Deck 4: Income From Employment

Question 1

Which of the following, when provided by an employer, is NOT a tax-deferred or tax-free benefit for the employee?

A)Contributions to the employee's registered pension plan
B)Premiums for private health care plans providing extended health coverage beyond a public plan
C)A near-cash gift for the employee's wedding
D)Counselling services to prepare the employee for retirement

Answer 1

C

Question 2

Kate Bell was employed by The Tea Shop (a Canadian controlled private corporation)from January December of 20x4. She earned a gross salary of $72,000.
She had the following deductions from her pay during the year: The following amounts were paid by The Tea Shop in 20x4 on Kate's behalf: Additional information:
On January 15, 20x2, Kate was given an option to purchase 500 shares of The Tea Shop for $5.00 pe The market value of the shares on that date was $5.50. Kate exercised her option on June 1, 20x3 wh shares were valued at $7.00. She then sold the shares on March 17, 20x4 when the market value was share.
Kate pays $50 a month for her cell phone which she uses to keep in touch with friends and family. S pays $80 a month to dry-clean her suits, and she purchases a new suit for $200 every three months. K purchased $300 worth of merchandise (at cost)from her employer during the year. The retail value o merchandise was $500.
Kate contributed $1,000 to her RRSP during the year. Required:

A)Calculate Kate's minimum net income for tax purposes for 20x4, in accordance with Section 3 of Income Tax Act. Identify items that have been omitted in your calculations.
B)Will Kate be able to deduct the stock option deduction to arrive at her taxable income? Why or w not?

Answer 2

Merchandise at cost-tax-exempt benefit
B)The shares are from a Canadian controlled private corporation. Therefore, Kate either has to hold the shares for two years after acquisition, or the option price must be equal to or greater
than the fair market value at the option date. Neither of these requirements has been met.
Therefore, Kate will not be able to deduct the stock option deduction in arriving at her taxable income.

Question 3

Which of the following factors are used by the courts in order to determine a taxpayer's status as an employee or a self-employed contractor?

A)control test, employer test, chance of lawsuit, integration test
B)control test, ownership of tools test, chance of profit and loss, integration test
C)control test, ownership of tools test, chance of lawsuit, integration test
D)control test, employer test, chance of profit and loss, integration test

Answer 3

B

Question 4

Simon Stevens is a high school history teacher. Simon is a national expert in ancient Mayan ruins.
In July of 20x1, he was hired by the local university to teach an elective course in ancient Mayan
history. Simon then conducted a field trip of the ruins in Guatemala with some of the local students from July 27th to August 7th. He recruited another local expert to teach his last class that fell during dates of the trip.
Simon earned $55,000 from his teaching job. He negotiated a contract price of $5,000 to teach the un elective and $7,000 to conduct the tour. The university provided Simon with office space during the July. He used his laptop computer to prepare his lectures and the tour material. Additionally, Simon used his extensive collection of books to prepare his notes. He was not provided any benefits or
insurance by the university. Simon was paid on July 31st and August 31st.
Simon is not sure how to prepare his tax return. He has a number of expenses from his university job wants to know if he can use them to reduce his taxes payable.
Required:
Determine the tax treatment of Simon's income for 20x1. Apply the four tests within the guidelines u courts to determine whether a taxpayer is an employee or an independent contractor.

Question 5

Susan was provided with a company car to drive from March 1st to December 31st of the current year. The car cost the company $22,000, plus GST (5%)and PST (6%) totaling 11%. Susan drove the car a total of 15,000 kilometres during the year. 11,000 kilometres were for business purposes and the other 4,000 kilometres were for personal use. Susan's employer pays for all of the vehicle's operating costs which totaled $1,100. What is the minimum amount that Susan will report in total taxable benefits as result of the above information? (Round your answer.)

A)$5,924
B)$2,212
C)$1,758
D)$1,172

Question 6

Cindy works for Sky Manufacturers, a public corporation. In 20x1 she was offered an option to purchase shares at $15 per share from her employer. The fair market value on that day was $17 per share. The option had a four year exercise time-limit. Cindy exercised her option in 20x3 and purchased 500 shares. The fair market value at that time was $21 per share. What is Cindy's tax treatment of this option on her 20x3 tax return?

A)$2,000 taxable benefit and a 50% security option deduction
B)$3,000 taxable benefit and a 50% security option deduction
C)$3,000 taxable benefit and no security option deduction
D)$2,000 taxable benefit and no security option deduction

Question 7

Steven is employed by Big Rigs Inc., a Canadian controlled private corporation. Steven earned $85,0 20x1. During the year, the following occurred:
A cash bonus of $8,000 was announced on December 3rd, to be paid to Steven on January 10th of th following year.
Steven was provided with a company car which he drove all year. The cost of the car (including taxe
$40,000. All operating costs were paid by the employer. Steven drove the car 21,000 kilometres in 2 which 10,000 kilometres were for personal use.
Big Rigs contributed $5,000 towards Steven's registered pension plan. Steven contributed $5,000 towards his registered pension plan.
Steven was presented with a watch from Big Rigs, valued at $200, on his birthday.
The company provided Steven with a $200 cell phone to be used for business purposes.
In January of 20x1, Big Rigs loaned Steven $15,000 at a rate of 1% interest. The CRA's prescribed ra interest during the year was 3%.
In January, Steven was offered a stock option to purchase 2000 shares in Big Rigs at a cost of $8.00 At that time, the fair market value per share was $9.00. Steven exercised his option in February when market value had risen to $9.50 per share. At the end of the year, Steven had not sold any of the shar was hoping to purchase more shares in the company in the upcoming year.
Big Rigs provided Steven with a $25 meal allowance every week due to the two hours of overtime th required to work each Wednesday immediately following his eight hours of regular work.
Steven's annual union dues totaled $850, which was deducted from his pay. Required:

A)Calculate Steven's minimum employment income for tax purposes in accordance with Section 3 o Income Tax Act
B)Identify any items that have been omitted in your calculations, and briefly explain why

Question 8

An individual has the option to receive a $1000 annual bonus and invest the after-tax amount for 25 years, or receive $1000 per annum in a registered pension plan for the next 25 years. Assuming a
constant rate of return of 8% and a tax rate of 40%, what will be the total after-tax difference between the two plans? Show all of your work.

Question 9

Andy worked for High Speed Bikes Inc. from March 1st to December 31st during 20x1. He earned a monthly base salary of $4,000, plus 1% commission on all of his sales. During 20x1, Andy's sales
totaled $800,000. Andy was required to pay for his employment expenses. He traveled out of his
city most days in order to sell to customers in surrounding towns. He received a monthly allowance of $500 to cover his traveling costs (which has been accurately recognized as 'unreasonable'). Andy a employer each contributed $2,000 to the company's registered pension plan in 20x1.
Andy provided you with the following receipts for 20x1: Andy purchased a new vehicle for work during the year, and drove it a total of 25,000 kms while em High Speed Bikes. 12,000 of these kilometres were for business. The vehicle cost Andy $32,000 plus 5% and PST of 5%. Work-related interest payments on the car loan totaled $200 per month.
Required:
Calculate Andy's employment income for 20x1 in accordance with Section 3 of the Income Tax Act.

Question 10

Sarah borrowed $25,000 from her employer at a rate of 1% interest. At the time the loan was made, the CRA's prescribed rate of interest was 3%. Sarah is in a 40% income tax bracket. What is the actual cost (rate)of Sarah's loan? (Assume there are no fluctuations in the prescribed rate of interest.)

A)1%
B)2%
C)1.8%
D)1.2%