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CHAPTER 3 Chapter 3 Employment Income 35 Copyright Wolters Kluwer and it is forbidden to distribute this document

36 Introduction to Federal Income Taxation in Canada CHAPTER 3 — LEARNING CHART Problem Descriptions Textbook Example Problems 3-1 Employed vs. self-employed — case 3-2 Employee loan 3-3 Employee stock option 3-4 Employee stock option 3-5 Employee stock option 3-6 Standby charge and operating benefit — employer owned — employment kilometres < 50% 3-7 Standby charge and operating benefit — employer owned — employment kilometres > 50% 3-8 Standby charge and operating benefit — employer leased — employment kilometres < 50% 3-9 Standby charge and operating benefit — employer leased — employment kilometres > 50% 3-10 Deductible automobile expenses — employee owned car 3-11 Deductible automobile lease expense — employee leased car 3-12 Deductible automobile expenses — employee leased car 3-13 Comprehensive example — employment income and expenses Exercises 1 Employed vs. self-employed 2 Employed vs. self-employed 3 Taxable benefits 4 Legal expenses — deductibility 5 Employee discount 6 Moving expense reimbursement 7 Employee benefits — employer payments 8 Employee stock option — CCPC 9 Standby charge, operating benefit 10 Home office expenses 11 Personal meals while travelling 12 Employment income — comprehensive calculation 13 Employment income — implications of components of a compensation offer 14 Employee vs. independent contractor 15 Employment income — expenses of a salesperson Copyright Wolters Kluwer and it is forbidden to distribute this document

CHAPTER 3 Ch. 3/Study Guide — Learning Chart 37 Problem Descriptions Assignment Problems 1 Auto benefits — company owned vs. company leased 2 Stock option — comparing CCPC to public company 3 Employee benefits — multi-part 4 Employee benefits — multi-part 5 Employee loans, car expenses 6 Commission expenses & limitation 7 Employee travel expenses 8 Employed vs. self-employed — Chow 9 Offer of employment — compensation options 10 Calculate employment income — benefits, stock option 11 Compensation alternatives — salary, bonus, benefits or stock option 12 Compensation alternatives — forgivable loan, stock option 13 Auto benefits — company owned vs. leased 14 Car allowance vs. reimbursement 15 Payment on termination 16 Calculate employment income — benefits 17 Calculate employment income — expenses 18 Calculate employment income — benefits, expenses, stock option 19 Calculate employment income — travel expenses 20 Calculate employment income — comprehensive benefits 21 Calculate employment income — comprehensive expenses 22 Calculate employment income — comprehensive benefits, auto expenses 23 Calculate employment income — comprehensive benefits, auto expenses 24 Employed vs. self-employed 25 Employed vs. self-employed 26 Employed vs. self-employed, resident 27 Employed vs. self-employed, resident 28 Employment income comprehensive calculation 29 Employee vs. independent contractor 30 Employment income — comparison under two alternative employment offers Copyright Wolters Kluwer and it is forbidden to distribute this document

38 Introduction to Federal Income Taxation in Canada Copyright Wolters Kluwer and it is forbidden to distribute this document

CHAPTER 3 Ch. 3/Study Guide — Review Questions 39 ¶ 3,800 REVIEW QUESTIONS (1) The best way to calculate employment income is to follow the format used on the personal tax return. Comment on the accuracy of this statement. (2) It does not matter whether an individual is employed or self-employed since he or she can claim the same expenses under either category as long as the expense was incurred to earn income. Comment on the accuracy of this statement. (3) If an individual fails any one of the tests which are used to determine employed versus self- employed status then the individual is employed. Comment. (4) When determining whether a person is employed or self-employed, one of the subtests used in the economic reality or entrepreneur test is the ‘‘control test’’. What does this test involve? (5) When determining whether a person is employed or self-employed, one of the tests used is the ‘‘integration or organization test’’. What does this test involve? (6) When determining whether a person is employed or self-employed, one of the tests used is the ‘‘specific result test’’. What does this test involve? (7) If a bonus cheque is received by an employee, Ms. Davis, on December 15 of this year and she chooses not to cash her cheque until January 5 of next year, then she will be able to defer the tax on the bonus until the next year since individuals are taxed on the cash basis. Comment. (8) A bonus is payable to an employee, Mr. Lee, on December 15 of this year and he decides that he wants to be taxed on the income in the following year instead of this year. He can ask his employer to defer the payment of this bonus until next year to accomplish his goal. Comment. (9) Employees are taxed on income from their employer to the extent that it is a gross payment before withholding tax or a taxable benefit. The employer can deduct, as an expense, the full amount of the gross payments before withholding tax and taxable benefits that are reported on the employee’s T4. Comment. (10) To maximize the after-tax income from a disability insurance policy to a disabled employee, the employer should not pay any of the premium for the coverage. Comment. (11) On June 2 of this year, Opco loaned $10,000 to an employee and did not charge interest. The employee repaid the loan on June 30 of the same year. How many days are included for purposes of determining the deemed interest benefit? (12) Explain the differences between a reimbursement and an allowance. (13) Opco bought a new car for its president that cost the company $40,000 plus $5,200 for HST. How much is the standby charge for this car for a full year assuming it is driven 40% for business purposes? (14) What are the five conditions that must be met before a sales/negotiating person can deduct expenses? (15) What are the four conditions that must be met by an employee, who is not a sales/negotiating person, in order to allow him or her to deduct travelling expenses other than car expenses? (16) Mr. Wang is a part-time lecturer at the University of Waterloo. He lives in a location in Toronto which is 105 kilometres away from the university. The rest of the time he has a tax consulting practice which he operates out of his home. The university pays him $0.40 per kilometre to travel to and from the university. He is issued a T4 at the end of the year for his teaching income on the basis that he is a part- time employee. How is the travel allowance of $0.40 per kilometre treated for tax purposes? (17) Guidelines for the deductibility of expenses related to work space in the home for employees are included in subsection 8(13). Under paragraph ( a ) of this provision the expenses are allowed if one of two conditions are met. In these conditions, the words ‘‘principally’’ and ‘‘exclusively’’ are used. What do these words mean for tax purposes? (18) Ms. Smith has come to you to ask your tax advice. She has just had a large bonus paid to her on December 31 and wants to defer some of it until next year. She is arguing that since the CRA’s portion was not sent to the Receiver General until January 15 she should be able to defer that portion until the next year on the basis that it was not received until January 15 when it was sent to the CRA. What do you think? ¶ 3,800 Copyright Wolters Kluwer and it is forbidden to distribute this document

40 Introduction to Federal Income Taxation in Canada ¶ 3,825 EXERCISES Isaac v. M.N.R. , 70 DTC Exercise 1 1285 (T.A.B.) The taxpayer is a qualified registered nurse, is entitled to use the traditional letters ‘‘R.N.’’ after her name and, in answering the questions contained in her income tax return, described herself as a ‘‘private duty’’ nurse both in the space provided for employed persons and in the space provided for persons in business or practising a profession. Thus, in trying to answer all the official questions on her return, the taxpayer indicated, on the one hand, that she was employed ‘‘as a private duty nurse’’ by the Canadian Forces Hospital at Halifax and, on the other hand, that she was in business of practising her profession ‘‘as a private duty nurse’’ in connection with the same hospital. The basic issue to be decided is, briefly, what was the taxpayer’s correct status vis- ` a-vis the Canadian Forces Hospital, Halifax in the taxation year in question. The taxpayer launched the present appeal by Notice of Appeal in which she alleged (in effect) as follows: that in the relevant taxation year she was employed by the Canadian Forces Hospital, Halifax, on a day-to-day basis terminable on 24 hours’ notice; that the usual so-called fringe benefits made available to and enjoyed by the regular full-time army nursing sisters such as holidays, sick pay, retirement plan, and so on, were not made available to her as a private duty nurse; that the regional surgeon’s office in Halifax classified her as a ‘‘self-employed R.N.’’; that in her previous return she claimed and was permitted to deduct from her income expenses of a similar type to those disallowed in the taxation year now under appeal; and that several of her fellow private duty nurses employed at the Canadian Forces Base, Halifax, were employed on the same basis as she was and had claimed expenses of a similar type to those disallowed in this appeal (i.e., the type of expenses one would associate with a private duty nurse). The CRA stated that, in making the assessment now in dispute, he had acted upon the following assumptions of fact — that the taxpayer is a registered nurse and was employed by the Department of National Defence at the Canadian Forces Hospital and Base, Halifax, during the taxation year, that in the course of carrying out her engagement as a general duty nurse the taxpayer was subject to supervision and discipline by the hospital authorities, and that of the expenses allegedly incurred by the taxpayer only the amount claimed as ‘‘R.N. fees’’ and the amount being her contribution to the Canada Pension Plan were permitted under the Act. The taxpayer testified, in effect, as follows: that she is a registered nurse; that in the relevant taxation year she was living in Halifax and was employed at the Canadian Forces Hospital (Stadacona Hospital), ‘‘not as a staff nurse but more or less as a private duty nurse, though my times were made up ahead of time’’ (the correct interpretation to be placed on the word ‘‘employed’’ in this appeal appears to be the key to the solution); that private duty nurses are allowed to claim as deductions from income certain expenses such as laundry, uniforms, travelling expenses, and so on; that the only difference between herself and a private duty nurse is that the hospital deducted her Canada Pension Plan contributions from the per diem amounts payable to her; that she acted as a private duty nurse at Stadacona Hospital for about five years, after which she moved from Halifax to Charlottetown and became associated with the Charlottetown Hospital as a relief nurse; that she is presently working under exactly the same conditions under which she carried on at the Canadian Forces Hospital, Halifax, i.e., ‘‘If I don’t work, I don’t get paid, I have no benefits or holidays. I get private duty wages (these amounted to $15 per day in Halifax and now amount to $20 per day). My time is made up. If they get full-time nurses they can let me go’’; that she and other private duty nurses were hired by Stadacona Hospital (on a day- to-day basis) to fill in while the hospital ‘‘didn’t have enough service nurses’’; and that in the year before she was replaced the said hospital ‘‘did get a large supply of military nurses in and we were all cut down’’ (i.e., a number of private duty nurses were simply laid off which was easy to do because they were working on a day-to-day basis). The Hospital supplied all equipment and supplies used by the taxpayer. The Hospital hired and fired all nursing assistants and other support staff who assisted the taxpayer in the performance of her duties. The taxpayer could request the Hospital to hire additional support staff but she personally did not hire them. The taxpayer also testified, in effect, as follows: that her time sheet in the Canadian Forces Hospital, Halifax, was made out a week in advance; that the said hospital’s authority to hire civilian nurses to meet its requirements was only valid while there was a shortage of military nurses; that, as they became available, the civilian nurses were replaced; that the hospital asserted its right to dismiss civilian nurses on 24 hours’ notice — ‘‘we were told that when we went there to work’’; that she, herself, ¶ 3,825 Copyright Wolters Kluwer and it is forbidden to distribute this document

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