John Markowski is a senior mechanic in the logging industry. Because of the specialized nature of his work, he is highly paid. His current employer pays him a basic salary with no special benefits.
Recently, Markowski received an offer of employment from a corporation in the same line of business. The salary offered is lower than what he currently receives but a number of benefits are included in the remuneration package.
Markowski is confused by the offer. He does not like the idea of a reduced salary but realizes that the benefits have some value. He also realizes that what is really important is the level of disposable income that he has for himself and his family.
Markowski has provided you with the pertinent information (see Exhibits 1 and 2) and has asked you to help him make a decision.
Required:
1. Determine what Markowski’s net income from employment for tax purposes will be if he remains with his current employer (Exhibit 1).
2. Determine what Markowski’s net income from employment for tax purposes will be if he accepts the offer from the competitor (Exhibit 2).
3. Assuming that Markowski pays tax at a rate of 40%, determine the amount by which his personal disposable income will increase (or decrease) if he accepts the new offer.
Exhibit 1: Information regarding current employment and certain other expenditures
1. Markowski’s gross salary next year will be $70,000. From this, the employer will deduct the required income tax, Canada Pension Plan contributions of $2,426, and Employment Insurance premiums of $914.
2. It is part of Markowski’s ordinary duties to work on equipment at locations other than the main repair depot. On average, he is called out of town two or three days each month. On such trips, he must always stay overnight in a hotel. His contract of employment requires that he pay his own automobile expenses. The company reimburses him for his hotel costs (lodging but not meals). No reimbursement is made for the vehicle.
3. Markowski leases his own car at $500 per month. He incurred the following additional travel costs in the current year:
Insurance ………………………….. $ 800
Repairs and maintenance………….. 600
Gasoline………………………….. 2,200
Meals (out of town)…………….. 200
During the year, Markowski drove a total of 22,000 kilometres, of which 4,000 were for his employer. Markowski anticipates that travel costs in the future will be about the same as they were this year.
4. Markowski is required to purchase and maintain his own small tools. Every year, he spends approximately $500 on new tools and to replace lost or stolen tools. He also purchases his own work coveralls and pays for their cleaning, which amounts to another $300 per year.
5. Markowski will take possession of his new home in three months, and he is currently shopping for a mortgage. He expects to obtain a $90,000 mortgage with interest at 8% for a term of five years.
6. Markowski maintains the following insurance policies:
Premium cost
Term life insurance of $300,000…… $1,200
Private medical insurance…… 600
House fire insurance……………. 1,000
7. Markowski is a golfer and belongs to a private club. His annual membership dues are $1,200.
Exhibit 2: Information regarding offer of employment with competitor
1. The proposed salary is $60,000 per year. From that amount, the employer will deduct the required income tax, Canada Pension Plan contributions of $2,426, and Employment Insurance premiums of $914.
2. The employer will lease an automobile identical to the one currently used by Markowski. However, the employer’s lease cost will be only $450 per month because of a fleet discount. In addition, the employer will pay the annual insurance cost of $800, the repair and maintenance costs, which are estimated to be $600 annually, and the gasoline costs of $2,200. Markowski will be entitled to operate the car for personal use. The number of business kilometres and personal kilometres driven will be the same as they are now. The employer will pay for all out-of-town meals when an overnight stay is required. The cost of meals is expected to be $200 per year.
3. The employer maintains a good supply of small tools, and mechanics are not required to purchase or use their own. In addition, the employer maintains a complete wardrobe of work coveralls, and so Markowski will not have to purchase or launder his own.
4. As a senior mechanic, Markowski will be entitled to a low-interest loan (3%) from the employer of up to five years’ duration. Such loans can be renewed at the end of term. The maximum loan amount is $10,000. Assume the prescribed interest rate set by the CRA is currently 7%.
5. The employer maintains a group term life insurance program and a private medical insurance program. At no cost to Markowski, the employer will provide $300,000 of group term life insurance as well as medical coverage equal to what he currently has. The premium costs to the employer will be as follows:
Life insurance…………………………. $900
Medical insurance…………………………. 500
These amounts are lower than Markowski’s current costs because group discounts are available to the employer.
6. The employer has agreed to pay Markowski’s annual golf club dues of $1,200. As Markowski does not entertain and deal with customers, the employer derives no benefit from Markowski’s membership in the club.