Chapter 04

Chapter 04 - Chapter Four CHAPTER 4 INCOME FROM EMPLOYMENT...

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Chapter Four CHAPTER 4 INCOME FROM EMPLOYMENT SOLUTIONS TO REVIEW QUESTIONS 1. In order for an individual to derive employment income, an employer/employee relationship must exist. This relationship normally exists when a person agrees to provide their services at the full direction and control of the employer in return for a specific salary or wage. This relationship contemplates that the employer decides when, where, and what work is to be done. In comparison, an individual may provide services as an independent contractor in return for a fee for service. In such circumstances, the individual is not subject to the same direction and control. Income earned in this fashion is business income. For example, an individual may provide accounting services as either an employee or as a business activity. The distinction rests with the manner in which the service is provided as determined by the relationship between the parties and not the type of service. 2. Individual A contracts on a fee for service basis (either a fixed fee or an hourly rate) and bears full risk for the quality of work, how it is performed, and the collection of the fee. As an independent contractor the income earned is business income. Individual B is under the direction and control of the painting firm which in turn contracts with the customer. Individual B receives a wage and is not responsible to the customer for quality of work or collection of the fees. Therefore, B is employed and earns employment income. 3. This statement is not entirely true. While employment income consists of the gross earnings minus the deduction of expenditures, not all remuneration is taxable and not all expenses incurred to earn that income are deductible. Income from employment is determined from the following basic rules: a) Gross employment income includes the salary, wages, commissions and gratuities earned, all benefits which are received or enjoyed by virtue of the employment, and all allowances received from the employer [S.5(1), 6(1)(a) b) By exception, a limited number of benefits and allowances are excluded from c) As a general rule, no deductions are permitted in arriving at employment except a limited number of specifically listed items [S.8(1)]. Consequently, certain income earned from employment is not taxable and 20
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Chapter Four certain expenses incurred to earn that income are not deductible. 4. The taxation year of an individual is the calendar year ending on December 31 [S.249(1)]. Income from employment is included for tax purposes only when received [S.5(1)]. Therefore, even though a part of the salary is earned in 20X0 and a part is earned in 20X1, it is all included in the 20X1 taxation year when it was received. 5.
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Chapter 04 - Chapter Four CHAPTER 4 INCOME FROM EMPLOYMENT...

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