the opposite view is also arguable.
 Nominal value
Cash gift
Permance related
Below $500 and for 5 year period
Gifts and awards exceeding $500 is taxable
Gifts and awards exceeding $500 is taxable
Gifts and awards exceeding $500 is taxable
Total Gifts and awards
This is for non-cash gifts only, cash gifts of $75 is excluded from this calculation
taxable

arge and Alternative method applies

0) x 4 = 7,200km

fit that should be included in Employment income

des GST/HST

fit that should be included in Employment income

doesn't apply
 11520

%/365*306

%/365*306
ded in Year-2

(not $12)

s are sold by employee

luded in employment Income

(not $12)

luded as Taxable Capital Gain

 Calculation)

In-the-money)

Calculation)

=6000 * 50%

(not $10)

Utilities cost
perty income
as part of business or property income
as part of business or property income
as part of business or property income
as part of business or property income

aimed on two capital items

ded to Employment Income for Pasqual

(not $8)

0%., ie: 50% of 'Option-Benefit' can be applied

of disposition of
o deduct 'Stock

y no tax, if the shares are qualified Small business Corporation.

usiness is a question

carrying on his/her
her employer’s

Anthony & Anthony, who receives

siness being carried on is that of

ne entity.

other employees.
head.
as directed.
e client fails to pay the firm.

employer/employee relationship.

income:

with Anthony & Anthony

yees do.

service and the related fee.

any employee of Anthony &

n as to the relationship.

special relationship with Anthony

ctor appears predominant.