AFM 202 Tax Tutorial

Sept. 19, 2014

In this tutorial
Personal Income Tax Administration
Capital vs. Income
Identical Shares
Capital Gains Reserve
Personal Use Property

Employment Income
Employed vs. Self Employed

Employee Stock Options

Dividends
Integration
Employment deductions

Personal Income Tax Admin

Income is calculated on a calendar year basis
(January to December)
Filing deadline= April 30 (June 15 for selfemployed)
Penalties for late/inaccurate filings
Late: 5% of unpaid tax +1% of unpaid tax each mth
False statement: greater of a) $100 b) 50% of tax
otherwise paid
Failure to disclose: $100 penalty for each failure

Capital vs. Income

Taxpayers prefer capital treatment for a
disposition rather than an income treatment
Only half taxable (50%)

Example:
Selling inventory: business income
Selling business equipment: capital gain

Look at taxpayers intention at time of disposal

Nature of asset

Taxpayers
business and
transaction in
question

Taxpayers
behaviour

Identical Shares
ACBs of identical shares pooled together
Example 1:
Jan 1- Bought 5 shares for $20 each
Feb 1- Bought 10 shares for $30 each
Mar 1- Sold 7 shares for $35 each

Calculate the Taxable Capital Gain on Shares

Solution Example 1
Date

Type

# of shares

Price/share

Total Cost

Jan1/2014

Purchase

20

100

Feb1/2014

Purchase

10

30

300

Total

15

400/15=27

400

Sale

27

187

Outstanding

27

213

Mar1/2014

Proceeds

245

=35*7

ACB

187

=27*7

CG

58

=245-187

TCG

29

=58*50%

Capital Gains Reserve

Applies when you have a capital gain but you
haven't actually received the money yet
Can deduct a reserve for CG realized this year
Calculation is: Lessor of
A) (proceeds yet to be received /total proceeds) *
CG
B) [(5- number of years done)/5] * CG

Add reserve back into income next year

Personal Use Property

No CL on personal use property
CG on PUP
Special rules for Listed Personal Property
Examples: art, jewellery, rare books, stamps, coins
Capital losses on LPP can be used to offset capital gains on LPP

Proceeds:
If >$1,000, Proceeds
If <$1,000, $1,000

ACB:
If >$1,000, ACB
If <$1,000, $1,000

Simple PUP Examples

Cost: $700
Proceeds: $1,000
CG=$1,000-$1,000=0
Cost:$1,100
Proceeds:$700
CG=$1,000-$1,100=($100)=0

Employment Income
Tests:
Economic reality
Control, Ownership of tools, chance of profit/loss

Integration
Specific Results
Contract

Employed:
Specific deductions
CPP: 4.95% * (salary up to 52,500- 3,500)
EI: 1.88% * (salary up to 48,600)

Self Employed:
Deduct all reasonable business expenses from income

Stock Options
Public

CCPC

Grant date- no tax

consequences

Grant date- no tax consequences

Exercise date Employment income = (price

at exercise price at grant ) *
# of options exercised
Add this to the ACB of shares
Sale date Capital gain/loss = proceeds ACB

Exercise date- no tax

consequences
Sale date Employment income = (price
at exercise price at grant ) *
# of options exercised
Add this to the ACB of shares
Capital gain/loss = proceeds ACB

Example 2 Stock Options

Stacy was granted 5,000 stock options on April 1
when the share price was $10
She exercised her option to purchase 2,500 shares
on July 1. The FV of the shares that day was $15
On December 1, she sold 1000 shares for $20
Calculate the price of shares if Stacy works for:
A) Public company
B) CCPC

Solution 2 Stock Options

Public Company

CCPC

Grant Date
April 1

Nothing

Nothing

Exercise Date
July 1

Employment Income:
($15-$10)*2,500
=$12,500
ACB:
$10*2,500+$12,500
=$37,500

Nothing

Sale Date
Dec. 1

Capital Gains:
Proceeds=$20*1000=$20k
ACB=$37,500/2500*1000
=$15,000
CG=$5000
TCG=$2500

Employment Income:
=($15-$10)*1000=$5k
Capital Gains:
TCG=$2500
(Calculations same as Public
company)

Dividends
Grossed up when received as individuals
(concept o integration)
Public (eligible): 38% gross up
Federal DTC: 6/11 of gross up
Provincial DTC: 5/11 of gross up

CCPC (ineligible): 25% gross up

Federal DTC: 13/18 of gross up
Provincial DTC: 5/18 of gross up

Example 3 Dividends
Joe received a $1000 dividend from Blackberry
(public company) and a $1000 dividend from
Local company (CCPC). What amount should be
recorded on the tax return and what is the DTC
to be reported for each?
Assume marginal tax rate of 46%

Solution 3 Dividends Problem

Dividend
Gross up

38%

Total Dividend
Income

Eligible

Ineligible

1,000

1,000

380

25%

1,380

250
1,250

Fed & Prov Tax

46%

635

46%

575

Federal DTC

6/11

(207)

13/18

(181)

Prov DTC

5/11

(173)

5/18

(69)

Total Credits

(380)

(250)

Taxes Payable

255

325

Integration
Point is so businesses and individuals pay the
same amount of tax
Seen through: Dividend gross up and DTC,
different tax rates for individuals and
corporations, SBD

Employment Deductions
Most of the time included on Line 229 of the J form
This is for other employment expenses
The form has a bunch of different things that can be
deducted from income
The J form does not specific deductions such as
RRSP deductions
Enter on Form T777
Some expenses are not deductible unless they were
required for the purpose of employment must
complete form T2200

Employment Expenses
In the process of earning income, there are some
expenses that can be deducted
Expense deductions are focused in section 8 of the
income tax act
There are differences in the treatment depending
on if the individual is a commissioned or regular
employee
Relevant Sections to know: 8(1)(b)(i)(m)(s)(h)(h.1)(j)
(f) for the income tax act

Examples of deductions
Automobile Expenses
CCA deduction if owned by you

Costs associated with car

Home Office Expenses

Must be prorated for the amount of

space in house

Includes: heating, electricity,

telephone etc.

Other deductions
Includes things such as:
entertainment costs, meals

Professional fees, legal fees

(restricted) etc.

Commissioned versus Regular

Commissioned

Regular

8(1)(f) is restricted
up to the amount of
commission
received

Cannot claim
property taxes and
insurance

They can deduct

items related to
entertainment costs
that are necessary
for earning income,

Usually claimed
under 8(1)(h)(h.1)
and other sections

Commissioned versus regular

Professional judgment is required to determine
if certain items should be deducted under
specific sections of the income tax act
Determine if the amount of deductions given up
somewhere else are going to be made up in
greater amounts in another section
The perfect example would be 8(1)(f) versus 8(1)
(h) (h.1)

Regular Non-Commissioned Employee

Can deduct legal costs to retrieve salary not paid

Professional membership fees
Trade union dues
RPP contributions
Travelling expenses other than vehicle expenses
For example meals have special restrictions on them
must be away for 12 hours or more and only 50% is
deductible

Automobile expenses that are not capital in nature

such as gas, maintenance and lease costs T777 Auto

Commissioned Employees
They fall under 8 (1) (f)
Commissions are shown under the T4 in box 42
Employee did not have an allowance for travel
expenses
8 (1) (f) is capped at the commission income

Taxprep and Employment Expenses

Forms that are important to remember are:

1. T2200 Declaration of Conditions of Employment
The form notes if there are certain expenses the
employer is giving permission the employee can deduct
Certain criteria include:
a) Was the employee suppose to pay for certain expenses?
b) Did the job require the employee to be out of town for
certain periods of time?
c) Did the employee have specific allowances related to
covering specific types of expenses
Lets look at this form on taxprep

Taxprep and Employment Expenses

Form J229 Other employment income
Linked to T777 Statement of Employment Expenses
Think of this as the form that aggregates everything
There are specific forms associated with specific types of
expenses such as:
T777A automobile, enter all the eligible automobile expenses
here
T777CCA if you own the automobile, you can deduct a portion
of this
REMEMBER ALL THESE EXPENSES MUST BE PRORATED
FOR BUSINESS USE
Deductibility of expenses is dependent on if there was an
allowance provided to the individual lets take a look at the

Example 4
Professor Timothy is an educational consultant
and he creates courses on taxation at the
University of Waterloo to second and fourth year
students. His contract states that he has to pay
certain expenses related to his employment. He
does not possess an office and nor does he receive
any allowances.
On a theoretical level, what expenses can the
Professor deduct from his employment income?

Solution 4
1. Home Office Expenses
There is a test for home office expenses:
The individual must spend more than 50% of their time
working from there
There must be a constant stream of meetings at the location
and it is for the purposes of earning employment income
These expenses do need to be prorated based on the space
at the house

2. Automobile expenses
Potential things he may be able to claim include: insurance,
gas, CCA maintenance etc. But these need to be prorated for
business use

WHY?

Example 5
Jane is the Vice President of Marketing at ABC
Company. Her salary is $125,000 and she received a
$50,000 commission due to robust sales attributed to
her tremendous marketing campaign.
What are the options for Jane in regards to
deductions? Think of the income tax act sections?

Solution 5

Jane is a commissioned employee

She has a choice:
She can deduct amounts under 8(1)(f)
The amounts deducted under here are only limited to
the amount of commission she has received
Now tell me, what expenses in 8(1)(f) might be useful to
Jane?
Think Home Office Expenses. Insurance and
property taxes

Example 6
Jane is a sales person and she was required to pay the following
expenses from her pocket:
Telephone costs = $500 (all for business)
Jane works from home and approximately occupies 30% of the house
for work. She incurred the following expenses related to this:

Mortgage interest of $2000

Insurance of $3521
Property Tax of $1234
Electricity of $4265
Heating of $3521

Automobile costs Gas @ $1000, Maintenance at $3250, License

costs @ $100. The car was used 55% for business.
This is her car and she purchased it on March 1, 2011 for $39,000. Please
note this was a simple passenger vehicle.
In order to buy the car, you had to take a loan of $35,000 and during 2011
you paid $325 in interest related to this loan

Solution 6
1. Were these expenses for the purposes of
earning income?
The answer is yes they were so we can deduct
them there is no mention of allowances that
might impact our decision so deduct
1) Telephone costs are deductible @ $500, since
all of them were for business purposes
2) What other things can we deduct?

Solution 6 contd
Home Office Expenses
Look at the test do we meet the test:
The individual must spend more than 50% of their time
working from there
There must be a constant stream of meetings at the location
and it is for the purposes of earning employment income

As per the information in the question, I think we can say that

she meets the criteria for home office expenses.
What home office expenses can she deduct?
Lets assume the best thing to do is to deduct under 8(1)(f).

Solution 6 contd

Mortgage interest of $2000

Insurance of $3521
Property Tax of $1234
Electricity of $4265
Heating of $3521

Mortgage is not deductible

If we are saying 8(1)(f), the following are deductible:
Insurance @ $3521
Property Tax @ $1234
The rest: electricity and heating @ $4265 and $3521 are
also deductible
Prorate for 30%, our home office deduction is $3,762.30

Solution 6 contd
Automobile costs important to note that she owns the
car
This is important because she can take a CCA deduction
Passenger vehicles are class 10.1 assets and therefore can
take a 30% CCA on an annual basis. In the acquisition year
we do the half year rule
Class 10.1 also has a limit of $30,000 per car, regardless of
the price. With HST, we have a cost of $30,000*1.13=
$33,900
Therefore, our CCA deduction for the year is as follows
$33,900 *0.5*0.3 = $5085
Prorate this for business use @55% = $2797

QUESTIONS?