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CHAPTER 3

Employment Income
Type 1 Problems
Solution 1: Auto BenefitsCompany-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) = 20,004/20,004 x [2% x ($39,550 x 12)] =
60% 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%)
Personal kilometres x $0.27 = 14,400 x $0.27 =
60% 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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Introduction to Federal Income Taxation in Canada

30

Option 2 Company Leased


Standby Charge:
40% Business (<50%)
A/B x [2% x (C x D) + 2/3 (E F) = 20,004/20,004 x [2/3 x ($10,170 0)] =
60% 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%)
Personal kilometres x $0.27 = 14,400 x $0.27 =
60% 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-partEmployee 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. Rishmas contribution is specifically allowed as a deduction [8(1)(m)]
b. The companys 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 Rishmas 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. Rishmas payment is not deductible but it will be eligible for a medical expense credit
[118.2(2)(q)]
b. The companys portion is not taxable to Rishma specific exclusion [6(1)(a)]

Introduction to Federal Income Taxation in Canada

34

Solution 5: Employee Loans, Car Expenses

Benefit would be the sum of:


(A) Car loanprescribed 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

Solutions to Chapter 3 Assignment Problems

35

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

Solutions to Chapter 3 Assignment Problems

37

Solution 7: Employment ExpensesTravel


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 employers 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

Solutions to Chapter 3 Assignment Problems

39

Solution 9: Employed Versus Self-EmployedChow


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 companys 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 companys perspective.
Although the workers may have been integral to the companys business, there was nothing to suggest that the
companys 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 companys
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.

Introduction to Federal Income Taxation in Canada

42

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.

Introduction to Federal Income Taxation in Canada

44

Solution 13: Compensation AlternativesForgivable 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 Bings 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.

Introduction to Federal Income Taxation in Canada

48

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 employers advantage rather than employees [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

13

Introduction to Federal Income Taxation in Canada

50

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 = $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.

Introduction to Federal Income Taxation in Canada

52

Solution 21: Calculate Employment IncomeComprehensive Benefits


(A) Employment income
Salary Gross .....................................................................................
Disability payments Amount received ...............................................
$
1,600
Less amount paid (20112014) ..............................................................
(350)
Preparation of 2013 income tax return(1) ................................................
MBA tuition fees(1) ................................................................................
Directors 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 Anitas 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.

53

Solutions to Chapter 3 Assignment Problems

55

Solution 23: Calculate Employment IncomeComprehensive 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 Anitas 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 employers advantage than for Anitas
personal enjoyment [IT-470R, par. 34]. If the membership was determined to be principally for Anitas
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)

Introduction to Federal Income Taxation in Canada

56

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) Anitas 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.

Solutions to Chapter 3 Assignment Problems

59

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 VPs 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 doesnt 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 companys 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 wouldnt 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

61

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 mothers;
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.