To achieve maximum satisfaction to the
employee at the least cost to the
Compensation is important for
reduces staff turnover
attracts best employees
helps in dealing with unions
3 types of compensation
Generally this is the amount paid in salary
The payment of salaries reduces the
taxable income of the employer by their
marginal tax bracket.
The employee's taxable income increases
If the employer is in the 18.1% tax rate
category, a 20% raise has an after tax
cost of 16.38%.
If the employer is in the 43.1% tax rate
category, a 20% raise has an after tax
cost of 11.38%.
A 20% raise to an employee in a 48.6%
tax bracket receives 9.72% in after tax $.
A 20% raise to an employee in a 29.24%
tax bracket receives 14.15% in after tax
Some types of indirect compensation are
taxable and some are not.
Refer to Handout
What value is there to
Economies of scale
Sometimes the employee would purchase
the item personally if not provided for by
Look at Handout of alternatives
Points to remember
It is very important for the employer to
examine compensation costs in after tax
Value forms of employee compensation in
terms of salary equivalents
Always explain alternatives to employees-
very rarely done.
Refer to Handout
While none are taxable to the employee,
they are deductible to the employer
except club fees.
They create additional cash flow in 2
eliminating tax on amt of benefits rec’d by
economies of scale
An employer pays $2,000 bonus to the
employee who is in a 40% tax bracket.
The employee needs additional family
health insurance and disability ins. The
employer is in the 18.1% tax bracket. The
employer can purchase these plans for a
20% reduction in cost from what the
employee would pay.
The salary increase or benefits package
cost to the employer is $2,000 - 362
(18.1% of 2,000) or $1,638.
The after-tax value to the employee is
On a bonus of $2,000 the employee pays
tax of $800 and thus pockets after tax
If we assume instead that the employer pays
$2,000 for the family health coverage and
Benefits recd tax free 2,000
Discount to employer 20% 500*
After tax value 2,500
*2,000 is after tax reduction so $2,000/.80=2,500
A $2,500 after tax value is = salary of $4,167.
It is worthwhile to provide employees
with tax free benefits that can be
purchased at a discount. Keep showing
employees in pre-tax salary equivalents
for the benefits they receive.
Compensation payment that is delayed
until some future time.
May lower tax rate on the income
If the pymts can be invested on behalf of the
employees, investment return is on a before
Saving for retirement
E.g.. Registered pension plans, (RPP) or
deferred profit sharing plans. (DPSP)
Deductible to the employer
Not taxable to the employee until
amounts are withdrawn in the future
There are limits to the amts available.
Essentially 18% prior yr earned income or
$13,500 per year.
E.g.. Employee profit sharing plan,
employee trusts or retirement
Employee is allocated employer
contributions and investment income
earned on the amounts contributed and
pays tax annually on mats.
When amts are withdrawn, no tax.
Stock based plans
Preferential treatment for stock dividends of
a Canadian controlled private Corp. (CCPC)
No tax on benefit when option exercised-
only taxed when shares are sold, therefore
tax bill coincides with receipt of cash from
sale of shares.
Responsibilities as an
Deduct income tax, CPP, and EI from
employee’s wages & remit to CCRA
Employer holds these amts in trust.
Remit these amts and your employer
share as well.
File T4’s showing employment income for
a yr on or before February 28 of the next
Send in deductions by the 15th of the
month following the month deductions
made. (If Sat or Sun - next working day)
Penalties and int for failure to do so by
the time limit:
10% of amt you should have remitted
Can be increased to 20% if done in the same
Failure to file T4’s-
$25 a day min penalty $100 and max $2,500
Directors are jointly liable with the corp to
pay the amounts due for wages. This
includes any penalties & interest.
The director is not personally liable
provided he/she takes positive action to
ensure the corp makes the necessary
Very hot area in the courts.
What if a business ends?
Send all remittances within 7 days of
Complete T4 and T4 supplementary
Do record of employment for all
3 conditions: Required to withhold CPP if
18 yrs of age or over but not 70 years old or
pensionable employment and
does not receive a CPP retirement or
Amts subject to Exempt from CPP
CPP Casual employment
Salary & wages employment of a child
Bonuses if no remuneration
Tips & gratuities employee as a census
taker or election
worker if not regular
stock option benefits employee & work <
How to deduct CPP
The employee pays a premium and the
employer matches it ($1 for $1)
You do not take into a/c any CPP paid in prior
Max pensionable amt is declared each yr. For
2003 – $39,900.
There is a basic yearly exemption - do not
deduct CPP if annually you pay less than this
amt. ($3,500 in 2003)
Earnings > $39,900 from one employer
does not result in CPP.
Max employee contribution in 2002 is
$1,801.80.( $39,900 - $3,500) x 4.95%
Max employer contribution is also
calculated at $1,801.80.
EI is based on “insurable employment”, which
includes most employment in Canada.
There is no age limit for deducting EI.
Both the employee and employer paid EI
For 2003, max EI insurable earnings is $39,000
at a premium rate of 2.1% for a maximum
annual premium of $819.
Employer pays 1.4 times the employee
Max amts apply to each job the person
Non insurable employment
casual employment Employment that is
non-arms length an exchange of work
employment or services
where a corp employs various other special
a person who controls circumstances
> 40% of the corp’s
The employer is required to deduct tax
from the pay of the employee
Each employee fills out a TD1 form or the
max amt of tax is withheld. (Claim code 1)
Code 0 in the books is for non-residents
Also now have to look up Newfoundland
Amounts subject to
deductions for tax
Salary & wages
The amount you use to determine tax ded
is the gross remuneration less the
employee’s contribution to a RPP and also
less the mat for union dues
Do not reduce gross remuneration for CPP
and EI withheld.
Nfld. Health & Post Secondary
Education Tax (HAPSET)
Referred to as payroll tax
General rate is 2% of taxable
Taxable remuneration = Remuneration
less the first $500,000 pd each calendar
The $500,000 is split among associated
All employers engaged in, about or in
connection with an industry in the
province must register with the WHSC.
Employers with at least one full time, part
time or casual worker is required to
register. (Includes the owner)
All incorporated entities must register
Non-incorporated business is required to
register only if a worker other than the
proprietor or partner is hired.
Optional personal coverage is available for
proprietors and partnerships.
Assessable Earning for WC
Regular salary Sick pay up to 13
Overtime pay consecutive wks
Directors fees Dividends
Vacation pay All other taxable
How is WC calculated?
Max amts of assessable earnings of about
$45,500 per employee.
The rates for WC are determined by
assessable earnings projections. The rates
in the booklet are per $100 of assessable
The classifications are done in accordance
For example, golf course maintenance is
Rate Code 9651 at a rate of $2.26 per
$100 of assessable payroll.
Hairdressing salons pay $.83 (Rate Code
Rate class 211 Veterinarians & kennels
are only .54.