Valerie Borg is a vice-president of Program Management with an equipment leasing company in Calgary. Recently, Valerie was approached by a large public company, Key Equipment Finance Limited ("Key"), which is based in Toronto, about the possibility of joining their firm. Valerie has always been looking for opportunities for career advancement and Toronto is an ideal city for relocation.
Valerie is in the process of negotiating her compensation package. She has just received a letter outlining a proposed package from Key. The package looks very attractive, but she would like to know the tax impact on various items outlined in the letter. Valerie is also interested in knowing the tax implications of the compensation package to her future employer. She believes that if she knows the cost to the employer, she will be in a better position to negotiate.
1. An annual salary of $150,000 and bonus, tied to the company's financial performance. Calculation of the bonus is based on the firm's December year-end results, with payment to occur on June 30.
2. Key offers to loan Valerie $200,000, interest-free, to help finance a new house. In addition, Key will reimburse all of her moving costs.
3. Key will pay the premium for Valerie to join its group term life insurance plan. Key will pay the premiums for a private health plan, a dental plan, and a drug plan. The company's insurance company is Green Shield.
4. Valerie is required to travel to Europe on a regular basis. Company policy permits a spouse to accompany its executives for these trips. Valerie's husband, Matt, is a freelance writer working from home. He is very excited about going to Europe with Valerie. The main purpose of the trips will be for Valerie to oversee the company's global operations. Her husband will spend his time visiting local museums. Key will pay a portion of the travelling expenses related to Matt.
5. Key will provide a BMW to Valerie. Valerie expects to drive the car 30% for business and 70% for her personal use. Valerie will receive a company credit card to be used to pay for gas and maintenance of the car. Key will pay a monthly lease of $850, including HST. Valerie will drive the car approximately 20,000 kilometers per year.
6. Key recently installed a fitness club in its building. All employees are encouraged to use the club free of charge. The club also offers free personal training. The equivalent value for similar facilities at a private club would be $1,100 per year, including applicable taxes.
7. Key pays for counselling services related to the physical health of its employees. Valerie will be covered by this service.
8. Valerie will participate in Key's deferred profit sharing plan. The maximum contribution will be made to this plan only when the company's earnings from operations for the year increase by more than 5% over the prior year's earnings from operations.
9. Key owns a yacht and it is made available to all of its executives. This offer is extended to Valerie. She can have it free for one week each year.
REQUIRED
(A) Discuss with Valerie the tax implications of the compensation package to both herself and Key.
(B) Discuss tax-related issues to be considered when designing an employee compensation package.