Employment Income, Lesson 2

Employment Income, Lesson 2 - Employment Income (Lesson 2)...

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Employment Income (Lesson 2)
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Employee Loans Employers occasionally offer interest-free or low interest loans to valuable employees To ensure equity amongst taxpayers, CRA prescribes minimum rates of interest, adjusted quarterly, based on the prime lending rate See Regulations 4300 and 4301 If there is a difference between the government’s prescribed rate and the rate given to the employee, it results in a deemed interest benefit under s.6(1) (a), s.6(9) and s.80.5
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Deemed Interest Benefit Calculated as: Amount of Loan X The rate prescribed in Regulation 4301 X Number of days/365 loan outstanding Less Interest actually paid by the employee before January 30 th of the following year
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Interest-free or Low Interest Loans As “Golden Handcuffs” Case 1 Individual with 40% tax rate receives a $50,000 loan from the bank at 10% interest Actual Annual Interest Paid: $ 5,000 Taxable Benefit: $0 Earnings required to pay the annual interest on loan: $5,000/.60 = $8,333 Case 2 Individual with 40% tax rate receives a $50,000 loan interest-free from employer CRA imputes a 10% interest rate: $5,000 Taxable Benefit: ($50,000 X 10%).40 = $2,000 Earnings required to pay the tax on this benefit: $2,000/.60 = $3,333
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Acceptable Uses for Employee Loans 1. Investment Purposes 2. Home Relocation or Home Purchase Loans
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Investment Purposes Employers may provide employees with loans for: Investing for business purposes (e.g. employee purchases car instead of requesting use of company vehicle), or To invest in income-generating assets, even shares of the company When the employee uses the loan to purchase income- earning investments: the deemed interest benefit must be added to income [ITA 6(9)], and the deemed interest benefit can be deducted as an expense when reporting the investment income [S.20(1)(c) ] As a result, the net cost to the employee is zero
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Home Loans Employers may offer employees low or no-interest loans to assist them with the cost of their housing: If the employee or the employee’s spouse is relocating, the loan is considered a “home relocation loan” and the move must locate the taxpayer at least 40 km. closer to work Loans can also be made to employees to purchase a new home or refinance an existing home mortgage The first $25,000 of the loan is exempt from tax for the first five years of the loan and is a Division C deduction for the taxpayer
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Imputed Interest on a Home Loan The interest rate benefit on a home loan is calculated on a quarter-by-quarter basis, and is the lesser of: a) the prescribed rate for the quarter while the loan was outstanding, or b) the prescribed rate in effect at the time the loan was made Option a) is a rate that changes every quarter whereas option b) locks in the prescribed rate in effect on the date the loan is granted The option b) rate can be used for a five year period (and a new option b) rate can be locked in again at
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This note was uploaded on 02/18/2011 for the course ECON 101 taught by Professor Professor during the Spring '11 term at American University of Antigua.

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Employment Income, Lesson 2 - Employment Income (Lesson 2)...

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