AFM362 Lecture Notes - Lecture 3: Tax Deduction, Withholding Tax, Operating Expense
28 Jun 2018
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Department
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Option grant date
: the employee is granted the option to purchase a certain number of shares at specified price,
known as the option price. Most options have an expiry date. There are no tax implications to an employee at the
time the options are granted
•
Number of shares exercised x (fair market value
(FMV)
of shares when exercised
-
option price)
○
Exercise date
: an employee of a public company will include an employee benefit when he exercises the option to
purchase the shares at the option price equal to
•
Number of shares sold x (proceeds of disposition - FMV of shares at exercise date)○
The capital gain or loss would be included in the calculation of net income at 50%
○
Selling date
: the employee will include in their net income for tax purposes a capital gain or loss equal to:
•
If an employee is granted options that were not in the money at grant date, there is an available Division C partial
deduction available to employees in the calculation of taxable income equal to one-half of the employment
income inclusion
•
Division C deduction
Employment income: Number of shares exercised x (fair market value (FMV) of shares when exercised -
option price)
○
Capital gain/loss: Number of shares sold x (proceeds of disposition - FMV of shares at exercise date)○
Main difference is that the inclusion of benefit when exercised occurs at the time that the shares are disposed of.
So at selling date:
•
3,125.20 rules applicable to Canadian
-
Controlled private corporation
If the options are not in the money at grant date, there will be a deduction equal to one
-
half of the
employment income inclusion under ITA 110(1)(d)
○
If the options were in the money at grant date but the employee held the shares for at least 2 years, there
will be a deduction available equal to one-half of the employment income inclusion under ITA 110(1)(d.1)
○
If one of the two criteria is met•
Division C deduction
The deduction of one
-
half of the employment income inclusion would be taken in the same taxation year as the
employment income inclusion
•
The employment income inclusion will be the same regardless of whether the employee works for a public or
CCPC. It is the timing of the inclusion that's different.
•
Two main points to remember when discussing stock option benefits
3,125.40 additional considerations relating to stock options
Easy to value if the shares are actively trade. •
Difficult if it's not. CRA's approach to valuation of this nature is contained in information circular 89-3•
Valuation of shares
Tax is required to be withheld at source on a stock option benefit, as if it were a bonus
•
The tax is withheld in the year the option is exercised not when it's granted•
The portion of the benefit that is deductible under Division C; or○
Benefits arising from rights granted before 2011 that included a written condition prohibiting the taxpayer
from disposing of the securities acquired under the agreement for a period of time after exercise
○
This withholding doesn't apply to:
•
Stock options - withholding tax
Public share prices fluctuate constantly depending on industry trends, interest and exchange rates, government
policies, and various other global factors
•
If you exercise and simultaneously dispose the shares, you minimizes the risk of a taxable benefit in income and an
economic loss on disposition
•
Risk factors
Employee may have the option to sell the stock options back to employer for cash
•
If its done, the amount earned from selling is recognized as employment income for the employee. The employer
will receive a tax deduction for the same amount.
•
The tax deduction is limited to prevent the possibility of both a Division C deduction for the employee and an
income deduction for the employer
•
Stock option cash outs
3,130 automobile benefits
When automobile is provided by an employer to an employee
•
The standby charge: this is the benefit that the employee receives from having the use of a capital asset; and
○
The operating benefit: this is the benefit received as a result of the employer paying for the cost of
operating the vehicle provided
○
The ITA specifies how the quantity of the benefit will be calculated. These rules consider two primary benefits•
Motor vehicle- an automotive vehicle designed to be used on highways and streets but not trolley buses or
vehicle on rails
○
Automobile- a motor vehicle designed to carry up to nine individuals plus baggage, including vans, certain
pick up trucks and station wagons but excluding ambulances ,taxis, hearses, vehicle inventory and clearly
marked fire department, police vehicles
○
Passenger vehicle
-
an automobile acquired or leased
○
Definitions in respect of cars:
•
Overview
A standby charge represents a benefit conferred upon an employee through the availability of a company owned
or leased automobile for all use
•
A/B ratio represents a reduction of the standby charge if employee uses the vehicle primarily (more than 50%) for
employment related purposes
•
3,130.10 calculation of the standby charge benefit
Taxable benefit for personal use
•
When employer pays for the operating expenses such as gas, insurance, maintenance cost but not parking costs•
Number of personal km driven in a year x the prescribed rate (25 cents/km in 2017)
•
If employee uses the employer provided vehicle primarily for work (more than 50%), an alternative computation is
50% of the reduced standby charge
•
Any reimbursement by the employee made to employer during the year or within 45 days of the end of the year
relates to the personal use of the vehicle will reduce the employment income inclusion related to that vehicle.
•
3,130.20 calculation of the operating benefit
If employee brings a car but employer pays for all operating costs of the automobile•
Total costs paid of employer prorated by personal use km/total used km by employee
○
The value of any benefit received by an employee for automobile operating expenses
attributable to personal use
must be included in income
•
3,130.40 employee
-
owned automobile operating expense benefit
3,140 other benefits
The general wording of the Act indicates that all benefits received and enjoyed by virtue of an individual's
employment will be included as part of the employee's remuneration and will be taxable.
•
Overview
Meaning the meals and room that are provided when someone pays to stay somewhere, for example when
working or studying away from home. Definition found on internet, not in textbook
•
All board and lodging supplied by an employer will be considered a taxable benefit in the year•
This amount should cover food preparation and service costs○
Where a lesser amount is recovered, the difference between that cost and the total cost will be taxable ○
If a "reasonable amount" is recovered from the employee, then it will not be a taxable benefit
•
The special work site must be a distance away from the employee's ordinary residence such that he cannot
reasonably be expected to travel daily and the nature of the duties or the remoteness of the worksite must
be it's not reasonable to establish and maintain a self-contained domestic establishment as his principal
place of residence
○
The board and lodging is necessary for not less than 36 hours and if an allowance is paid by an employer not
The Act excludes the value of board and lodging at a special work site or remote location. The conditions that must
be met for exception to apply:
•
3,140.10 board and lodging
Adjusted cost base
Remember capital gain and taxable capital gain (1/2 of CG)
B = 1,667 x total periods available (total available days/30)•
A/B * 2% * (full original cost of an employer owned automobile including HST * total periods available
(total available days/30))
A/B * 2/3 * (lease payments including HST - portion of the lease payment relates to insurance for loss
damages and liability in using the automobile)
AFM 362 Page 2
Document Summary
Option grant date: the employee is granted the option to purchase a certain number of shares at specified price, known as the option price. There are no tax implications to an employee at the time the options are granted. Exercise date: an employee of a public company will include an employee benefit when he exercises the option to purchase the shares at the option price equal to. Number of shares exercised x (fair market value (fmv) of shares when exercised - option price) Selling date: the employee will include in their net income for tax purposes a capital gain or loss equal to: Number of shares sold x (proceeds of disposition - fmv of shares at exercise date) The capital gain or loss would be included in the calculation of net income at 50% 3,125. 20 rules applicable to canadian- controlled private corporation.
