Employment income-notes - Tran Chung Income or Loss From...

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Tran Chung Income or Loss From and Office or Employment INTRODUCTION Subdivision a of Division B defines employment income under the Act. Section 5 – salary, wages and gratuities received Section 6 – other income inclusions arising from employment Section 7 – stock option benefits Section 8 – deduction allowed against employment income BASIC RULES Employed vs. Self-employed/Independent Contractor The issue of whether an individual is an employee or independent contractor often arises in connection with the deductibility of expenses. The reason is that independent contractor can deduct reasonable expenses (except capital outlays) incurred for the purpose of gaining or producing income from business. CPP and EI Deductions Self-employed individual has no liability to Employment Insurance (EI), and corresponding cannot receive EI benefits. Self-employed individuals have to make Canada Pension Plan (CPP) contributions for both employer’s and employee’s portions. In effect, the self-employed individual makes twice the contribution, but receives the same benefits from CPP compared to those who are employees. Making the Distinction There is no single test that is decisive in determining whether an individual is an employee or an independent contractor. The following interrelated tests have evolved in the courts: a. Economic reality or entrepreneur test; 1) Control 2) Ownership of tools 3) Chance of profit 4) Risk of loss b. Integration or organization test; and c. Specific result tests. Economic Reality The economic reality test as espoused in Montreal v. Montreal Locomotive Works considered four factors: 1) control, 2) ownership of tools, 3) chance of profit, and 4) risk of loss. © 2010 Tran Chung 1
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Lord Wright discussed the economic reality test (also known as the entrepreneur test) in Montreal Locomotive as follows: In earlier cases a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortuous liability on the part of the master or superior. In the more complex conditions of modern industry, more complicated tests have often to be applied. It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving, (1) control; (2) ownership of the tools; (3) chance of profit; (4) risk of loss. Control in itself is not always conclusive. . . . In many cases the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties. In this way it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior. The economic reality test encompassed a number of smaller economic factors that were often
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This note was uploaded on 11/03/2010 for the course COMM 355 taught by Professor Trancheung during the Winter '10 term at The University of British Columbia.

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Employment income-notes - Tran Chung Income or Loss From...

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