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In: Accounting

1. On January 2017, Tom received a job offer from XYZ Inc. Tom was very happy...

1. On January 2017, Tom received a job offer from XYZ Inc. Tom was very happy with the offer as in addition to the starting salary of $120,000 the company also provided the use of a company car and Tom was eligible for a low interest employee loan. Tom accepted the offer of employment from XYZ Inc. and also accepted the use of the company car. It is now March 2018, Tom has received his T4 to prepare his personal tax return for 2017. Tom is upset and confused as his taxable income is $135,000 and he was expecting that his income would be $120,000 as per the starting salary. He is very upset as he has to pay income taxes on the extra $15,000 of employment income and he does not understand why. Please provide clarity to Tom so he understands why he has to pay additional taxes.

Solutions

Expert Solution

Here Tom has been offerd three things by company:

1 Salary of $ 120,000

2 Use of the company car

3 Low interest employee loan

Salary is monetary compensation paid by company, while use of car and low interest employee loan are perks offered by company which are non monetary in nature. Here, it worth noting that although perks are non monetary in nature but they are taxable for tax computation. Both of perks are valued here for $ 15,000 for which tom has to pay additional tax on them.

The valuation is based on fair value for these perks like for employee loan if market interest rate is 10% but company is offering employee loan @ 5%, then 5% interest is the value for perk of low interest employee loan. Similarly, for car use if same car is provided by some rental company, then that value can be used to value the use of company car perk.

So, from above explanation tom can know why he has to pay taxes on $ 15,000 of employment income.

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ekkarill92 answered 2 years ago
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