Chap03 Sol Odd

CHAPTER 3

Employment Income Type 1 Problems Solution 1: Auto Benefits—Company-Owned Versus Leased Driving the car more than 50% for business purposes entitles Lisa to a reduced standby charge and the alternative operating benefit of 50% of the standby charge. Business Driving 40% 60% Personal kilometres 14,400 9,600 Business kilometres 9,600 14,400 Total 24,000 24,000 Reduced standby and operating benefits A = personal use kilometres = B = 1,667 km x (365/30) = C = original cost including HST = $35,000 x 1.13 = D = available days/30 = E = lease payments including HST = $750 x 12 x 1.13 = F = insurance portion of lease payments = Option 1 – Company-Owned Standby Charge: 40% Business (50%) A/B x [2% x (C x D) + 2/3 (E – F) = 9,600/20,004 x [2% x ($39,550 x 12)] = Operating Benefit: 40% Business (50%) Lower of 50% of standby charge (50% x $4,555 = $2,278) or per km benefit ($0.27 x 9,600 = $2,592) Total benefit = Cost at a tax rate of 46% = Difference

No

Yes

14,400 20,004 $39,550 12 $10,170 0

9,600 20,004 $39,550 12 $10,170 0

$9,492 $4,555

3,888

2,278 $13,380 $6,833 $6,155 $3,143 $3,012

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Option 2 – Company Leased Standby Charge: 40% Business (50%) A/B x [2% x (C x D) + 2/3 (E – F) = 9,600/20,004 x [2/3 x ($10,170 – 0)] = Operating Benefit: 40% Business (50%) Lower of 50% of standby charge (50% x $3,254 = $1,627) or per km benefit ($0.27 x 9,600 = $2,592) Total benefit = Cost at a tax rate of 46% = Difference

$6,780 $3,254

3,888

1,627 $10,668 $4,881 $4,907 $2,245 $2,662

Based on this analysis, Lisa would prefer that the company lease the car regardless of whether she uses it 60% or 40% for business.

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Introduction to Federal Income Taxation in Canada

Solution 3: Multi-part—Employee Benefits 1.

A salary of $90,000 per year, payable by direct deposit on the last day of each month. a. Taxed on the cash basis as the income is received [5(1)]

2.

A bonus payable based on the year-end results of the company. The bonus would be up to $10,000. a. Taxed when received as long as not artificially delayed. b. There is a benefit to receiving it in the next calendar year if there is a lower tax rate in the following year. Tax is withheld at source.

3.

Motion Tech has a defined contribution registered pension plan where Rishma and the company each contribute 6% of her salary. a. Rishma’s contribution is specifically allowed as a deduction [8(1)(m)] b. The company’s contribution is not a taxable benefit – specific exclusion [6(1)(a)(i)] c. All payments out of the RPP will be taxed later, when she receives them

4.

Since she will have to move to Waterloo to take up this position, the company will pay her an allowance of $15,000 to cover her moving expenses. a. Allowances must be included in income unless there is a specific provision to exclude. No exclusion for allowance for moving expenses. [6(1)(b)] b. She can deduct her moving expenses against her employment income in the new location. [62]

5.

Motion Tech will cover the annual dues for a fitness club up to a cost of $2,000 per year. a. If it is primarily for Rishma’s benefit, then it is taxable. b. If it is primarily for the benefit of Motion Tech, then it is not taxable. c. Who benefits most from having a healthy employee?

6.

The company will pay for Rishma to have her personal tax return prepared at a cost of up to $1,000. a. Taxable benefit [IT-470R]

7.

The company provides a group health plan administered by Manulife, including glasses. Rishma will pay about $200 per month and the company will pay about $800 per month. a. Rishma’s payment is not deductible but it will be eligible for a medical expense credit [118.2(2)(q)] b. The company’s portion is not taxable to Rishma – specific exclusion [6(1)(a)]

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Solution 5: Employee Loans, Car Expenses

Benefit would be the sum of: (A) Car loan—prescribed rates 1st quarter 2nd quarter 3rd quarter 4th quarter (B)

7% × $15,000 × 90/365 = 6% × $15,000 × 91/365 = 8% × $15,000 × 92/365 = 7% × $15,000 × 92/365 =

$259 224 302 265

$ 1,050

$1,726 1,496 1,764 1,764

$ 6,750

$173 150 202 176

$ 701

Home purchase loan(1) The lesser of the prescribed rate at the time of the loan (i.e., 7%) and the prescribed rate per quarter. 1st 2nd 3rd 4th

7% × $100,000 × 90/365 = 6% × $100,000 × 91/365 = 7% × $100,000 × 92/365 = 7% × $100,000 × 92/365 =

(C) Other loan 1st 2nd 3rd 4th

7% × $10,000 × 90/365 = 6% × $10,000 × 91/365 = 8% × $10,000 × 92/365 = 7% × $10,000 × 92/365 =

$8,501 Less amounts paid(2) (a) 6% × $15,000 × 365/365 . . . . . . . . . . . . . .. . (b) 4% × $100,000 × 365/365 . . . . . . . . . . . . . .. . (c) 7% × $10,000 × 365/365 . . . . . . . . . . . . . .. .

$ 900 4,000 700

5,600 $ 2,901

The Act would deem $150 of the car loan interest ($1,050 - $900) to be paid in the year and, therefore, eligible for an interest deduction, since the interest was deemed to be paid within 30 days of the year-end, as required. An Interpretation Bulletin indicates that the deemed interest expense must be prorated for employment use. 27,000 km 45,000 km

ITA: 80.5 ITA:8(1)(j), 80.4(1)(c)

IT-522R, par. 27

× $150 = $90

The interest deduction provision would deny a prorated deduction of the $900 paid on January 15 of the following year, since it was not paid in the taxation year in question. However, this amount would be eligible for a deduction in the following taxation year to the extent of the business use. The interest limitation restricts the interest to the lesser of (a) $90 and (b) $300 × 365/30 × 27,000/45,000 = $2,190.

ITA:8(1)(j)

ITA:67.2

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—NOTES TO SOLUTION (1)

If this loan had been as a consequence of an employment relocation, Division C of the Act would have provided a deduction for five years, equal to the imputed interest benefit on the first $25,000 of the ‘‘home relocation loan’’, as defined. As a result, in this particular case, the overall benefit on the housing loan would have been reduced by $1,688 (i.e., $25,000/$100,000 of $6,750). See Chapter 10 for a complete discussion of this provision. The ‘‘lesser of’’ comparison is made on a quarter-by-quarter basis.

ITA:110(1)(j), 248(1)

(2)

The interest benefit is calculated on an aggregate basis. Any excess interest payment on one loan effectively reduces the deemed interest benefit on the other loans.

ITA:80.4

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Solution 7: Employment Expenses—Travel Allowances and related expenses: There are two conditions that must be met in order to permit the allowance to be excluded from income: (a) the allowance must relate to travel outside of the municipality in which the employer’s office is situated; (b) the allowance must be a reasonable amount. The $10,000 accommodation allowance is a taxable allowance, since the amount is an unreasonable amount on the assumption that the incurred expenses of $12,000 were reasonable. Therefore, she is entitled to a deduction, since she meets the other conditions of this paragraph; namely, she ordinarily travels in respect of her employment duties and is required by her employment contract to pay for her own expenses. Total accommodation expenses Less: disallowed meal portion (50% X $4,500)

$12,000 2,250 $ 9,750

The car expenses are deductible since she meets the conditions of this paragraph which are quite similar to paragraph 8(1)(h), described above, to the extent of the following calculations: Gas Maintenance Capital cost allowance (1/2 × 30% × $30,000 × 1.13) Insurance Licences Interest — lesser of: (a) $4,000 (b) $300 ×

361 days 30

= $3,610

$1,500 500 5,085 1,200 90

$3,610 $11,985

Deductible car expenses: 15,000 km 20,000 km

X $11,985

= $8,561

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Solution 9: Employed Versus Self-Employed—Chow The facts in this case are very similar to those in the Wiebe case [Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025 (F.C.A.)]. In the Wiebe case, the company had been treating the workers as self-employed contractors. The CRA believed the workers to be employees and assessed the company for failure to withhold employment source deductions. The Tax Court of Canada agreed with the CRA and the company appealed. The case was decided on the basis of the economic reality test. The Federal Court of Appeal held that the economic reality test really encompasses the control test and the integration or organization test. As well, ownership of tools and the chance of profit or risk of loss must be considered. It is not necessary that all tests be independently satisfied. The economic reality test is decided on the basis of the overall scheme and the relative importance of each of these factors. (1) Economic Reality or Entrepreneur Test (a) Control Test Taken in isolation, the control test is indecisive on these facts. The workers had a fair degree of autonomy in that they could accept or refuse specific assignments, could choose when and how to do the jobs they accepted, within reason, and were not required to report to a specific workplace. This is indicative of self-employment. On the other hand, the company assigned the jobs to the installers and had the right to require defective work to be fixed by the workers and the workers were required to comply with this. This aspect of control is more indicative of an employer relationship. As a result, the control test does not distinguish the case of employed versus selfemployed very well. (b) Ownership of Tools The ownership of tools test is indicative of self-employed status. Each worker supplied the majority of the required tools, including the truck to transport the doors. Although the company would supply certain specialized equipment on request, this was considered ancillary to the basic ownership responsibility. Interestingly, the Court did not address the ownership of the doors and component parts, either under this or any of the other tests. The rationale for this exclusion may be that the supply of such parts was unique to the company’s business, while the tools necessary to install or repair such parts could be used by the workers for any other assignments they undertook. (c) Chance of Profit, Risk of Loss The chance of profit, risk of loss test would also indicate self-employed status. Although the fee provided for each job was decided primarily by the company, the worker had some control over whether he or she would make a profit or incur a loss. If the worker was efficient and accepted more jobs, his or her chance for profit increased. Adversely, if the worker was careless and was required to redo much of his or her work, the risk of loss increased. (2) Integration or Organization Test The lower court decision was based largely on the application of the integration or organization test. The Tax Court of Canada decided that, without the workers, the company was unable to provide the services which were, in essence, its business. Therefore, the workers were so integral to the business that they had to be considered employees, according to this reasoning. The Federal Court of Appeal rejected this approach. The appeal court ruled that the integration test must be applied from the workers’ perspective and not the company’s perspective. Although the workers may have been integral to the company’s business, there was nothing to suggest that the company’s business was integral to the workers. That is, the facts did not indicate that the workers could not carry on the business of installing and repairing doors or performing similar services in the absence of the company’s contracts. Taking this perspective on the test would suggest self-employed status on the basis of the facts of this case.

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Introduction to Federal Income Taxation in Canada

(3) Specific Result Test This test was not considered by either court. Applying the test to these facts would seem to indicate selfemployed status. The workers were hired for a specific task — to install or repair a specific door. Although the worker may be hired for a number of installations, the worker was hired for a specific project, not for an indeterminate period of time. Conclusion On the basis of the facts and the application of the combined tests, the Federal Court of Appeal ruled that the economic reality of the relationship of the workers to the company was that of independent contractors. Based on the findings in the Wiebe case and striking similarity in the facts, it would appear that the installers at Chow will be considered independent contractors.

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Solution 11: Calculate Employment Income Employment Income Section 5 — Gross salary Section 6 — Provincial mandatory public health care (Note 1) Hawaii trip Section 7 — Stock option benefit (Note 2) Section 8 — Registered pension plan Income from employment

$59,000 0 6,000 7,000 (3,000) $69,000

Notes: 1. The CRA states at paragraph 41 of IT-470R that public health care premiums for a provincial hospital insurance plan or a provincial medical care insurance plan that the employer is required to pay by law are not a taxable benefit. A provincial employer health tax is not considered to be a taxable benefit either. 2.

Stock option benefit FMV at exercise date Employee cost Taxable benefit

= =

$19 × 1,000 $12 × 1,000

= =

$19,000 (12,000) $ 7,000

Since Erin exercised her option after March 4, 2010, she is not able to elect to defer the recognition of the income until she disposes of the shares. Therefore, she must report the stock option benefit in 2014. 3. 4. 5. 6. 7. 8.

The charitable donations, CPP, and EI are personal credits and not deductions. The private dental plan is specifically excluded from income. The reimbursement of moving expenses will reduce her moving expense claim; a reimbursement of actual costs is not a taxable benefit. The club membership dues are primarily for the benefit of her employer. The bonus declared and not paid will be taken into income when received. The hard hat and safety glasses are not for personal use.

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Solution 13: Compensation Alternatives—Forgivable Loan, Stock Option (a) The stock option benefit is $500,000 (100,000 shares at $5 per share). It is planned that the shares will be sold in the same year that the option is exercised. The ACB of the shares will equal their sale price ($15), so no capital gain arises. A deduction of 50% of the stock option benefit will be allowed under paragraph 110(1)(d), so only $250,000 of the option is ultimately taxed. (b) Under subsection 6(3), the signing bonus is taken into employment income in the year in which it occurs, so the player would recognize an additional $300,000 in his employment income figure. Under subsections 6(9) and 6(15), the employee loan will carry with it two tax burdens. The first will arise annually to account for the taxable benefit received by virtue of the interest-free component. The taxable benefit is calculated as the loan amount multiplied by prescribed rates. The second tax consequence arises in the year that the loan is forgiven. Under subsection 6(15), the amount of the forgiven loan is included in the calculation of employment income for the year in which it is forgiven. (c) Assuming the loan is not forgiven, the deemed interest benefit of the loan for: (i)

2014 taxation year:

$100,000

×

(ii)

2015 taxation year:

$100,000

×

46 days 365 days

365 days 365 days

×

6%

=

$756

×

6%

=

$6,000

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Introduction to Federal Income Taxation in Canada

Solution 15: Allowance Versus Reimbursement Bing should be not be indifferent between the two compensation packages, as (a) is clearly superior. In (a), the allowance he receives would not be included as a taxable benefit in his income because it is a reasonable amount. Therefore, he will be fully compensated for the operating expenses and depreciation on his Jeep without paying any additional taxes. In (b), Bing will be fully compensated for his operating expenses because the employer will fully reimburse him. This would not be considered a taxable benefit as he had to account for his actual expenses. He can also deduct the employment portion of CCA on his Jeep yearly (65% × $3,000). The tax savings from claiming the capital cost allowance will be $878 (assumed tax rate of 45%, so 45% × 65% × $3,000). The total compensation then under (b) is $4,878. There will be a rebate of the GST/HST component in the CCA claimed. The rebate will reduce Bing’s CCA claim in the following year, when the rebate is received. Therefore, the reasonable allowance of $6,000 is superior. Also, when examining the administrative requirements of each package, Bing should prefer (a), although he is still required to keep a detailed log of kilometres driven for employment. For alternative (b), he would need to keep a record of all operating expenses he incurs and a detailed log of all kilometres he drives for employment and personal purposes. In (a), he would not have to keep any records (other than a log for kilometres driven); therefore, it would be a much simpler system for him.

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Solution 17: Calculate Employment Income (A) Employment income Salary — gross .......................................................................................... $ 80,000 Group term life insurance ........................................................................... 250 Trip to Europe ........................................................................................... 6,000 Income protection payments ($12,000 – $2,300) ......................................... 9,700 2,500 Stock option benefit (1,000  ($4.50 – $2.00)) ............................................ $ 98,450 Less: Registered pension plan .................................................................... $ 5,500 Professional fees ................................................................................ 800 (6,300) Employment income .................................................................................. $ 92,150

ITA Reference 5 6(1)(a) 6(1)(a) 6(1)(f) 7 8(1)(m), 147.2(4)(a) 8(1)(i)

(B) (i) Private health plans such as those offered by Sun Life and Liberty Mutual are statutory exemptions [par. 6(1)(a)]. In addition, Health Services tax levies, such as those in Manitoba, Ontario, and Newfoundland, are not taxable benefits. (ii) Membership fees paid by the employer for social clubs may not be included in the income of the employee if the membership was principally for the employer’s advantage rather than employee’s [IT470R, par. 34]. (iii) There is no stock option benefit when the option is granted. The sale of shares in December results in a capital gain of $0.50 per share (i.e., $5.00 – $4.50), which is not employment income. (iv) Registered retirement savings plan — Subdivision e, not Subdivision a deduction. (v) Income tax not deductible — Subsection 8(2). (vi) Charitable donation — Division E tax credit, (vii) CPP contributions and El premiums are tax credits deductible under Division E. (C) HST rebate

/113 of professional fees (13/113  $800) ...........................................................................................

$92

Par. 6(8)(c) employment income inclusion in year of receipt of rebate ................................................

$92

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Solution 19: Calculate Employment Income With Stock Option Income from Employment Base salary Gross commissions Day care subsidy Stock option benefit Less: Employment expenses Meals and entertainment Hotel and travel Airfare Union dues Total deductions Income from employment

$32,000 23,500 1,200 700

$57,400

( 1,150) ( 1,780) ( 1,800) ( 280)

ITA: 5(1) ITA: 5(1) ITA: 6(1)(a) ITA: 7(1) ITA: 8(1)(f) ITA: 8(1)(f) ITA: 8(1)(f) ITA: 8(1)(i)

( 5,010) $52,390

Notes: 1. Stock option benefit = ($2.50 - $1.80) × 1,000 = $700. 2.

Meals and entertainment: 50% × $ 2,300 (subsection 67.1(1)).

3.

Stock option deduction = ½ × $700 benefit. This is not a deduction from employment income. Rather, it is a subsection 110(1) deduction from net income for tax purposes in the computation of taxable income.

4.

EI and CPP qualify for a non-refundable tax credit against taxes payable.

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Solution 21: Calculate Employment Income—Comprehensive Benefits (A) Employment income Salary — Gross ..................................................................................... Disability payments — Amount received ............................................... $ 1,600 Less amount paid (2011–2014) .............................................................. (350) Preparation of 2013 income tax return(1) ................................................ MBA tuition fees(1) ................................................................................ Director’s fee ........................................................................................ Christmas gift(2) ..................................................................................... Imputed interest(3).................................................................................. Gas allowance ($250  12) .................................................................... Standby charge(4) ................................................................................... Car operating costs(4) ............................................................................. Bahamas condo — Fair market value(1) .................................................. $ 500 Less amount paid................................................................................... 100

$

90,000 1,250 424 1,000 2,000 200 308 3,000 9,240 4,320

$

400 112,142

Sec. 5 Par. 6(1)(f) Par. 6(1)(a) Par. 6(1)(a) Par. 6(1)(c) Par. 6(1)(a) Ssec. 6(9); 80.4 Par. 6(1)(b) Par. 6(1)(e); 6(2) Par. 6(1)(k) Par. 6(1)(a)

(B) Omissions (i) Income taxes are not deductible under section 8 [ssec. 8(2)]. (ii) CPP and El provide tax credits under Division E. (iii) Group accident disability insurance premiums are not deductible under section 8 [ssec. 8(2)]. (iv) Employer-paid group accident disability insurance premiums are not a taxable benefit [par. 6(1)(a)]. (v) The employer-paid retirement planning advice is not a taxable benefit [clause 6(1)(a)(iv)(B)]. (vi) The employer-paid tuition for the two-day computer workshop is not a taxable benefit [IT-470R, par. 19]. (vii) A 30% employee discount which is available to all employees is not a taxable benefit, since the price is not below cost [IT-470R, par. 27]. (viii) According to ITTN No. 40, frequent-flyer points are not considered to be taxable benefits. (See ¶3,125.70 of the text.) (C) If there was no company-owned car provided to Anita, there would be no standby charge ($9,240) or operating cost benefit computed under paragraph 6(1)(k) ($2,400). Instead, paragraph 6(1)(l) would apply to compute Anita’s operating cost benefit as:

16,000km  $2,920  $1,869 25,000km —NOTES TO SOLUTION (1) These issues are discussed in Interpretation Bulletin IT-470R, paragraphs 10, 14, 18, 19, and 26. (2) To meet the administrative exception, the gift cannot be cash or near cash. This was a cash gift. (3) 7%  $8,000  76/365 .................................................................................................................. $ 117 6%  $8,000  9l/365 ................................................................................................................... 8%  $8,000  92/365 .................................................................................................................. 7%  $8,000  92/365 ..................................................................................................................

Less: 3%  $8,000  35l/365 .........................................................................................................

120 161 141 $ 539 (231) $ 308

Solutions to Chapter 3 Assignment Problems (4) Standby charge [par. 6(1)(e) and ssec. 6(2)]:

20,004km  2%  12  $38,500  $9,240 20,004km Operating cost including HST benefit [par. 6(1)(k)]: 16,000 km  $0.27 = $4,320 Anita is not eligible for either the standby charge reduction or the subparagraph 6(1)(k)(iv) election method since she does not use the automobile more than 50% for business purposes, which is required for these provisions.

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Solutions to Chapter 3 Assignment Problems

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Solution 23: Calculate Employment Income—Comprehensive Benefits, Auto Expenses Employment income Gross salary....................................................................................................$ Rent ($1,200  .75  12) ................................................................................. Bonus............................................................................................................. Monthly allowance for incidentals ($150  12) ................................................ Imputed interest [$8,000  .06  90/365](1) ..................................................... Group income protection benefits [$11,500 − $2,880]] .................................... Less: RPP — Current service(2) ................................................... Union dues ........................................................................ Travel expenses (related to monthly allowance) .................. Car expenses(3) ...................................................................

$

5,000 800 1,200 9,816

$ $

115,000 10,800 12,500 1,800 118 8,620 $148,838

16,816 132,022

Reference Sec. 5 6(1)(a) Sec. 5 Par. 6(1)(b) Ssecs. 6(9), 80.4(1) Par. 6(1)(f) Par. 8(1)(m) Spar. 8(1)(i)(iv) Par. 8(1)(h) Pars. 8(1)(h.1), (j)

Excluded items (i) The 25% of the monthly rent on Anita’s home in Toronto that she reimburses to the company does not form part of the taxable benefit calculation as it is not paid by her employer. (ii) Income tax withheld is not an allowable deduction under section 8 by virtue of subsection 8(2). (iii) CPP and El premiums paid are not an allowable deduction under section 8 by virtue of subsection 8(2), but these amounts will be allowed as tax credits under Division E. (iv) Contributions to the company group RRSP are not deductible under section 8 by virtue of subsection 8(2) but are deductible under section 60 of the Act subject to the applicable limits. (v) Group accident income protection insurance premiums are not deductible under section 8 by virtue of subsection 8(2). (vi) The monthly rent reimbursed by Anita to the company is not deductible under section 8 by virtue of subsection 8(2). (vii) The company payment of the board and lodging costs when Anita is out of town is not a taxable benefit as it meets the condition for exemption set out in subsection 6(6) because: • her duties at these locations are temporary; • she maintains a principal place of residence at another location (Toronto) that is available to her throughout her period of stay at these out-of-town locations and her principal place of residence is not rented to any other person during these periods; • due to the distances involved, she could not reasonably be expected to return to her principal place of residence in Toronto from these out-of-town locations on a daily basis; and • she is never at an out-of-town location for less than 36 hours. (viii) The provision of boots and company uniform is not a taxable benefit by virtue of IT-470R, paragraph 29. (ix) The company contribution to a registered pension plan is not a taxable benefit by virtue of paragraph 6(1)(a)(i). (x) The fitness club membership dues paid by the company would not be taxable by virtue of paragraph 6(1)(a) if the membership is principally for the employer’s advantage than for Anita’s personal enjoyment [IT-470R, par. 34]. If the membership was determined to be principally for Anita’s personal enjoyment, the taxable benefit is $805. HST rebate 13 /113 of section 8 deductions excluding zero-rated and exempt items: Car expenses deducted under pars. 8(1)(h) and (j) (see Note (3)) ............................................... Less: Acquired car costs with no HST, and CCA: Insurance (exempt) ....................................... Licence (exempt) .......................................... Interest CCA (see below)

$

$

1,333 90 118 1,207 2,748



35,000km  40,000km

$

9,816

(2,405)

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Leased car costs with no HST: Insurance (exempt) ......................................... Licence (exempt) ............................................

$ $

Add: CCA on car ..........................................................

$

667 30 697

1,207





18,000km  20,000km

$

(627) 6,784

$ $

1,056 7,840 902

35,000km  40,000km

HST rebate = 13/113  $7,840 ......................................................................................... Employment income inclusion in year of receipt of rebate [par. 6(8)(c)]: $6,784  $902  $781 $7,840

Capital cost reduction in year of receipt of rebate [par. 6(8)(d)]: $1,056  $902  $121 $7,840 —NOTES TO SOLUTION (1) The imputed interest is based on total days the loan is outstanding for 2014 excluding the day that the loan was actually repaid [31 + 28 + 31]. (2) Anita’s contribution would be fully deductible if both her contributions and Car Parts Inc.’s contributions did not exceed the actuarially permitted amounts [par. 147.2(4)(a)]. (3) Car expenses: Acquired car Lease costs (see Note (a)) ........................................................................ N/A Gasoline and oil ...................................................................................... $ 2,880 Insurance ................................................................................................ 1,333 Maintenance............................................................................................ 400 Licence ................................................................................................... 90 Interest (see Note (b)) .............................................................................. 118 CCA ....................................................................................................... 1,207 $ 6,028

Leased car $ 2,668 1,440 667 240 30 N/A N/A $ 5,045

Deductible car expenses [pars. 8(1)(h) and 8(1)(j)] Acquired car 35,000km  $6,028  40,000km

$

5,275

$ $

4,541 9,816

Leased car 18,000 km  $5,045  20,000 km

Total car expenses

Note (a): The car lease costs are subject to the restrictions in section 67.3. Lease cost — Lesser of: (a)

($800  1.13  122/30) – $0

(b)

$920  4 months   $30,000  1.13 85% of the greater of :

=$

3,676

=$

2,668

(i) $30,000  1.13  100/85 = $39,882 (ii) $55,000

Note (b): The imputed amount of interest is deductible by virtue of section 80.5. The amount is subject to the restriction under section 67.2 that is the lesser of $900 (i.e., $300  90/30) and the $118 deemed paid. The lesser amount is $118.

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Solution 25: Employed Versus Self-Employed Issue To determine whether Sandra is an employee of Global Investments or an independent contractor. If Sandra is considered an employee for tax purposes she will be somewhat restricted in her ability to deduct expenses incurred to earn income. Analysis The courts generally consider three tests: 1. Economic Reality or Entrepreneur Test (a) Control Test  Based on this test, Sandra appears to be an employee because she is not allowed to work for anyone else, and must obtain the VP’s signature to close investment agreements.  Although she does have the ability to bill the company for services rendered, she appears to be accountable to the VP. (b) Ownership of Tools  She must use her own office, supplies, and equipment.  She must pay her own travel and entertainment expenses and have liability insurance. Global provides the research and “back room” expertise. (c) Chance of Profit, Risk of Loss  Who carries the business risk?  Although Sandra has access to supplies and promotional materials from Global, she is responsible for carrying her own business insurance, locating her own sales clients, and using her own supplies and equipment. She was also required to purchase a license to operate for $10,000.  It is evident that Sandra carries the business risk.  She doesn’t get paid unless she sells investments. 2. Integration and Organization Test  This test attempts to identify whether Sandra is an integral part of the company.  It appears that she is not an integral part because her contract will not be renewed unless she meets the sales quota.  The newspaper announcement advertising Sandra as a new sales associate points to her being part of the organization.  All promotional materials have the company’s letterhead. 3. Specific Results Test  Must have sales of $750,000 to continue employment.  Not contract oriented.  Sandra is paid at the completion of each sale. Conclusion Sandra is likely an independent contractor for the following reasons:  She carries the majority of business risk.  She purchased a license, which gives her the right to operate her own sales office. As a self-employed person, Sandra will be able to claim expenses she wouldn’t be entitled to as an employee. These include her office in the home costs, CCA on her computer, printer and fax machine, and amortization of her $10,000 licence cost.

Solutions to Chapter 3 Assignment Problems

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Type 2 Problems Solution 27: Employed Versus Self-Employed, Resident Issue To determine whether Sherry should object to her notice of assessment that claims that she is a resident of Canada for tax purposes. Is she an employee or an independent contractor? How should the fringe benefits be treated? Residency If Sherry were to go to court, the judge would consider the facts that would indicate that her continuing state of relationship is with Canada. Facts to support residency:  stored furniture at mother’s;  kept health care card, Visa, and bank account in Canada;  cheques deposited in Canadian bank account;  boyfriend visited her for six months and then returned; and  letters indicated that she wanted to come home. Based on the above facts, it is obvious that Sherry did not sever all of her ties and, during her absence, her intentions to return home were obvious. Employer vs. Independent Contractor  Sherry was employed with TSE prior to going overseas and considered herself as part of the TSE team. For example, she used TSE letterhead and business cards.  The Iraq government contracted with TSE, and not directly with Sherry. Therefore, it would follow that Sherry conducted herself more like a TSE employee by not incurring any financial risk. She also went to Iraq under the direction of TSE (Control and chance of profit/risk of loss tests). Conclusion  Sherry is a resident of Canada between the period of March 2012 and October 2013; therefore, she must pay tax on her worldwide income.  Since Sherry is also considered a full-time employee of TSE, her income would include the $12,000 received from TSE, together with the value of fringe benefits. Some of the personal living expenses may not be considered a taxable benefit, because Sherry is living in a remote location. However, the length of stay may prevent her from being viewed as living in a remote location.  Sherry may be entitled to an overseas employment tax credit, which would essentially allow $80,000 of employment income to be tax exempt if certain conditions are met. This credit is discussed further in Chapter 10. Assuming that she was granted the overseas employment tax credit, it is recommended that a notice of objection not be filed. This avoids professional legal fees and administration costs. Interest and penalties will continue to accrue during the period of objection, unless the income tax is not outstanding.