AFM 206

Employment income
and the T4

Module B
Week 2 Lecture
Topics: Employment Income and the T4 2

§ Overview: What is employment income

§ Let’s look at the Income Tax Act – the statute behind income tax

§ What is included in employment income

§ Review the taxable benefits
§ Other aspects of employment income

§ Form T4
 VIDEO 2(1)
Overview of employment income
But, what is employment income???
Ø Google it!

Ø Try the CRA T1 Guide

Ø Try the T4 instructions

§ Income from providing services to another party…

(you must be employed!, more on that later...)
§ CRA website describes Line 10100 of the T1 (Employment Income) as follows:
§ Employment income can consist of amounts you receive as salary, wages, commissions (see
line 10120), bonuses, tips, gratuities, and honoraria
What is employment income
§ Being employed is different from being self-employed (which is a form of
conducting a business).
§ Deductions for employed people are very limited
§ Self-employed people have a wide range of business deductions!

§ Generally, employment involves working for someone who gives direction on how
to do the job and paid for time

Key concept #2: Taxation follows legal structure

in this case, of the relationship between worker and the contracting party
Employment income – General Principles
• Calculated on a cash basis (based on when you receive the income…not when you
earn it…)
Key concept #3:
• Starting point is 0 and add all inclusions on a gross basis and
There is constant
take away any allowed deductions tension between
• Generally, any income or benefit paid/enjoyed is added to employment the gov’t and
income except for specific items taxpayers
• Generally, any expense paid/incurred is not deducted except for specific items

• Amounts collected/withheld/deducted by an employer (income tax, CPP, EI, etc.)

are generally not deductible in calculating employment income but rather are
credits taken in other parts of the tax return (next module!)
How do we calculate employment income?

Income Tax Act Practical: reporting

Inclusions: Salary, wages, and other § Employer responsible for computing
section 5 remuneration (e.g., tips, bonuses)
received in the calendar year employment income and issuing a
Inclusions: + Other employment income
T4
section 6 items (e.g., taxable benefits)
§ Not all items included on the T4 slip
Inclusions: + Stock option benefits
section 7 § For example, an employer may not know
Deductions: - Specific deductions allowed the costs incurred by the employee that
section 8 are deductible
Part I, Div. B Employment Income Key concept #6: Part of “all
sources” of Div. B income
Key concept #4: Income is a net concept
 VIDEO 2(2)
Statutory provisions for employment income
What Does The Act Say? 9

5(1) Income from office or employment –

Subject to this Part, a taxpayer's income for a taxation year from an office or
employment is the salary, wages and other remuneration, including gratuities,
received by the taxpayer in the year.

What is important here?

What Does The Act Say?
Taxation year – calendar year!
5(1) Income from office or employment –

Subject to this Part, a taxpayer's income for a taxation year from an office or
employment is the salary, wages and other remuneration, including
gratuities, received by the taxpayer in the year.

Cash basis!
That’s tips….bummer (with a few exceptions)
What Does The Act Say? 11

6(1) Amounts to be included as income from office or employment –

There shall be included in computing the income of a taxpayer for a taxation year as
income from an office or employment such of the following amounts as are
applicable:
(a) Value of benefits – the value of board, lodging and other benefits of any
kind whatever received or enjoyed by the taxpayer in the year in respect of,
in the course of, or by virtue of an office or employment, except any benefit…
(b) Personal or living expenses – all amounts received by the taxpayer in the
year as an allowance for personal or living expenses or as an allowance for any
other purpose, except…
What Does The Act Say?
8(1) Deductions allowed –
In computing a taxpayer's income for a taxation year from an office or employment,
there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may reasonably be
regarded as applicable thereto…
Can only deduct the small list in the Act

8(2) General limitation – Except as permitted by this section, no

deductions shall be made in computing a taxpayer's income for a taxation year
from an office or employment.
SECTION 6: Taxable benefits
Section 6 provides a general principal and then a list of inclusions and
exceptions
Key concept #3:
• Cash and near-cash There is constant
Inclusions: • Things received or enjoyed tension between
the gov’t and
• Very few
taxpayers
Exceptions: • Only those listed in ITA or CRA docs

General rule: Value of benefit = fair market value less any payment the employee
made towards the benefit
 VIDEO 2(3)
More detail on taxable benefits
What Does The Act Say? 15

6(1) Amounts to be included as income from office or employment –

There shall be included in computing the income of a taxpayer for a taxation year as
income from an office or employment such of the following amounts as are
applicable:
(a) Value of benefits – the value of board, lodging and other benefits of any
kind whatever received or enjoyed by the taxpayer in the year in respect of,
in the course of, or by virtue of an office or employment, except any benefit…
(b) Personal or living expenses – all amounts received by the taxpayer in the
year as an allowance for personal or living expenses or as an allowance for any
other purpose, except…
What are taxable benefits? 16

§ It’s the indirect compensation; the stuff other than salary, bonuses and other
direct (obvious) compensation…
§ Often not obvious (hence the phrase ‘indirect compensation’) Key concept #1:
Tax laws appear
§ The rules may seem arbitrary, and sometimes they are! arbitrary but
guided by
economics and
Someone else can social goals
provide the benefit OR
enjoy the benefit
General Principal: Received or enjoyed
Include most things in income
• Anything received or enjoyed as a result of employment activities
• Cash from anyone (even if not employer)
• Stuff received
• Other benefits received

Do not include
• Very few items specifically identified in ITA or CRA publications
• RPP, many health plans
• Reimbursements of employer’s expenses paid by employee
• Nominal value stuff (not cash or equivalents)
Section 6: Common taxable benefits
Included:
§ Cash or near-cash gifts or awards
§ Other fringe benefits – see CRA T4130 guide
§ Value of board and lodging (incl. meals)
§ Employment insurance benefits
§ Allowances
§ Interest-free or low interest loans
§ Auto benefits- complex rules
Not included
§ Non-cash gifts or awards (total $500 or less)
§ Nominal items (e.g., coffee, mugs, t-shirt with
employer logo)
§ Overtime meals
§ Group sickness or accident insurance plan (e’er
contributions)
§ Private health plan premiums (e’er)
§ Reimbursements
§ Registered Pension Plan (RPP) (e’er)
Other (maybe not so obvious) taxable benefits
§ Rent free and low-rent housing
§ Gifts (wedding, holiday) from an employer that are in cash or near cash (see exceptions on
previous slide)
§ Holiday trips and other prizes and incentive awards
§ Spouse travel, if no business reason for spouse’s presence
§ Tax return preparation fees!
General rule:
§ Day care reimbursement (but on site daycare is NOT a taxable benefit)
value ($$ amount)
§ Fitness, gym or health club memberships of a benefit is fair
§ Transit passes market value
 VIDEO 2(4)
Other points for employment income
Allowances are taxable 21

What is an allowance?
§ An allowance is a fixed, specified amount that is paid to an employee on a regular
basis, over and above a normal salary, to cover certain expenses incurred by the
employee
§ Key: the employee does not need to provide any explanation for how they spend
the $$ !
§ But then there are nine exceptions! (e.g. reasonable overtime meal allowances…)
And CRA issues
guidance on what’s
Note: Special rules for salespeople…and reasonable…
for travel for non salespeople…
Reimbursements are NOT taxable…. 22

§ Just to close the loop on this….

Allowance ≠ Reimbursement

§ If an employer reimburses an employee for a business expense (based on an

expense report usually), that payment is usually not a taxable benefit
§ Usually this would be items like business travel (airfare, hotel, meals) and could be
business mileage when using a personal car
§ It can also include moving expenses (more on that in Week 4)

Tax-efficient compensation planning may lead companies to

structure compensation so reimburse amounts rather than giving
an allowances for costs – saves employee tax and the employer $$
Reminder: Understanding Income Tax 23

In addition to ITA (and case law), we can also refer to:

CRA website
CRA publications and guides
What to report and
CRA forms and instructions
what not to report
IT Bulletins/Folios on T4 slips !!!!

And that is what we will use in this course…we’ll use ‘CRA administrative policy and
interpretation ’ so you’ll be ready for preparing personal income tax returns
Summary: Decision Tree for Employment Items

Received Paid

Included Not Deductible Not

(taxable) Included Deductible

Difference = employment income

Section 7: stock option benefits 25

§ Taxed as employment income to the extent that the employee can pay less than
fair market value (FMV) for the stock as a result of an option or other contract
with the employer
§ So, if your employer is giving you a “benefit”, it is taxable to you!

§ Benefit = FMV of the stock at time of exercise – amount actually paid for the stock
= Market price when acquired stock – Exercise price
Stock options (security options benefits)
VERY complex rules,
tax depends on type
§ Sometimes employee get a deduction for 50% of that benefit of company and
other factors
§ ALSO, these rules impact the ‘cost base’ of these securities
when the employee sells them and must report a capital gain or loss (it increases
the cost base to FMV even though you didn’t pay FMV)
§ Taxed like regular stock ownership after acquired (taxed as a typical capital gain
or loss)

Very contentious area, tax law

changes were announced and
then delayed, modified, tried again…
 VIDEO 2(5)
Reporting: the T4 Slip
T4 Slip
Employer's name – Nom de l'employeur T4
§ Used by employer to tell
Year Statement of Remuneration Paid
Année État de la rémunération payée

employee the employment

Employment income Income tax deducted
Revenus d'emploi Impôt sur le revenu retenu
14 22

income and other relevant tax

Protected B when completed / Protégé B une fois rempli

Employer's account number / Numéro de compte de l'employeur Province of employment Employee's CPP contributions – see over EI insurable earnings
54 Province d'emploi Cotisations de l'employé au RPC – voir au verso Gains assurables d'AE

information
10 16 24
Social insurance number Exempt – Exemption
Numéro d'assurance sociale CPP/QPP EI PPIP Employment code Employee's QPP contributions – see over CPP/QPP pensionable earnings
12 28 Code d'emploi Cotisations de l'employé au RRQ – voir au verso Gains ouvrant droit à pension – RPC/RRQ
29 17 26

§ Also tells CRA the same

RPC/RRQ AE RPAP
Employee's EI premiums Union dues
Employee's name and address – Nom et adresse de l'employé Cotisations de l'employé à l'AE Cotisations syndicales

information Last name (in capital letters) – Nom de famille (en lettres moulées) First name – Prénom Initial – Initiale
18 44

RPP contributions Charitable donations

Cotisations à un RPA Dons de bienfaisance
20 46

§ Not always the complete Pension adjustment

Facteur d'équivalence
RPP or DPSP registration number
N° d'agrément d'un RPA ou d'un RPDB

computation of employment
52 50

Employee's PPIP premiums – see over PPIP insurable earnings

income
Cotisations de l'employé au RPAP – voir au verso Gains assurables du RPAP
55 56

Box – Case Amount – Montant Box – Case Amount – Montant Box – Case Amount – Montant

Some items are not known to the

Other information
§ (see over)

employer Autres Box – Case Amount – Montant Box – Case Amount – Montant Box – Case Amount – Montant

T4 (21)
renseignements
(voir au verso)

§ Some deductions are not tracked by T4

the employer
Employer's name – Nom de l'employeur

Year Statement of Remuneration Paid

Année État de la rémunération payée
Employment income Income tax deducted
Revenus d'emploi Impôt sur le revenu retenu
14 22
B une fois rempli

Employer's account number / Numéro de compte de l'employeur Province of employment Employee's CPP contributions – see over EI insurable earnings
54 Province d'emploi Cotisations de l'employé au RPC – voir au verso Gains assurables d'AE
10 16 24
Social insurance number Exempt – Exemption
Numéro d'assurance sociale CPP/QPP EI PPIP Employment code Employee's QPP contributions – see over CPP/QPP pensionable earnings
12 28 Code d'emploi Cotisations de l'employé au RRQ – voir au verso Gains ouvrant droit à pension – RPC/RRQ
29 17 26
RPC/RRQ AE RPAP
Some tools to help prepare a T4 You will be 30
preparing T4s
§ CRA Simple Payroll Deductions Online Calculator in your labs
§ Calculates income tax, CPP and EI withholding needed
§ https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/payroll-
deductions-online-calculator.html

§ CRA Benefits and Allowances chart

§ For taxable benefits, advises if you need to deduct CPP and/or EI, code for T4 slip and whether
to include GST/HST or not in the value of the taxable benefit
§ https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-
allowances/benefits-allowances-chart.html
Summary 31

§ Employment income is based on narrow rules

§ Generally, any form of compensation, broadly defined is included in income and

payments are not deductible, but it is very important to know the exceptions
§ Employers want to minimize the cost of their payroll, employees want to maximize
their after-tax income
§ As T4 preparers, ACCURACY is ** critical **

§ The T4 is tied to the ITA…!

§ CPA firms often assist clients with payroll consulting, compliance and T4
preparation due end of February (before T1 season)