The crucial question of whether a worker is in an employee-employer relationship or in a business relationship (self-employed independent contractor) must be answered in order to determine tax consequences, for both the employer and the worker.
If the worker is a contractor, the hiring company is relieved of certain obligations, such as providing a pension, giving reasonable notice of termination, and withholding and remitting Canada Pension Plan (CPP) and Employment Insurance (EI) contributions to the Canada Revenue Agency (CRA).
If the worker is an employee, the hiring company is considered an employer. Employers are responsible for deducting CPP contributions, EI premiums, and income tax from remuneration or other amounts they pay to their employees. Employers must remit these deductions along with their share of CPP contributions and EI premiums, to the CRA.
While there are definite tax advantages to being self-employed, most notably the ability to deduct expenses incurred in the course of earning income, thereby reducing taxable income, there is a list of factors you must consider when determining whether or not you are legitimately a self-employed independent contractor, in order to be on-side with the CRA. Problems arise when companies have independent contractors providing services, but there are some aspects of the relationship that suggest or resemble a traditional employee-employer relationship.
Due to the numerous court cases on the subject, a series of common law tests have been established in order to determine whether a worker is an employee or an independent contractor. While this list is not exhaustive, nor will one specific factor make the determination, the main issues to consider are the following:
There can potentially be serious consequences, from a legal and taxation standpoint, for both the worker and the hirer, if an individual who is in fact an employee is treated as an independent contractor. Therefore, whether the hiring company, potential employee, or independent contractor, all parties should have a thorough understanding of the subject prior to making any employment decisions.
If you have any questions about employees vs. independent contractors, please contact your CPA or:
Megan Long, CPA, CGA
Megan Long, CPA, CGA of Omland Heal Chartered Accountants, provides accounting and tax advice to help people meet their financial objectives. Services include; financial statements, corporate taxes, personal taxes, business advising, corporate reorganizations and estate planning.