ADMS 4562 Lecture Notes - Lecture 2: Independent Contractor, Capital Cost Allowance, Net Income

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11 May 2018

School

York University

Department

Administrative Studies

Course

ADMS 4562

Professor

Joanne Magee

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3520-2: Last updated on Sept 10, 2014 1-16

This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].

1 Lecture 2: Residency and Employment income

▪ Selected parts of Chapters 1, 3 and 21

▪ Web links are included to provide more information to those who are interested to learn more

about particular topics

▪ Recommended exercises and self-study problems in chapter 3: Exercises 1-3, 8-9, 11-12, 14-

16,

▪ Self-Study Problem 3-10: As you are not responsible for the standby charge (and the

operating cost benefit, if any), you can assume that the standby charge is $4,871 (before

taking into account any payments made by Ms. Firth to her employer)

2 Residency [ch. 1]

2.1 ITA 2 is the charging provision [1-77 to 1-90]

▪ It defines who the taxpayer is and what the base is = who is liable for tax on what taxable

income

▪ For residents of Canada for tax purposes

▪ The base is worldwide taxable income in Division C of the Act

▪ For non-residents of Canada for tax purposes

▪ The base is certain Canadian source taxable income in Division D of the Act if they

were

▪ employed in Canada,

▪ carried on a business in Canada, or

▪ disposed of a taxable Canadian property (e.g., Canadian real estate) at any time in

the year or a previous year

▪ Read ITA 2(1), 2(2), 2(3)

2.2 Definitions [1-78]

▪ Person = individuals, corporations, and trusts

▪ Resident – unless an individual severs all significant residential ties with Canada upon

leaving Canada

▪ Significant residential ties include: having a spouse or minor child in Canada; and having a

home in Canada

▪ See also http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html

2.3 Computation of Income [1-100 to 1-105]

2.3.1 Division B of Part I of the Act- Computation of Net Income for Tax Purposes

▪ Taxable income = Net income for tax purposes minus Division C deductions

▪ Division B has subdivisions for each source of income:

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3520-2: Last updated on Sept 10, 2014 2-16

This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].

▪ a = employment

▪ b = business or property

▪ c = taxable capital gains/allowable capital losses

▪ d = other income (e.g. spousal support received, pension income)

▪ e = other deductions (e.g. RRSP contributions, moving expenses, spousal support paid,

child care expenses)

2.3.2 Computation of Income ITA 3 [1-106 to 1-126]

▪ See Fig 1-3

▪ ITA 3 brings together all the different sources of income to form Net Income for Tax

Purposes

▪ Taxable capital gain (TCG) = 1/2 of a capital gain

▪ Allowable capital loss (ACL) = 1/2 of a capital loss

▪ One key point in ITA 3 is that if allowable capital losses are greater than taxable capital

gains, the allowable capital losses deducted in computing net income is limited to the taxable

capital gains for the year

▪ Excess ACLs are available for deduction in other years (“carried over"). They can be carried

back to the preceding three years and deducted against TCGs in those years (if any) and/or

carried forward indefinitely and deducted against future TCGs. If not deducted before death,

they can be deducted in the year of death (and the immediately preceding year) against any

type of income

▪ See Example at 1-125

3 Income or Loss from Employment [ch. 3]

3.1 General Rules [3-1 to 3-6]

▪ ITA calculates income by source

▪ For example, employment income is computed separately from business and property income

and separately from capital gains/capital losses [ITA section 4]. Only deductions permitted

under the Act are allowed for each source (i.e., employment income, business and property

income, and capital gains/losses)

▪ Rules for computing employment income are in ITA 5, 6, 7 and 8 of subdivision a of

Division B of Part I of ITA

▪ ITA 5 = salary, wages, other remuneration, including gratuities received (gratuities =

tips)

▪ ITA 6 = taxable benefits

▪ ITA 7 = stock option benefits

▪ ITA 8 = deductions

▪ It is possible to have an employment income loss but it is very rare

▪ Read ITA 5(1)

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3520-2: Last updated on Sept 10, 2014 3-16

This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].

3.2 Bonus Arrangements [3-7 to 3-11]

▪ ITA 5 taxes employment income on a "received" or "cash" basis rather than an accrual basis

▪ See examples in 3-8 and 3-9

▪ See Figure 3-1

3.3 Net Concept [3-12 to 3-13]

▪ Employment income = ITA 5, 6 and 7 inclusions minus ITA 8 deductions

3.4 Employed v. Self-Employed [3-14 to 3-44]

▪ Self-employed = business person = consultant = independent contractor earning business

income

▪ Over the last few years, many firms have "contracted out" different services, hiring

independent contractors to do work previously done by employees

3.4.1 Employee's perspective

▪ First, deductions for employees are limited by ITA 8 and are very limited

▪ Commissioned employees enjoy more deductions than salaried employees but self-

employed taxpayers get the most deductions

▪ Second, payroll withholdings must be made for employees

▪ Tax [ITA 153]

▪ No tax is withheld on business income; tax instalments are made instead (if required,

as discussed in lecture 1) and there is some ability to defer tax here because

instalments can be based on prior year's taxes

▪ EI

▪ Both employees and employers must pay; generally speaking there is no EI for a self-

employed person

▪ However, starting January 2011 self-employed persons who participate in this

voluntary program have been able to access employment insurance special benefits.

This voluntary program will require the self-employed person to pay EI premiums

(for at least 12 months) and it then allows them to access certain benefits such as

maternity leave. There are no EI benefits when a self-employed person is “laid off”

or loses clients

▪ CPP

▪ Both the employee and employer make CPP contributions

▪ The rate for self-employed persons is double the rate for employees (because there is

no “employer” making contributions so they pay it)

▪ Third, fringe benefits/job security

▪ Only employees get fringe benefits such as medical plans & pensions and can get

severance if they are terminated (i.e., an advantage to being an employee)

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Document Summary

Ita 2 is the charging provision [1-77 to 1-90] 2. 3. 1 division b of part i of the act- computation of net income for tax purposes: taxable income = net income for tax purposes minus division c deductions, division b has subdivisions for each source of income: 2. 3. 2 computation of income ita 3 [1-106 to 1-126: see fig 1-3. Ita 3 brings together all the different sources of income to form net income for tax. They can be carried back to the preceding three years and deducted against tcgs in those years (if any) and/or carried forward indefinitely and deducted against future tcgs. If not deducted before death, they can be deducted in the year of death (and the immediately preceding year) against any type of income: see example at 1-125. Ita calculates income by source: for example, employment income is computed separately from business and property income and separately from capital gains/capital losses [ita section 4].

Related Questions

Case study - Australia Tax

Mr George Sykes was born in Australia and had lived here all his life. He successfully applied for a position in Singapore to help operate a branch office of his Australian employer. On 1 December 2010, he was transferred to the position for a minimum of two years.

George was accompanied by his wife, Karen, but their sixteen-year-old daughter, Stephanie, stayed in Perth to finish her schooling and attend boarding school.

Arrangements were made for her to travel to Singapore for all school holidays. the Sykes made a decision not to sell their jointly owned house and chose to rent it out for the period of their absence. George maintained a small bank account balance of $5,000 in Australia as an emergency fund. His salary of A$90,000 a year was paid by his employer from Australia into his bank account in Singapore, with the exception of an amount A$10,000 which George had requested his employer to pay direct to his father in Perth to cover his father's medical expenses. Singapore tax was paid on the salary.

George worked successfully in Singapore, returning to Australia three times a year for brief visits to report to his employer. However, due to financial problems the branch office was forced to close and George and his wife returned to Australia on 31 March 2012. Net rent (rental receipts less expenses) on the Australia house for the period1 July 2011 to 31 March 2012 is A$14,000.

REQUIRED:

Do complete all the test.

(a) Advise George of his likely residency status for Australian income tax purposes for the year ended 30 June 2012 (5m)

(b) Assuming George would be treated as a resident, identify and briefly discuss the tax issues (consequences) that would arise. (1.5m)

(c) Assuming George would be treated as a foreign resident (non-resident) identify and briefly discuss the tax issues (consequences) that would arise.

(d) Idnetify and briefly discuss any other relevant issue(s) to be considered in determining George's Australian tax liability for the year ended 30 June 2012 (1m).

LECTURE'S NOTES:

1. Common law test- "Reside" means any place you stay habitually more than temporary

2. Domicile test - Country of birth, Australia?

3. Were you living in Australia more than 6 months/ 183 days?

4. Did superannuation contribute?

Consequences of the Test:

(A) Resident

1. Income sourced in or outside of Australia is accessible

2. Enjoy tax-free threshold of A$18,200

3. Subject to ML & MLS (Levie and Surcharges)

4. Enjoy tax-offset

Non-Resident:

1. Income sourced in Australia only are assessable

2. No tax free threhold- charge the first dollar

3. No ML or MLS

4. No tax-offset

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QUESTION 1 The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True False 0.2 points Saved QUESTION 2 Employees of a company would not have a reason to use the information provided by financial accounting. True False 0.2 points Saved

QUESTION 3 Financial accounting should be used for assessing the financial health of large organizations only. True False 0.2 points Saved

QUESTION 4 Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True False 0.2 points Saved QUESTION 5 Lenders might use the information produced by financial accounting when making loan decisions. True False 0.2 points Saved

QUESTION 6 Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. True False 0.2 points Saved

QUESTION 7 Financial accounting is helpful to investment advisors. True False 0.2 points Saved

QUESTION 8 Financial accounting is more useful than managerial accounting. True False 0.2 points Saved

QUESTION 9 The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True False 0.2 points Saved

QUESTION 10 Which of the following statements is true of financial accounting? A. It is used by external parties to make investment decisions. B. It is used to make lease or purchase decisions. C. Managerial accounting is another name for financial accounting, D. It is primarily used to make internal decisions of a business. E. The effectiveness of advertising can be judged using financial accounting. 0.2 points Saved QUESTION 11 The charge for using money over time, often associated with long-term loans, is known as: A. interest. B. principal. C. distribution charge. D. cash dividend. E. preferred dividend. 0.2 points Saved QUESTION 12 Which of the following is a common feature of financial and managerial accounting? A. Both have same objectives B. Both are prepared according to U.S. GAAP C. Both are reported at year end in the annual report D. Both are analyzed by external users while making investment decisions E. Both are used by the management in making decisions 0.2 points Saved

QUESTION 13 Dividends are required to be paid to stockholders on an annual basis. True False 0.2 points Saved

QUESTION 14 An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True False 0.2 points Saved

QUESTION 15 Corporations do not exist as separate legal entities apart from their owners. True False 0.2 points Save Answer

QUESTION 16 It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. True False 0.2 points Saved

QUESTION 17 Stock markets match up investors who wish to buy shares with those who wish to sell them. True False 0.2 points Saved

QUESTION 18 Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: A. stocking. B. filling. C. attributing. D. registration. E. incorporation. 0.2 points Saved

QUESTION 19 An advantage of ownership in a sole proprietorship over ownership in a corporation is: A. tax benefits. B. having a board of directors. C. the ability to raise capital through issuance of stock. D. separation of owner and business as legal entities. E. limited liability for debts. 0.2 points Saved

QUESTION 20 Who hires the management of a corporation? A. Stockholders B. Board of directors C. Creditors D. Government E. SEC 0.2 points Saved QUESTION 21 Inventory refers to the: A. excess amount paid for an asset over its fair value. B. intangible assets of a business. C. merchandise bought or manufactured for the purpose of selling. D. amount of net income reinvested by company for future operations. E. revenue generated from investment. 0.2 points Saved QUESTION 22 Investors use financial information to predict whether a: A. company will recruit more employees. B. company's stock price will increase C. company has invested in buildings. D. company will pay salaries. E. company's bond price will increase. 0.2 points Saved

QUESTION 23 Financial accounting can be compared to a portrait. True False 0.2 points Saved

QUESTION 24 Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True False 0.2 points Saved

QUESTION 25 The information reported in financial statements must be exact for an investor to make any decision. True False 0.2 points Saved

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ADMS 4562 Lecture Notes - Lecture 2: Independent Contractor, Capital Cost Allowance, Net Income

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