Chapter 3

Employment Income

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 Employment Income
Under Part I, Division B, subdivision a:
• Inclusions:
– Sec. 5 – Salary, wages, and gratuities
– Sec. 6 – Other income inclusions arising from
employment
– Sec. 7 – Stock option benefits
• Deductions:
– Sec. 8 – Deductions allowed against employment
income

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 Employed vs. Self-Employed
• Distinction is important for tax reasons because:
– Deductibility of expenses is more restricted for employees
– Employers must remit income tax, EI, and CPP payments to the
CRA for employees only
• Non-tax implications for independent contractors:
– Ineligible for general EI benefits, holidays, and employer-paid or
other non-cash benefits;
– Potential liability for services they perform;
– Cannot collect severance pay; and
– Lack of job security and so increased economic risk.

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 Employed vs. Self-Employed
• Determination tests:
– Economic reality;
– Integration test; and
– Specific result test.

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 Employed vs. Self-Employed
Economic reality test:
– Control
– Ownership of tools
– Chance of profit/risk of loss

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 Employed vs. Self-Employed
Integration test:
• Is the individual doing the work economically
dependent on the organization?

Specific result test:

• Is the individual engaged in completing a
specified work?

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Steps to Addressing Employed vs.
Self-Employed Issue
1. Assess the situation and identify the issues
(a) Gather all the facts relating to the person's
position and activities.

(b) Organize your thoughts around the following

tests:
a. Economic reality or entrepreneur test
i. Control
ii. Ownership of tools
iii.Chance of profit/risk of loss
b. Integration or organization test
c. Specific result test

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Steps to Addressing Employed vs.
Self-Employed Issue
2. Analyze the Issues:
(a) Based on the tests above, develop
your best arguments for both
employed and self-employed. Be
balanced in your analysis.

(b) Analyze the strengths and

weaknesses of your arguments.

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Steps to Addressing Employed vs.
Self-Employed Issue
3. Conclude and Advise:
(a) Arrive at a conclusion of employed or self-
employed consistent with your analysis.

(b) Assess the impact of your decision and advise

on the implications.
(i) Expenses deductible for tax purposes,
(ii) Tax rates applicable to the income, and
(iii) Non-tax factors such as employee and
government benefits.

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 Employment Income
• Taxation year
– Reported on calendar-year basis
• Includes salary, wages, and other remuneration
including gratuities
• Reporting based on amounts received (cash
basis)

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 Employment Benefit Inclusions
• Benefits included in section 6
• Benefits from employer stock options in
section 7

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 Employment Benefit Inclusions
• General Rule:
– Par. 6(1)(a) includes benefits that arise in the course of
or by virtue of office or employment
• Exceptions:
– Employer’s contributions to:
• RPP/PRPP
• Group sickness or accident insurance plan
• Private health services plan premiums and provincial health
levies, but not provincial health plan premiums
• Supplementary unemployment benefit plan
• Deferred profit sharing plan (DPSP)
• Group term life insurance policy

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 Employment Benefit Inclusions
Other exceptions to par. 6(1)(a):
– Benefits under a retirement compensation arrangement, an
employee benefit plan, or trust which are already included in
income under other provisions;
– Benefits in respect of the use of an automobile;
– Benefits from counselling services; and
– Benefits under a salary deferral arrangement already included in
income.
– Education assistance received by an individual other than an
employee under a program provided by the employer (proposed)

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 Employment Benefit Inclusions
• Employee loans
– Imputed interest benefit included in employment
income on an interest-free or low-interest loan
Actual interest
Benefit = Interest at charged by
prescribed rate employer
– Actual interest paid is deductible
– Sec. 80.5 deems interest benefit to be paid
• Important for deduction of interest paid on funds borrowed to
purchase a car for use in employment or purchase shares of a
corporate employer

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 Employment Benefit Inclusions
• Home Purchase Loans
– Benefit calculated each quarter the loan is outstanding
as the lesser of:
• Prescribed rate for the quarter while the loan was outstanding;
and
• Prescribed rate in effect at the time the loan was made.

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 Employment Benefit Inclusions
• Forgiveness of employee loans
– Included in employment income the amount of
the employer loan net of any payments made by
the employee

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 Steps to addressing an employee loan
calculation
(1) Assess the Situation and Identify the Issues: Gather all the facts
relating to the individual’s employee loan.

(2) Analyze the Issues: Based on the information gathered determine:

(a) The amount of interest benefit to be included in employment
income. If the loan is used for several different types of purchases,
separate out the components of the imputed interest.
(b) The total amount, if any, of the loan that must be included in
income.

(3) Conclude and Advise: Assess the impact of your calculation and advise
on the implications, such as:
(a) the amount that may be deductible under specific circumstances; and
(b) tax rates applicable to the income.
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 Stock Options
• Two income tax issues arise for employee:
– Nature of the income inclusion: Is it employment
income or capital gain or both?
– The timing of the inclusion
• Total income to be accounted for is difference
between proceeds of disposition on the sale of the
shares and the original price paid for the shares

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 Stock Options
Total income will include:

1. Employment =
FMV at
-
Price paid for
Income exercise the shares

Capital gain/ = Proceeds on sale FMV at

2.
Capital loss to third party - exercise

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 Stock Options
• Timing of inclusion of employment income
depends on:
– Type of corporation;
– Whether the employee and the corporation were
dealing at arm’s length; and
– Relationship of option price to the FMV of the shares
when the option is granted.

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 Stock Options – Public corporation
Three important dates:
1. Option grant date
2. Exercise date – employment benefit
– Division C partial deduction equal to ½
income inclusion if granted options were not
in the money
3. Selling date – capital gain/loss

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 Stock Options – CCPCs
Three important dates:
1. Option grant date
2. Exercise date
3. Selling date
– Employment benefit inclusion
– Capital gain/loss
– Division C deduction available

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 Stock Options: CCPCs
• Division C deduction – ½ of the income inclusion
if:
– shares have not been sold before the 2nd anniversary
date of the day of acquisition [par. 110(1)(d.1)] OR
– The options are not in the money at the grant date [par.
110(1)(d)]

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 Stock Options: Example
Mr. Dietrich, who is employed by Public Co. Ltd., was
granted an option in year one to purchase up to 5,000
common shares at $10 after completion of his fifth year of
employment. The FMV of the common shares at the time of
granting the right was $12. He does not have any other
shares.
During Mr. Dietrich’s seventh year of employment, he
decided to exercise part of his right and purchased 1,000
shares with a FMV of $15 as at that date.
Three years later, Mr. Dietrich sold the shares for $25 per
share.

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 Stock Option: Example
What are the tax implications of each of the
above transactions?

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 Stock Option: Example
What are the tax implications of each of the above
transactions?
When option granted: no tax effect
When option is exercised:
Employment income = 1,000 shares * ($15 - $10) = $5,000
ACB of 1,000 = $15 per share
No Division C deduction available
When shares are sold:
Capital gain = 1,000 shares * ($25 - $15) = $10,000

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 Stock Option: Example
How would your answer differ if the option
price was $13 instead of $10?

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 Stock Option: Example
How would your answer differ if the option price
was $13 instead of $10?

When option granted: no tax effect

When option is exercised:
Employment income = 1,000 shares * ($15 - $13) = $2,000
Division C Deduction = ½ * $2,000 = $1,000
ACB of 1,000 = $15 per share
When shares are sold:
Capital gain = 1,000 shares * ($25 - $15) = $10,000

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 Stock Option: Example
How would your answer differ if Mr.
Dietrich was employed by a CCPC?

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 Stock Option: Example
How would your answer differ if Mr. Dietrich was
employed by a CCPC?

When option granted: no tax effect

When option is exercised: no tax effect
When shares are sold:
Employment income = 1,000 shares *($15 – $10) = $5,000
Capital gain = 1,000 shares * ($25 - $15) = $10,000
Eligible for ½ deduction of employment income inclusion
since he held shares for more than 2 years.

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Steps to addressing an employee stock option benefit

(1) Assess the Situation and Identify the Issues:

Gather all the facts relating to the individual’s stock
options including:
(a) The type of corporation that has granted the stock options: private
or public.
(b) The option price, the fair value at exercise date and the proceeds
of disposition per share.
(c) The fair market value of the shares at grant date.

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Steps to addressing an employee stock option benefit

(2) Analyze the Issues: Based on the information gathered

determine:
(a) The timing of the employment income inclusion.
(b) The employment income inclusion amount based on
the fair value at exercise price less the option price.
(c) The capital gain or loss on the sale of the stock
options.

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Steps to addressing an employee stock option benefit

(3) Conclude and Advise:

(a) Assess the impact of your calculation and advise on the
amounts to be included in employment income and when
the amounts should be
included as follows:
(i) The option grant date
(ii) The date of exercise

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 Additional Considerations:
Stock Options
• Valuation of shares
• Withholding tax
• Risk factors
• Stock option cash outs

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 Automobile Benefits
• Taxable benefits for automobiles provided by
employer
• Two primary benefits:
– Standby charge
– Operating benefit

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Automobile Benefits: Stand-by Charge
A
X [2% X (C X D) + 2/3(E – F)]
B

A = lesser of:
a) Total personal-use kms driven during the time period, and
b) Value determined for B during the days the automobile is available;
B = 1,667 km x (total available days/30)
C = full original cost of an employer-owned vehicle, including HST
D = (total available days when employer owned the automobile / 30)
E = lease payments, including HST, made by employer
F = portion of the lease payments which pertains to insurance for loss or
damages

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 Automobile Benefits: Operating Cost
Benefit
• Operating expenses for personal use of employer-
owned automobile, paid by employer, gives rise to
a taxable benefit
– Options for calculations:
• Kilometre method
• Election where use is primarily (> 50%) employment

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Automobile Benefits
Figure 3-1

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 Automobile Benefits
• Employee-Owned Automobile Operating
Expense Benefit
– Taxable benefit if employer pays for operating
costs
• Benefit computed by prorating the operating costs
by the ratio of personal-use kms

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 Allowances
• Allowance versus reimbursement
– Allowance is a taxable benefit under par. 6(1)
(b)
– Reimbursement is generally not a taxable
benefit

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 Allowances
• Many exceptions to allowance inclusions outlined
in par. 6(1)(b)
• Exceptions of allowance for travel expenses:
– For sales/negotiating person if:
• Allowance is reasonable;
• Allowance is only for travelling expenses (including motor
vehicle expenses); and
• Recipient must be involved in selling of property or
negotiating of contracts for his/her employer.

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 Allowances
• Exceptions to inclusion of allowance for travelling
expenses:
– For other employee if
• Employee does not sell property or negotiate contracts;
• Allowance is reasonable in the circumstances;
• Allowance is for travelling expenses but not for motor vehicle;
and
• Recipient must travel away from the area of the employer’s
establishment where employee ordinarily worked.

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 Motor Vehicle Allowances
• Ordinary employee – conditions for exemptions:
– Allowances are reasonable
– Allowances must be in respect of travelling in the
performance of duties of an office or employment

– Note: allowance is not reasonable if

• Motor vehicle allowance is not based solely on kms in respect
of use for the employer’s business; or
• Both an allowance and a reimbursement are received.

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 Motor Vehicle Allowances
Exceptions to Employment Income Inclusion of Travelling Allowances

Par. 6(1)(b)
Sales/Negotiating Other Persons
Persons
Travel allowance other
than motor vehicles Spar. 6(1)(b)(v) Spar. 6(1)(b)(vii)

Allowance for motor

vehicles Spar. 6(1)(b)(v) Spar. 6(1)(b)(vii.1)

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 Is the car
owned by the
employer or
employee?

Employee
Employer

Is the amount
reasonable?
Is it primarily
business or
personal
use? Yes - No No - Amount
taxable of allowance
benefit included as
Business Personal income and
use use reasonable
expenses
allowed for
Standby Operating deduction
charge = Full Operating
benefit = standby benefit=
Standby lesser of 1/2
charge x charge $.26/km
standby or
Reduction $.26/km
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 Other Benefits
• Common employee benefits:
– Flexible benefit programs;
– Boarding and lodging
– Employer paid education costs and memberships
– Loyalty programs
– Financial counselling
– Business trip with spouse
– Non-cash gifts and awards; and
– Overtime meals.
• Administrative practice:
– “Benefits and Allowances Received from Employment” Tax Folio
S2-F3-C2
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 Other Benefits
• Board and lodging
– Exception: employment in special work site or remote
location if meet the below conditions:
a) Special work site is far enough away that employee cannot
reasonably be expected to travel daily and temporary in
nature so it is unreasonable to establish “self-contained
domestic establishment”; and
b) Board and lodging is necessary for not less than 36 hours
and allowance, if received, is reasonable

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 Other Benefits
• Housing loss and housing cost benefits
– Employer-paid housing loss included in income unless
an “eligible housing loss”
– Eligible housing loss:
• Housing loss that is designated or chosen by the taxpayer as
such and is in respect of an eligible relocation of the taxpayer
or non-arm’s length person
– If an eligible housing loss, only ½ of the amount in
excess of $15,000 of an employer-paid amount is
included in employment income

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 Other Benefits
• Director’s or Other Fees
• Volunteer Services Exemption
• Benefit from Employer-Paid GST/HST
• Group Sickness and Accident Insurance
Plans

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 Deductions from Employment Income
• Ssec. 8(1) lists all deductions that can be claimed
against employment income
• General limitation: expenditure must be
“reasonable in the circumstances” [sec. 67]

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ITA Expenses
8(1)(b) Legal expense of employee
8(1)(c) Clergy residence
8(1)(d) Teachers’ exchange fund contribution
8(1)(f) Sales expenses
8(1)(g) Transport employee’s expenses
8(1)(h) Travel expenses
8(1)(h.1) Motor vehicle expenses
8(1)(i) Dues and other expenses of performing duties
8(1)(j) Motor vehicles and aircraft costs
8(1)(l.1) CPP contributions and EI premiums
8(1)(m) Employee’s RPP contributions
8(1)(m.2) Employee RCA contributions
8(1)(n) Salary reimbursement
8(1)(o) Forfeited amounts
8(1)(p) Musical instrument costs
8(1)(q) Artists’ employment expenses
8(1)(s) Deduction – tradesperson’s tools

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ITA Expenses
8(2) General limitation
8(4) Meals
8(6.1) Eligible tool of tradesperson
8(7) Cost of tool
8(13) Work space at home

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 Salesperson/Negotiator’s Expenses
• Nature and type of expenses not restricted, unlike for other
employees
• Amount deductible is limited to amount of the employee’s
commission income
• Conditions to be met:
– Employee must be required to pay his/her own expenses as
stipulated in employment contract
– Employee must ordinarily be required to carry on the duties of
employment away from the employer’s place of business
– Remuneration must be dependent on volume of sales/contracts
– A non-taxable travel allowance cannot be received

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 Ordinary Employee’s Travelling
Expenses Including Motor Vehicle
Expenses
• Travelling expenses of employees who are not
involved in selling of property or negotiating of
contracts are deductible under:
– 8(1)(h) – Travelling expenses other than motor vehicle
expenses
– 8(1)(h.1) – Motor vehicle expenses

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 Ordinary Employee’s Travelling
Expenses Other Than Motor Vehicle
Expenses
• Conditions:
1. Employee must ordinarily be required to carry
out his/her duties away from his/her
employer’s place of business.
2. The payment of travel expenses by the
employee must be part of his/her contract.
3. Employee cannot receive a tax-exempt
allowance for travelling expenses, which
exclude the allowance if it is reasonable.
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 Any Employee’s Travelling Expenses
Other Than Motor Vehicle Expenses
• Limitations
– Cost of meals while travelling deductible only
if taxpayer away for 12 hours or more from
area where he/she usually works
– Cost of meals and entertainment limited to 50%

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Expenses
3-1

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 Expenses
• Motor vehicle and aircraft – interest and CCA
– Imputed interest deemed paid
– Limitations:
• Interest on money borrowed for passenger vehicle
• Capital cost for passenger vehicle
• Cost of leased passenger vehicle

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 Dues and Other Expenses
• Deductible:
– Annual professional membership dues paid to
maintain standing in a profession recognized by
statute;
– Office rent paid or;
– Salary paid to an assistant;
– Cost of supplies paid; and
– Annual union membership dues paid.

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 Work Space in Home
• Deduction only permitted if the work space is:
a) The place where the individual principally performs
employment duties; or
b) (i) Used exclusively for the purpose of earning
employment income during the period; and
(ii) Used on a regular and continuous basis for
meeting customers or other persons.

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 Home Office Expenses
Expenses Commission Other
Employees Employees
Rent  
Repairs and maintenance  
Supplies  
Telephone  
Utilities  
Home insurance  X
Property taxes  X
Mortgage interest X X

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 Registered Pension Plans
• Two types:
– Defined Benefit
• Guarantee a predetermined amount of retirement
income
• Investment risk lies with employer
– Money-purchase (Defined Contribution)
• Whatever pension income that the contributed funds
in the plan can purchase through acquisition of an
annuity (no guarantee of pension income)
• Investment risk lies with employee
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 Other Expenses
• Legal Expenses
• Tradesperson’s Tool Expenses
• Registered Pension Plans

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