Chapter Objectives

Be able to: Apply the factors that will be considered when determining whether

an individual is considered employed or self-employed. Explain the fundamental rules in computing employment income. Explain and calculate what is included in taxable remuneration. Explain and calculate what is included in taxable benefits. Explain and calculate what is included in taxable allowances. Explain and calculate what is included in allowable deductions from

employment income.

Definition of Employed

Individuals are considered employed when they agree to provide their services, at the full discretion and control of the employer, in return for a specific salary or wage.

When it is unclear whether an individual is employed or self-employed, the courts will consider four primary tests to make a determination.

Control test - who determines what is done, where, when and how. Ownership of tools test - an employee would not normally own tools. Chance of profit (loss) test - an employee would not have an

opportunity for profit (or the risk of loss). Integration test - a worker who is an integral part of the business is

likely an employee.

Fundamental Rules for Employment Income

The four fundamental rules are: All remuneration is included in income when it is received by the

employee. Subject to specific exceptions, all benefits received or enjoyed by

virtue of employment are included in employment income. Subject to specific exceptions, all allowances for personal living

expenses or for any other purpose are included in employment income.

Except for a specific list of items, no deductions are permitted in arriving at employment income.

Taxable Remuneration

Employment income includes salary, wages, commissions, gratuities, bonuses, honoraria and director’s fees.

Employment income is recognized when received which is not necessarily when earned.

Although employers can deduct the remuneration when incurred, there are limits or anti-avoidance rules to avoid abuse of salary deferral programs.

The first is that the remuneration must be paid within 180 days of the year end in which the expense was incurred.

The second is that when an agreement is entered into the main purpose of which is to defer the receipt of remuneration that would otherwise have been paid, the employee is deemed to have received it in the year that it was earned.

Taxable Benefits

It is easiest to assume that all benefits of any kind whatever are taxable unless a search of the list of specific exceptions disclosed that the benefit is not taxable.

The amount of the benefit is usually determined as the lower of the cost to the employer and the fair market value of the benefit.

Special benefit calculations apply to:

use of employer automobiles

loans from employers

reimbursement of specific relocation expenses

stock option benefits

Tax-deferred and Tax-exempt Benefits

Employer contributions for an employee to a RPP or a DPSP are tax deferred benefits.

Payments of premiums for an employee for: group sickness or accident plans, private health service plans and supplementary employment insurance plans are tax-exempt benefits.

The cost of counseling services relating to the mental and physical health or to the re-employment or retirement of an employee are also tax-exempt benefits.

By administrative policy, the CCRA has also designated certain other benefits to be non-taxable.

Taxable Allowances

Allowance refers to a fixed, specified amount that is paid to an employee on a regular basis, over and above a normal salary, to cover certain expenses incurred by the employee.

Employees do not have to account for the allowance or provide details of how it was spent as opposed to a reimbursement.

A reimbursement is the repayment of a specific expenditure incurred by an employee on the employer’s behalf and is not an allowance.

There are nine specific allowances excepted from the general rule. The two exceptions with broad application are employees selling property or negotiating contracts and employees other than salespeople.

If an allowance is reasonable, it is non-taxable. If an allowance is unreasonably high or low in relation to the actual costs

incurred, it is taxable and the expenses can be deducted.

Deductions from Employment Income

Only deductions specifically included in the list in the ITA are allowable.

The major items that are allowed as deductions are: expenses of employees on commission selling property or negotiating

contracts travel expenses in certain circumstances cost of supplies consumed directly in the performance of employment

duties cost of work space in home contributions to employer’s RPP professional membership dues union dues.