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chap03 - CHAPTER 3 Employment Income Problem 1 Chow...

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CHAPTER 3 Employment Income Problem 1 Chow Installation and Repair Ltd. (“Chow”) is in the business of installing and repairing overhead doors. Chow maintained a list of qualified installers and repair-persons and would contact them as work became available. Chow informed these workers that they would be considered to be running their own business, so no withholding of income tax, El or CPP was made. Workers were paid by the job and worked mostly on their own. If the person contacted refused the assignment, Chow would call the next person on the list. The person who agreed to the job would go directly to the job site; he or she was not required to report to Chow’s work place, except to pick up a door or parts. Chow supplied the doors and the parts used in the repair or installation. Each worker maintained his or her own truck and tools. Chow, however, owned specialized racks made for transporting the doors and a special drill which could be used on cement. These items were available to any worker who required them. Chow guaranteed all work for one year. Under the terms of the agreement between Chow and the workers, if a guarantee had to be honoured, the worker would be responsible to fix any defects. If any parts were required to correct the defect, the worker would have to pay for them. REQUIRED Determine whether the workers should be considered employees of Chow or independent contractors. Evaluate this fact situation in detail before arriving at your conclusion. In presenting your answer, discuss the tests that are applied by the courts in this type of situation and consider how the facts relate to these tests. 27
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Introduction to Federal Income Taxation in Canada Solution 1 [Reference: Wiebe Door Services Ltd. v. M.N.R., (F.C.A.) 87 DTC 5025] In the court case on which these facts were based, the company had been treating the workers as self- employed contractors. The CRA believed the workers to be employees and assessed the company for failure to withhold employment source deductions. The Tax Court of Canada agreed with the CRA and the company appealed. The case was decided on the basis of the economic reality test. The Federal Court of Appeal held that the economic reality test really encompasses the control test and the integration or organization test. As well, ownership of tools and the chance of profit or risk of loss must be considered. It is not necessary that all four tests be independently satisfied. The economic reality test is decided on the basis of the overall scheme and the relative importance of each of these factors. (1) Economic Reality or Entrepreneur Test (a) Control Test Taken in isolation, the control test is indecisive on these facts. The workers had a fair degree of autonomy in that they could accept or refuse specific assignments, could choose when and how to do the jobs they accepted, within reason, and were not required to report to a specific workplace. This is indicative of self-employment. On
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