Acco340Lecture 2-3 - Employment Income

Corporate marginal tax rate 40 employee non

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Corporate marginal tax rate – 40% - Employee: - Non-relocation house loan - $100,000  - Marginal combined federal & provincial tax rate – 48% - Mortgage rate – 7% - Prescribed rate – 6% Alternative #1-No Interest-Free Loan Provided Employee
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Mortgage loan interest- $100,000 x 7% = $7,000 (after tax) Before tax salary required-$7,000 ÷ (1.00 - .48) =$13,462  -Gross salary required to net $7,000 Employer Salary expense $13,462 Corporate tax reduction @ 40% (  5,385 ) After-tax cost $  8,077 Alternative #2-Interest Free Loan Provided Employee Taxable benefit ($100,000 x 6%) = $6,000 Taxes payable @ 48% = $2,880 Gross-up salary to pay taxes ($2,880  ÷  (1.00 – .48) = $  5,528 Employer Gross-up salary expense $5,528 Corporate tax reduction @ 40% (2,215 ) After-tax cost $  3,323 After-tax Lost Earnings $100,000 x 15% x (1.00 - .40) $  9,000 Total After-tax cost of providing loan $12,323 Conclusion Alternative 1, payment of additional salary is the better alternative, ignoring other factors such as, ability for employee to obtain  loan or ability to grant salary increases as per company salary policies.                                                                                    APPENDEX   The following on deferral elections is general information only and will not be tested: STOCK OPTION BENEFIT DEFERAL – FOR OPTIONS EXERCISED AFTER MARCH 4, 2010 Deferral(until disposal) of income inclusion on exercising options, up to $100,000 under ITA 7(8) if: i) Acquisition of shares through options was a "qualifying acquisition" ii) Taxpayer must make an election under ITA 7 (10) in order to have ITA 7(8) apply. "Qualifying acquisition" is defined under ITA 7(9) as follows: i) Acquisition of shares under options occurs after Feb. 27, 2000
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ii) Employee is entitled to a 50% deduction under ITA 110(1)(d) (ie, option price on Grant date was not less than FMV; options for common shares; employee deals at arm's length with employer) iii) Employee not a "specified shareholder" (ie individual who owns at least 10% of corp. shares) iv) Acquired shares must be listed on a Canadian or foreign stock exchange Election must be filed with employer by Jan. 15 of the year following the share acquisition. Employer is responsible to report the deferred benefit on the employee's T4 for the year shares were acquired and which will be included in income in year employee disposes the shares, dies or ceases to reside in Cda. Annual elected amount cannot exceed the lesser of $100,000 and the " specified value", defined in ITA 7((11) as the FMV of the shares at the time the options were granted , times the shares available on options that vest during the year (ie, not based on number of shares under options but not yet vested). Note: If FMV at the time of the option and the option price are different, then it is the FMV that prevails in respect to the tax deferral computation.
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