CHAPTER 4

INCOME FROM EMPLOYMENT

Key Concept Questions
QUESTION TWO
Mikes employer has a generous benefit program. During the current year his employer
provided him with the following benefits:

A contribution to the company RPP of $6,000.

Group term life insurance coverage of $100,000.The premium for the coverage was
$400.

Group sickness or accident insurance coverage. The premium paid was $550.

A private health services plan that provided Mike with dental, vision, prescription
drugs, and private-hospital room coverage. The premium was $800.

Mental health counselling for Mikes daughter. The psychologists fee was $1,500.

Fitness club membership for Mikes personal enjoyment. The membership dues were
$900.

Public transit pass for city bus. The annual cost was $800.

Determine the amount to be included in Mikes employment income for tax purposes.
Income tax reference: ITA 6(1)(a), 6(4).

KC 4-2
[ITA: 6(1)(a), 6(4) Taxable benefits]
Mike must include $2,100 in his income for tax purposes.
Employer-paid premium for life insurance coverage [ITA 6(1)(a), 6(4)]
Club membership dues, not principally for the employers benefit [ITA 6(1)(a),
T4130 page 23].
Public transit pass

$ 400
900
800
$2,100

The following benefits are excluded from income for tax purposes:

Employers contribution to the RPP [ITA 6(1)(a)(i)]

Employer-paid premium for group sickness or accident insurance coverage [ITA 6(1)(a)
(i)]

Employer-paid premium for a private health insurance plan [ITA 6(1)(a)(i)] and

Counselling services for mental health for Mike or his relatives, paid for by his employer
[ITA 6(1)(a)(iv)].

QUESTION THREE
Jennifers employer provided her with the following gifts and awards in 20X9:
Golf shirt with the employer logo (cost amount)

$ 15

Birthday gift monetary restaurant gift certificate

75

Reward for meeting sales performance holiday weekend

400

10-year anniversary award (golf club). Her last anniversary award

was on her 5th anniversary with the employer

275

Wedding gift (cutlery)

300

Innovation and excellence award (tickets to a concert)

250

Holiday season gift (artwork)

150

Briefly describe the tax consequences to Jennifer for the above gifts and awards. Income tax
reference: ITA 6(1)(a); CRA Income Tax Technical News (June 11, 2009)

KC 4-3
[ITA: 6(1)(a); CRA Income Tax Technical News, June 11, 2009 Taxable Benefits]
Tax consequences in accordance with CRA published administrative policy:

The golf shirt is not a taxable benefit since it is of an immaterial/nominal value.

The gift certificate is a taxable benefit since it is a near-cash gift.

The weekend holiday given to the employee for meeting the sales performance target
is a taxable benefit. Performance-related rewards are considered to be a form of
remuneration and are taxable.

The 10-year anniversary award in not a taxable benefit. Jennifer has not received an
anniversary award for the past five years of service and the total value of the gift was
no in excess of $500.

The total value of the remaining gifts and awards (wedding, innovation and excellence
and holiday season) amount to $700. Jennifer will be considered to have received a
taxable benefit in the amount of $200 ($700 $500).

Note that although the 10-year service/anniversary award was $225 less than the allowable
$500 threshold, this shortfall cannot be applied to offset the taxable benefit arising as a result
of the excess value of the annual gifts and awards over $500.

QUESTION FOUR
On September 1 of the current year, Teresa will have worked for A Ltd. for three years and will
be entitled to a company car as of that date. For A Ltd. to purchase the car that
Teresa wants they will have to pay $48,000, including tax. If the car is leased, the monthly
lease cost will be $950, including tax. In either case, A Ltd. will pay all of the operating costs for
the car which are expected to be $2,500 annually. Teresa anticipates that she will drive the car
2,000 km per month of which 200 km will be for employment purposes. Income tax reference:
ITA 6(1)(e), (k), 6(2).
A. Determine the amount to be included in Teresas employment income for the current
year (i) if A Ltd. purchases the car, and (ii) if A Ltd. leases the car.
B. If in the following year, Teresa drives the car 12,000 km for employment purposes and
8,000 km for personal use, determine the amount to be included in her income for tax
purposes, assuming the car is purchased by A Ltd.
[ITA: 6(1)(e), (k), 6(2) Automobile benefits]
A. (i) A Ltd purchases the car for $48,000:
Standby charge [ITA 6(1)(e), 6(2)]
$48,000 x 2% x 4 months
Operating benefit [ITA 6(1)(k)]
$0.27 x 7,200 personal km
(2,000 km 200 km = 1,800 x 4 months = 7,200)

$3,840
1,944
$5,784

(ii)

A Ltd leases the car for $950 per month:

Standby charge [ITA 6(1)(e), 6(2)]
2/3 x $950 x 4 months
Operating benefit [ITA 6(1)(k)]
$0.27 x 7,200 personal km
(2,000 km 200 km = 1,800 x 4 months = 7,200)

$2,533
1,944
$4,477

B.

A Ltd purchases the car for $48,000 and Teresa drives more than
50% of the km in the year for employment purposes:
Standby charge [ITA 6(1)(e), 6(2)]
$48,000 x 2% x 12 months x 8,000/(1,667 x 12 mo)
Operating benefit [ITA 6(1)(k)] - lesser of
50% x $4,607 = $2,304
$0.27 x 8,000 personal km = $2,160

$4,607

2,160
$6,767

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.

QUESTION EIGHT
In Year 1, a public company granted an employee resident in Canada an option to purchase
1,000 common shares of the employer company for $10 per share. The fair market value of
the shares at the date the option was granted was $8 per share. No other stock options were
granted to this employee during Year 1. In Year 2, when the shares were worth $16 per share
the employee exercised the option and purchased all 1,000 shares.
In Year 5, the employee sold the 1,000 shares for $38 per share. The shares do not have any
special dividend rights or restrictions.
Discuss the income tax consequences to the employee from these transactions (show
calculations). Income tax reference: ITA 7(1), 110(1)(d).

KC 4-8
[ITA: 7(1), 110(1)(d) Stock options]
In this case, the employee qualifies for the stock option deduction in computing taxable
income, since the shares are ordinary common shares, the employee was at arms length with
the employer when the option was granted and the value of the shares when the stock option
agreement was entered into did not exceed the exercise price of the option [ITA 110(1)(d)].
Year 2 (shares purchased):
Employment income Value of shares at date acquired (1,000 x $16)
Option purchase price (1,000 x $10)
Employment income [ITA 7(1)]
StStock option deduction (taxable income calc.)
(1/2 x $6,000 employment benefit)

$16,000
(10,000)
$6,000
$(3,000)

Year 5 (shares sold):

Selling price (1,000 x $38)
Value at share purchase date (1,000 x $16)
Capital gain
Taxable capital gain

QUESTION TEN

$38,000
(16,000)
$22,000
$11,000

Julie is required to use her own automobile and pay for all her travelling expenses in carrying
out her duties of employment. She purchased a new car on January 2nd of the current year for
$45,000 (plus tax) and incurred the following expenses during the year:
Gasoline
Repairs and maintenance
Parking (employment related)
License and insurance
Interest on loan to acquire car (12 months)

$2,100
400
100
2,300
4,100

Julie drove her car 20,000 km in the current year of which 8,000 km were driven in carrying out
her duties of employment.
Calculate the maximum tax deduction available to Julie for her car for the current year.
(The CCA rate for automobiles is 30%, except in the first year when it is only 15%.) Income
tax reference: ITA 8(1)(h.1),(j), 13(7)(g), 67.2.

KC 4-10
[ITA: 8(1)(h.1), (j), 13(7)(g), 67.2 Automobile deductions]
The maximum tax deduction available to Julie for her car is $5,510, calculated as follows:
Automobile operating costs [ITA 8(1)(h.1)]:
Gasoline
Repairs & maintenance
License and insurance
prorate for employment use
Parking (all employment)
Automobile CCA and Interest expense [ITA 8(1)(j)]:
CCA $33,900 * x 15%
Interest on car loan limited [ITA 67.2]
o $300/30 x 364 days = $3,640
o actual $4,100
prorate for employment use

$2,100
400
2,300
4,800
x 8/20
1,920
100

$2,020

$5,085
3,640
8,725
x 8/20

3,490
$5,510

* The maximum cost of an automobile available for CCA is $30,000 plus applicable taxes. The
applicable taxes are assumed to be HST of 13%. Therefore, CCA is calculated on $33,900
($30,000 x 1.13) even though the car cost $45,000 plus tax.

Problems
PROBLEM ONE

Bill Watkins is a chartered accountant. He carried on a professional business as a tax

consultant for 12 years. By the end of 20X0, the practice had grown very large. Watkins was
overworked and under pressure to hire additional staff or take a partner. Watkins was
interested in education and several years earlier had contracted with a publisher to write a
book on taxation for university students. Because of the pressures of his practice, this project
made little progress.
To optimize his work life, Watkins decided to close his professional practice and enter into an
arrangement with Anthony and Anthony, a national firm of chartered accountants. According to
the agreement, he would work a minimum of 600 hours per year for the firm; he would also be
free to pursue his writing and other interests. He would provide the 600 hours mainly during
the winter months and would not be expected at the office every day of the week.
Anthony and Anthony made a formal announcement in the newspaper that Watkins was now
associated with their firm and provided him with business cards stating both his name and the
firms. The firm did not give him a specific title, though most of its employees had one,
whatever their level. The firm did provide him with an office (of the same size as was given to
partners) and a secretary at no cost to him.
As a tax consultant, Watkins met with the clients of the firm and corresponded with them under
the firms letterhead. Jobs were assigned to him by any partner who required his services.
Usually, he charged any time spent on a client directly to the particular partners account; that
partner, in turn, billed the client and collected the fees.
Anthony and Anthony charged clients for Watkinss time at $150 per hour. The agreement
stated that he was to be paid $100 for each hour charged to a client whether the client paid the
fee or not. At the end of each month, Watkins prepared an invoice requesting that the firm pay
$100 for each hour charged that month.
Throughout the year, Watkins paid for his own parking and for his own subscriptions to several
tax services, the latter being necessary for him to carry out his duties. Whenever the firm held
a social function, Watkins was invited. In 20X1, he gave three speeches to various business
groups and was always introduced as Bill Watkins, a tax consultant with Anthony and
Anthony.
In 20X1, Watkins worked 820 hours for the firm. He spent the balance of his working time
writing his book and giving tax seminars to various professional groups.
Required:
Was Watkins employed or self-employed in 20X1? Give reasons to support your conclusions
and reasons to support the opposing view.

Solution to P 4-1
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 leading cases are:

Sagaz Industries Canada Inc. v 671122 Ontario Ltd., 2001 SCC 59

Wolf v The Queen, 2002 FCA 96

Royal Winnipeg Ballet v. MNR., 2006 FCA 87

Dynamic Industries v. The Queen , 2005 FCA 211
Wiebe Door Services Ltd. v MNR, 2 FC

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 employers business are as follows.
1) Control: the level of control the employer has over the workers activities will always be
a factor. Where an employee/employer relationship exists, the employer has the right
to tell the employee, not only what is to be done, but, where, when, and how to do it.
The fact that the employer does not exercise this right is not important. Sagaz
Industries and Wolf state that the importance of control over how work is done
diminishes as the skill of the worker increases. Where relevant, control is compared to
the control that the employer exerts over its employees, doing similar work.
2) Ownership of Tools: An independent contractor carrying on business normally supplies
the equipment and helpers required to do the job; an employer normally provides the
tools to an employee. The value of the investment in tools is considered. See, for
example, Gagnon v. R, 2007 FCA 33, where the taxpayers $1,000 investment in tools
was normal for workers employed in the industry in union jobs and did not assist the
taxpayers case.
3) Chance of Profit, Risk of Loss: An independent contractor carrying on business risks
incurring losses due to bad debts, damage to equipment or materials, unforeseen
delivery delays, and other operating costs, while at the same time having an
opportunity for profit. The method of compensation is relevant (a fixed fee, piece

work or commission basis would indicate independent contractor status,

whereas an hourly rate would be an indicator of employee status).
4) Integration: This test examines whether the worker is economically dependent on the
payer organization and how integral to the business is the worker. Evidence of the
worker receiving the economic rights, privileges and benefits normally enjoyed by
employees would be facts supporting employment status. Benefits normally enjoyed by
employees include job security, paid vacation and statutory holidays and access to
employee-type benefits. Evidence of the worker having other clients (or the ability to
have other clients) would support self-employed status. See, for example, W.B. Pletch
Co. v. R, 2005, TCC 400 and Dynamic Industries v. R , 2005 FCA 211.
In summary, an employer controls (or has the right to control) the employees hours and
working conditions; the employee uses the employers equipment and facilities; the employee
does not share the employers risk, the employee is an integral part of the business; and the
employee may receive normal employee benefits. Where these factors are missing, the
worker is likely an independent contractor earning business income.

The decision of the Federal Court of Appeal in Royal Winnipeg Ballet v. MNR., 2006 FCA 87,
and in Wolf v The Queen, 2002 FCA 96 highlight the importance of the parties intention and
the existence of a written contract as evidence of their intention, as long as the contact is in
accordance with the facts and not a sham.
Watkins
In this case the relationship between Watkins, who provides the service, and Anthony
&Anthony who receives the service is difficult to establish.
Factors supporting an employee/employer relationship and that the only business being
carried on is that of Anthony & Anthony:

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 relationship.
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 Anthony & 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.

PROBLEM FOUR
[ITA: 7(1), 110(1)(d)]
Pasqual Melo is employed by a public corporation. On January 1, 20X0, she was given an
option to purchase 1,000 shares of the public corporation for $8 per share (the option
extended for two years).
On December 15, 20X0, she exercised her option and bought 1,000 shares at $8 per share
(total = $8,000).
On June 15, 20X3, she sold the 1,000 shares. The value of the shares at the particular dates
was as follows:
Date option granted
Date option exercised
Date shares sold

$ 8.50
10.00
14.00

Required:
1.

Determine the amount and type of income received by Melo and when that income was
taxable.

2.

How would your answer change if the value of the shares at the date the option was
granted was $8 rather than $8.50?

3.

How would your answer change if the employer were a Canadian-controlled private
corporation?

Solution to P4-4
1. In 20X0, the year in which the option was exercised and the shares purchased the
following employment income would be earned for tax purposes [ITA 7(1)]:
Value of shares on purchase date (1,000 x $10)
Cost of shares acquired (1,000 x $8)

Employment Income

$10,000
(8,000)
$ 2,000

In 20X3, the year the shares are sold

Selling price (1,000 x $14)

Value of shares at purchase date (1,000 x $10)

$14,000
(10,000)

Capital Gain
Taxable capital gain (1/2)

$ 4,000
$ 2,000

2. Since the option is not in the money at the grant date (i.e., the option price is not less
than the grant date value), in 20X0, one-half of the employment income from the stock
option (1/2 x $2,000 = $1,000) can be deducted from net income in computing taxable
income as a stock option deduction [ITA 110(1)(d)].
3. If the employer was a Canadian-controlled private corporation the answer in part 1
would change in two ways:
a. The timing of the recognition of the stock option benefit for tax purposes. The
employment income of $2,000 [(1,000 x $10) (1,000 x $8)] is included in the
taxpayers 20X3 income for tax purposes (the year the shares were sold) rather
than in 20X0 (the year the shares were acquired) [ITA 7(1.1)].
b. The stock option deduction. Because the employee held the shares for at least
two years, when computing taxable income in 20X3, one-half of the employment
income from the stock option (1/2 x $2,000 = $1,000) can be deducted as a
stock option deduction [ITA 110(1)(d.1)].
Note that the taxable capital gain, in this case, may be eligible for the capital gains deduction
as the shares may be qualified small business corporation shares if all or substantially all of
the corporations assets are used in an active business [ITA 110.6(1)].

PROBLEM NINE
[ITA: 5(1); 6(1)(a), (b); 6(4); 8(1)(h), (h.1), (f), (j); 8(2)]
Barry Yuen is district sales manager for a Vancouver-based distribution company. He has
requested that you help him establish his employment income for tax purposes for the 20X3
taxation year. He has provided the following information:
1.

Yuens base salary in 20X3 was $78,000. As sales manager, he is entitled to a small
commission on the sales made by staff under his supervision. He received $7,200 in
such commissions in 20X3, which included $1,000 of commissions earned in late 20X2.
The December 20X3 commissions had been computed as $1,800 and were received in
January 20X4. The employer deducted the following from his salary in 20X3:
Canada Pension Plan contributions
Employment Insurance premiums
Private medical plan premiums

2.

In addition to the above, the employer paid the following to Yuen or on his behalf:
Travel allowance
Group term life insurance premiums for $50,000 coverage
Premiums for a private medical insurance plan

3.

$2,426
914
300

$2,400
600
300

Yuens wife died in late 20X2, leaving him to support three children. In 20X3, he hired a
person at a cost of $9,000 to provide baby-sitting services for the two youngest

children. Following his wifes death, Yuen suffered from depression. As a result, his
employer paid the cost of $3,000 for counselling services and also provided him with
airline tickets costing $2,300 so that he and the children could attend a relaxation
resort.
4.

Yuen uses his own vehicle for employment duties. The vehicle (class 10.1) had an
undepreciated capital cost of $14,000 at the end of 20X2.Yuen paid $4,000 in 20X3 to
operate the car and used it 70% of the time for employment duties.

5.

Yuen incurred the following additional costs relating to his employment:

Promotion (meals)
Purchase of a cellular phone
Lease costs for laptop computer
Golf club dues
Hotel costsout-of-town travel

6.

$ 800
1,200
700
1,000
4,300

When not travelling, Yuen works from an office at his employers place of business.
Increasingly, he has been taking home work to do in the evenings and on weekends.
He intends to set aside a specific room in his house that he will use only for this
purpose. His house costs include property taxes, insurance, utilities, and mortgage
interest. He will also purchase a work desk and chair.

Required:
1.

For the 20X3 taxation year, determine Yuens net income from employment for tax
purposes.

2.

Briefly explain the tax treatment of the intended home-office expenses.

Solution to P4-9
Part 1
Income from employment 20X3:
Salary [ITA 5(1)]
Commissions [ITA 5(1)]
Travel allowance (Note 1) [ITA 6(1)(b)(v)]
Group term life insurance [ITA 6(1)(a); 6(4)]
Travel tickets [ITA 6(1)(a)]
Deduct:
CCA on car [ITA 8(1)(j)]
$14,000 x 30% = $4,200 x 70%
Salesperson expenses [ITA 8(1)(f)]:
Travel (hotel)
Car (operating) - $4,000 x 70%
Promotion - $800 x 50%
Computer lease

Limited to commission income

$78,000
7,200
2,400
600
2,300
90,500
(2,940)
$4,300
2,800
7,100
400
700
$8,200
(7,200)
$80,360

Notes:
1. The travel allowance is unreasonably low compared to Yuens actual employment related
travel expenses. Therefore, the travel allowance is taxable [ITA 6(1)(b)(v)].
2. Yuen has the option of not claiming any deductions under ITA 8(1)(f) and deducting
travel and car operating expenses under ITA 8(1)(h) & (h.1). His deductions would be
$100 less in this case.
3. Items not included in the calculation of employment income:
The $1,800 of commission earned in December, 20X3 is excluded from income
because it was not received until 20X4 [ITA 5(1)].
The private medical insurance premiums of $300 and the $3,000 of counselling
services are specifically excluded as taxable benefits under ITA 6(1)(a).
The child care expenses are not an employment expense [ITA 8(2)] but rather are
deducted (subject to limitations) as other deductions [ITA 63] in the aggregating
formula in section 3.
The golf club dues are specifically not permitted as a deduction. [ITA 8(1)(f) and 18(1)
(l)]. The purchase of a cellular phone is not deductible because as it is a capital item
[ITA 8(1)(f)] and capital cost allowance is not permitted [ITA 8(1)(j) &(p)].
CPP & EI premiums are not deductible [ITA 8(2)]. A credit is available in computing tax
payable [ITA 118.7].
Part 2
No deduction will be permitted for home office expenses because the home office will not be
the place where Yuen principally performs his duties of employment nor will it be used
exclusively to earn employment income and on a regular and continuous basis for meeting
customers [ITA 8(13)].

PROBLEM TEN
[ITA: 5(1); 6(1)(a), (e), (f), (k); 6(2); 7(1); 8(1)(b), (f), (h.1),(m); 8(2); 110(1)(d)]
Charles Ebo was terminated from his employment with QR Ltd. in July 20X6. In November
20X6, he began work as a commission salesperson for AP Ltd., a Canadian public corporation.
Ebo has asked you to help him prepare his 20X6 tax return. Information regarding his
employment is outlined below.
1.

Ebos employment with QR was terminated on July 31, 20X6. His salary to that date
was $56,000. Besides income tax, QR had deducted the following amounts from his
salary:
Registered pension plan
CPP and EI contributions
Group sickness and accident insurance plan premium
Reimbursement for personal use of employer auto

$4,000
3,340
500
800

QR also contributed $4,000 to an RPP and $500 to a group sickness and accident
insurance plan on Ebos behalf. Ebo took a medical stress leave from January 10 to

March 15, 20X6. His salary was not paid during the leave. However, he received $4,500
for loss of earnings from the group sickness and accident insurance plan. In previous
years, Ebo had paid a total of $3,000 in premiums to the plan.
2.

On July 31, 20X6, Ebo returned the company car to QR, which had been available for
his personal use. The car had an original cost of $35,000 and a book value of $24,000.
Ebo had driven the car 20,000 km in 20X6, of which 8,000 km was for employment
purposes. QR paid the operating expenses of $2,900.

3.

In December 20X6, Ebo sold 4,000 shares of AP Ltd. at $10 per share. He had
acquired them in November 20X6 under a stock-option plan at $6. At the time of
acquisition, the shares were valued at $8 per share. When the option was granted, the
shares were valued at $6 per share.

4.

When his employment was terminated, Ebo paid a lawyer $800 to settle compensation
issues. As a result, he received additional holiday pay of $1,000 and a retiring
allowance of $6,000 for his 10 years of service.

5.

Ebo collected employment insurance of $5,400 before starting his employment with AP
on November 1, 20X6. Besides a base salary of $1,000 per month, Ebo receives
commissions on sales. Ebos commission is 4% of sales. His first sales were made in
late December 20X6 and totalled $150,000.The related commission was received on
January 15, 20X7. On December 1, 20X6, AP paid Ebo $1,500 as an advance against
commissions. AP certified that Ebo was required to pay his own car and other
expenses. On November 1, 20X6, he leased a car at $960 per month (including tax).
Operating expenses for November and December were $900 in total. The car was used
70% of the time for employment purposes.
Ebo incurred the following additional expenses:
Entertainmentmeals and beverages
Promotiongift calendars for customers
Purchase of a cellular phone

$600
200
500

Required:
Determine Ebos net income from employment for the 20X6 taxation year.

Solution to P4-10
Employment income 20X6:
ITA 5(1)

Salary

- QR Ltd.
- AP Ltd.

ITA 5(1)
ITA 5(1)
ITA 6(1)(f)
ITA 6(1)(e)
ITA 6(1)(k)

Holiday pay
Commission advance
Insurance receipts - $4,500 - ($500 + $3,000)
Standby charge - 35,000 x 2% x 7 months
Auto operating benefit - 27 x 12,000 km

ITA 7(1)

less reimbursement
Stock option benefit - 4,000 shares x ($8 - $6)

$56,000
2,000
58,000
1,000
1,500
1,000
$4,900
3,240
8,140
(800)

7,340
8,000

76,840
Employment expenses:
ITA 8(1)(m) RPP
ITA 8(1)(b) Legal - salary dispute
ITA 8(1)(h.1)Auto lease - $904 x 2 months (Note 3)

Auto operating costs

Employment portion - 70%
Net employment income

(4,000)
(800)
$1,808
900
$2,708
(1,896)
$70,144

Notes:
1. The commission earned in 20X6 but not received until 20X7 is included in employment
income in 20X7 [ITA 5(1)].
2. The employers contribution to the RPP ($4,000) and the $500 premium for group
sickness and accident insurance paid by the employer are not taxable benefits. They
are specifically excluded [ITA 6(1)(a)(i)].
3. Ebo paid car lease payments of $960 per month. Automobile lease payments for tax
purposes are limited to $800 (plus tax) per month. Therefore, the monthly amount
recognized for tax purposes is $800 x 1.13 = $904 (assumes the tax paid is HST at
13%).
4. The retiring allowance and employment insurance receipts are not employment income
but are classified as other sources of income for purposes of the aggregating formula in
section 3 of the Income Tax Act.
5. The purchase of the cellular phone is a capital item and cannot be deducted under
section 8. Capital cost allowance is not permitted [ITA 8(2); 8(1)(j) & (p)].
6. Ebo has the option of deducting car expenses ($1,896) under ITA 8(1)(h.1) which has
no limit, or deducting entertainment ($300) and promotion ($200) expenses together
with car expenses ($1,896) under ITA 8(1)(f). The total deduction under ITA 8(1)(f) is
limited to his commission income ($1,500). Therefore, he is better off claiming the
deduction under ITA 8(1)(h.1). This means that the entertainment and promotion
expenses cannot be deducted.
7. Because the option price was not less than the share value at the date the option was
granted, a stock option deduction of $4,000 ( x $8,000 employment benefit) can be
deducted from net income when computing taxable income [ITA 110(1)(d)].

PROBLEM ELEVEN
[ITA: 5(1); 6(1)(a)]

After a recent staff evaluation, Susan Pearsons employer offered her the following alternative
remuneration proposals:
1.

A salary increase of $2,500 per annum, from $40,000 to $42,500.

2.

A contribution of $2,000 per year to the companys deferred profit-sharing plan.

Pearsons living expenses are modest, and if she accepts the salary increase she intends to
invest the additional cash flow in secure 10% bonds. Coincidentally, the companys deferred
profit-sharing plan also achieves an average investment return of 10%.
Pearson plans to retire in 30 years, and her intention is to use the remuneration increase to
help fund her retirement. Currently, she pays tax at a marginal rate of 40%.
Required:
Assuming that investment returns and tax rates remain stable at 10% and 40%, respectively,
which alternative should Pearson prefer? You may also assume that if she accepts the
deferred profit-sharing plan, it will be paid to her in a lump sum at the end of 30 years.

Solution to P4-11
If Susan accepts a salary increase of $2,500 per year, the increase will be subject to an annual
tax of $1,000 (40% of $2,500) leaving only $1,500 available for investment. The investment
return of 10% is also taxable at 40% providing a 6% after-tax return (10% less 40% tax on the
10%).
Although the deferred profit sharing plan alternative provides a lower absolute amount ($2,000
vs. $2,500) it is not taxable as employment income on an annual basis. Therefore the plan has
$2,000 annually for investment at 10%. The investment returns within the plan also are not
taxable and, therefore, accumulate at 10%. However, when the funds are withdrawn, the full
amount is taxable (i.e., in year 30).
Susan is better off choosing the deferred profit sharing plan because it will provide
approximately $91,000 in additional funds after 30 years calculated as follows:
Salary Option ($2,500 annually):
$1,500 for 30y @ 6% =

$125,702

DPSP Option ($2,000 annually):

$2,000 for 30y @ 10% =
less tax on lump sum payout (40%)

$361,887
(144,755)

Net value

$217,132

Benefit of DPSP (note)

$ 91,430

Note: The above calculation assumes that the DPSP investment is made at the beginning of
each year rather than at the end of each year.