Flashcards in Midterm 2 - Income from Employment Deck (23)
What subsection of the ITA includes "income from office or employment"? What other sections are relevant for income from employment?
s. 3(a) - income from office or employment specifically included
• s. 5 has basic inclusion
• ss. 6 and 7 include other benefits from employment
• s. 8 sets out permitted deductions
Describe four distinctions under the Income Tax Act between the treatment of income from employment and the treatment of income from business.
1) Employment calculated on CALENDAR year (business calc on FISCAL year)
2) WITHHOLDING tax on employment income at SOURCE (Business in installments)
3) Taxed on CASH basis (business on ACCRUAL)
4) Deductions TIGHTLY CONTROLLED (business has more)
ID & briefly explain policy considerations that influence limits on deductions for income from employment and taxation of benefits w/r/t employment
1) IMPORTANCE - employment income LARGEST SOURCE of tax revenue -> need to protect tax base
2) NEUTRALITY - looser regime would allow employers to shift more to non-taxable benefits
3) EQUITY - contrary to equity if some employees paid more non-taxable benefits than others
4) EFFICIENCY - inconvenient for both TP and Gov
5) Social POLICY - deductions help shape gov policy
Explain the distinction between an “office” and “employment”.
EMPLOYMENT = needs CONTRACT of service --> OFFICE = does not (position independent of the individual)
Office = position of individual ENTITLING individual to fixed or ascertainable STIPEND or REMUNERATION (e.g judge, MP, etc)
EMPLOYMENT = position of individual in SERVICE OF SOME OTHER PERSON
Explain why the distinction between an “office” and “employment” is not that significant under the Income Tax Act.
Not important b/c subdivision 3(a) lumps both TOGETHER
key distinction in ITA is btwn "office or employment" and "business or property"
Identify and explain five tests that have been used in the assessment of whether a person is an employee or an independent contractor.
Weibe, 1986 FCA
1) the “control” test - looks at degree of control possessed by employer over work to be performed
2) the “integration test” - whether person is integral part of emp's business
3) the “economic reality” / “entrepreneur” test - chance of profit and risk of loss
4) the “specified result” test - whether or not services at disposal of person for period of time without reference to specified result
5) total relationship test - take into account multiple factors
What is the primary test for employee vs independent contractor?
Sagaz Industries (2001, SCC)
control test + non-exhaustive list of other factors:
- own equipment,
- own helpers,
- financial risk,
- responsibility, etc
Identify and describe potential tax advantages to an employee, were it not for anti-avoidance provisions in the Income Tax Act, from having the employer contract with an employee’s corporation for services rather than contracting with the employee directly.
Potential benefits for employee
- tax deductions for business expenses
- lower tax rate within corporation
- small business deduction
- income splitting
Identify and describe potential tax advantages to an employer, were it not for anti-avoidance provisions in the Income Tax Act, from having the employer contract with an employee’s corporation for services rather than contracting with the employee directly.
Potential benefits for employer
- no need to withhold tax from employee (save administrative cost)
- no payroll taxes (CPP, EI)
Explain how the provisions of the Income Tax Act treat income from employment on a cash basis.
s.5(1) says income from office or employment must be RECEIVED by the TP in the YEAR (i.e. CASH basis)
s. 6, 7 - benefits included when RECEIVED (CASH basis)
s. 8 - deductions when PAID (CASH basis)
Give an example of how the cash method can be significant for income from employment
VEGSO, 1956 case = good example
- ~8k/yr for working on father's farm
- only entitled to ~1k/yr until married
- married -> received ~80k in one year
- ENTIRE amount TAXABLE in year of receipt b/c cash basis (even though would NOT have been taxable if paid as 8k/yr)
Explain the concept of “constructive receipt”.
income/benefit "received" when employee ENJOYS ITS ADVANTAGES (ie employee does NOT need to have in hand/bank account)
Markman; Morin - applies where a payment has been made by a payor to a party who is NOT the payee, but was made FOR THE BENEFIT OF THE PAYEE in satisfaction of an OBLIGATION contracted by him (class example of having employer pay directly to roofer instead of employee)
Blenkarn - Constructive receipt when employee had actual right to be paid
Describe the distinction between salary and wages in common parlance and the significance of the distinction in the Income Tax Act.
- Salary and wage not defined for purposes of s. 5(1)
- common parlance “salary” usually computed on longer period such as a year and “wages” computed for shorter period such as an hour or week
- Difference NOT IMPORTANT b/c no difference in tax treatment
Describe how the Act deals with remuneration other than salary or wages.
s. 5(1) includes salary, wages, and "other remuneration"
s. 6(1) includes SPECIFIC TYPES for "greater certainty":
- director's fees,
- sickness/accident/disability insurance
s. 6(3) brings SIGNING BONUSES and Non-compete payments
Set out the meaning that has been given to “benefit” in s. 6(1)(a) of the Act
s.6(1)(a) - meaning of benefit includes "value of board, lodging and other benefits of any kind whatever received or enjoyed by the TP in the year in RESPECT of, in the COURSE of, or BY VIRTUE of an office or employment"
specific items listed include: company car, car expenses, interest free loan
Discuss whether a benefit under s. 6(1)(a) must be convertible into money
No (Waffle v MNR)
s. 6(1)(a) includes "board" and "lodging" which are CONSUMED/can't be converted to cash
- Lodging and Board are before "other benefits" and therefore other benefits also DON'T HAVE TO BE CONVERTIBLE to cash to be taxable
Explain the scope of “in respect of” in terms of underlying policy considerations.
Broad scope. Effectively a PRESUMPTION that payment to employee was in respect of employment
Includes benefits by third party (Waffle)
Court to consider whether benefit provided to employee as employee or as person (Savage)
- eg wedding gift not "in respect of employment" (would be personal gift and not taxable)
Policy - to prevent employers from using non-taxable benefits instead of salary/wages (equity, neutrality)
Explain the distinction between an allowance and a reimbursement and why allowances are included in income while reimbursements generally are not included in income.
Allowance = not defined in Act, but defined by courts as "ARBITRARY amount paid in lieu of any reimbursement for the employee to use WITHOUT BEING ACCOUNTED FOR"
Reimbursement = to indemnify, reimburse, or defray ACTUAL EXPENSES for employee (no discretion, has to be accounted for, for a specific expense)
- REIMBURSEMENTS DO NOT result in accretion to wealth/ability to pay, but ALLOWANCES DO
- not having to account for allowance = employee may benefit
Explain why there are special provisions on automobile benefits and how the special provisions address these concerns.
Automobile expenses = difficult to VALUE, hard to determine BENEFIT and COSTLY to litigate
Purpose - to simplify, reduce litigation
Provisions: 1) SPECIFY taxable amount (km compensable, value of vehicle, etc), 2) sets "primarily" test and 20,004km/yr test for employee vs employer use
Explain why there are special provisions on interest free loans and how they work.
1) not including interest-free or low interest loans to employees would be unequitable --> confers benefit on employee
2) difficult to calculate benefit w/o provisions
1) s. 6(9) requires inclusion in income of benefit
2) s. 80.4(1) sets out how benefit to be determined -> based on DEEMED RATE ( T-bill + 4%)
Benefit = difference btwn interest (if any) paid and prescribed rate
Explain why there are special provisions for employee home relocation?
Inconsistent case law (b/c of difficult in determining whether assistance was benefit or reimbursement) --> amendments to Act to create BRIGHT LINE RULES
What is the current approach to employee home relocation assistance in the ITA?
Current approach - s. 6(23) for "greater certainty", value of financial assistance for employee home relocation loan to be INCLUDED IN INCOME FROM EMPLOYMENT
- but DEDUCTION of interest allowed (prescribed rate times 25k for 5 yrs)
- ie allows employer to assist with the prescribed rate, but includes any amount over that in income
- must be HOME RELOCATION loan (within 40km of work)
allows compensation for HOUSING LOSS (loss in value) up to 15k (but HALF must be included in income)