employer’s share of CPP contributions and EI premiums. Since a business does not contribute towards CPP or EI for its contractors, it is often less expensive for a company to have contractors perform work rather than employees. Further, when a business engages contractors instead of hiring employees, the employer has more flexibility in terms of terms of work (e.g., sick days, paid vacations), payment, and termination. As such, many businesses attempt to classify workers as contractors instead of employees; however, sometimes the CRA disagrees and will try to reassess the business on that basis.
An employer who fails to deduct the required CPP contributions and EI premiums may be forced to pay both the employer’s share and the employee’s share of any contributions and premiums owing, plus penalties and interest. So, determining the status of a worker is of the utmost importance to an employer.
In order to prevent tax fraud by claiming tax deductions which otherwise would not be available to an employee, the CRA routinely investigates cases to determine employment status.
Determination of status in Quebec is made based on the Civil Code of Quebec, while in the rest of Canada, the CRA uses a test comprised of two factors to examine the “total relationship between the worker and the payer.”
In the first step, the CRA assesses the intent of the parties by examining the language from when the worker/payer relationship was first created. Slight changes in language, for instance parties agreeing to a “contract for services,” signals different intent than a “contract of services.” The first indicating a business relationship, while the latter is indicative of an actual employment relationship.
It is evident that clarity of intent of the type of relationship is paramount when entering into a working or business relationship. When discrepancies of intent exist, the CRA tends to favour resolution towards an employment relationship versus a business relationship. This is why, whenever possible, an agreement in writing should be created, as to help clarify any possible discrepancies of intent.
Following the first step of establishing the parties’ intent, the second step verifies that parties have followed through on their intent. The CRA looks at the facts of the situation to ensure that the parties are not misusing the status of the independent contractor and in doing so it will look at all the factors discussed below.
2.1 Employee versus self-employed
It is important to understand when and in what situations one may be considered a self-employed contractor versus being labelled an employee. The circumstances of the working relationship as a whole determine the employment status. Although none of the factors are individually determinative of one’s status when examining whether or not one is an employee or self-employed individual, the key question is whether or not one was engaged to perform services as a person in business on his or her own account, or as an employee. Some of the factors that help determine whether a worker is an employee or a self-employed contractor are outlined below.
1.2a Level of control the company has over the worker
The degree of control the company has over the worker is important. The more control over the worker, the more likely the worker will be seen as an employee. If the worker is a contractor, such as in the case of an independent corporate financial auditor, it is not likely that the company will be able to control that auditor like it would an employee. The company may not be able to dictate the schedule of the auditor, or how the auditor performs his or her work. Since the auditor is an independent expert, he or she will likely determine how and when to do his or her job, and which hours he or she works.
Essentially, if the payer is authorized to, and has the right or ability to control the worker, or the manner in which the work is done, or what work is to be done, then the payer will likely be considered to have control over the worker’s daily tasks. Such indication of the payer exercising a high level of control may lead to a conclusion that an employment type relationship is evident.
Common indicators leading the CRA to a conclusion of an employment-type relationship include when the payer determines and controls specifics within the working relationship. Such control would be evidenced by control over what techniques and procedures the work would entail, what type of work and at what pay, whether there was any direction or training on how to complete the task, as well as control over the final work product. Essentially the working relationship is one of a subordinate type relationship, where the worker lacks the power to necessarily effect decisions or methodologies within the relationship. Other evidence may include the worker having to ask permission of the payer to work contemporaneously with the relationship.
Self-employed contractors differ from the employer-employee relationship in that the worker maintains his or her independence and is not under the direct control and power of the payer. In fact, practically the only type of control the payer has in this situation is outlining the framework for the work, while the contractor is completely independent to work as he or she chooses. Factors which may evidence a self-employed contractor include the worker being free to complete a task in the manner he or she sees fit without any oversight by a payer. This also means that a typical contractor has no true loyalty or continuity with his or her payer, and as a result, need not ask permission to accept or reject work. It is true that a contractor is usually not obligated to refrain from working for various payers contemporaneously with his or her current payer.
2.1b Source of tools and equipment required to perform the work
If the worker also has control and ownership over his or her own equipment, he or she is more likely to be considered a self-employed contractor rather than an employee. In the example of the independent corporate auditor, it is unlikely that such a contractor would be provided with a calculator and a laptop to do his or her job. These tools would generally be provided by the contractor. Similarly, one could not imagine that a person who works on a garbage truck for an hourly wage would be required to provide his or her own garbage truck.
2.1c Ability of worker to hire assistance or subcontract the work to third parties
In the vein of a self-employed contractor having a high degree of control over his or her work, a good indication that the worker is a contractor versus an employee is his or her ability to delegate services to an assistant or a replacement. If he or she cannot hire his or her own assistance or subcontract the work to third-parties, outside a provision in the service contract which prevents such subcontracting, he or she is most likely an employee.
2.1d Degree of financial risk taken by the worker
A contractor may have to prove to the CRA in the course of an audit, that he or she operates as a business independent of the company for which it performs work. In order to do so, there may be an analysis performed of whether, like any other business, the worker was in the position where there was a financial risk, and where he or she could potentially lose money. What differentiates a contractor from an employee is that generally an employee cannot lose money. If he or she shows up to work and does his or her job, the employee gets paid. This is not so for a contractor. Many contractors have invested significant resources in tools, equipment, staff, insurance, and other business costs. This puts them in the position where there is the potential for financial risk.
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FILING TAX RETURNS
Most people file a personal income tax return each year either because they owe taxes or because they wish
