Many individuals choose to categorize themselves as an independent contractor (self employed) because of the various tax advantages. The Canada Revenue Agency has its own rules regarding whether a person is in a business relationship (independent contractor), or in an employee-employer relationship. Simply because your contract states you are an independent contractor does not mean the CRA will abide by the terms of your contract.
Court Cases
The following court cases have been extremely important in shaping this area of the law:
- Supreme Court of Canada 671122 Ontario Ltd. vs Sagaz Industries Canada Inc., June 2001;
- Tax Court of Canada Preddie v. the Queen, March 2004; and
- Federal Court of Appeal 1392644 Ontario Inc. O/A Connor Homes vs Minister of National Revenue, and 1324455 Ontario Inc. vs Minister of National Revenue March 2013.
Court Opinion
The courts look at a number of factors in making the determination as to whether someone is an independent contractor or an employee. The typical considerations are as follows:
- Control;
- Chance of Profit / Risk of Loss;
- Integration; and
- Tools and Equipment.
Employee Advantages
Employee Disadvantages
Independent Contractor Advantages
Independent Contractor Disadvantages
Eligible for Canada employment tax credit
Paying employment insurance premiums
No employment insurance premiums
No severance pay if terminated - but notice may be required if contractor is a dependent contractor - Khan v. All-Can Express Ltd. (2014 BCSC 1429 )
Qualify for Employment Insurance
Little to no expenses are tax deductible
More expenses are tax deducible
Cannot collect employment insurance
50% of Canada Pension Plan premiums paid by employer
Little to no control over work hours and conditions
Freedom in working hours
Must pay employee and employer portions of Canada Pension Plan contribution
Vacation Pay
Typically can work for multiple clients
Must keep detailed records
Worker’s compensation coverage
Small business deduction if incorporated
No overtime
Overtime Pay
Can recover GST/HST paid
Costs of purchasing ones own equipment and tools
Harder to be fired
Risk of loss
Severance if fired
Liable if one does not fulfill contract obligations
Typically will have to make tax installment payments
Must register to collect GST/HST, except for small suppliers (see our article here)
More costly accounting
Employee Advantages
Eligible for Canada employment tax credit
Qualify for Employment Insurance
50% of Canada Pension Plan premiums paid by employer
Vacation Pay
Worker’s compensation coverage
Overtime Pay
Harder to be fired
Severance if fired
Employee Disadvantages
Paying employment insurance premiums
Little to no expenses are tax deductible
Little to no control over work hours and conditions
Independent Contractor Advantages
No employment insurance premiums
More expenses are tax deducible
Freedom in working hours
Typically can work for multiple clients
Can recover GST/HST paid
Small business deduction if incorporated
Independent Contractor Disadvantages
No severance pay if terminated – but notice may be required if contractor is a dependent contractor – Khan v. All-Can Express Ltd. (2014 BCSC 1429)
Cannot collect employment insurance
Must pay employee and employer portions of Canada Pension Plan contribution
Must keep detailed records
No overtime
Costs of purchasing ones own equipment and tools
Risk of loss
Liable if one does not fulfill contract obligations
Typically will have to make tax installment payments
Must register to collect GST/HST, except for small suppliers (see our article here)
More costly accounting
Casual Employment
If you would be considered an employee, the employment would not be pensionable or insurable if the work is done infrequently and the employment does not relate directly or indirectly to benefit the employer’s business.
See Casual Employment found on the CRA website for additional information.
Confused
If you do not know whether you are self-employed or an employee, there is a mechanism inside the CRA to request a decision. Please see How to obtain a ruling for CPP and EI purposes on the CRA website.
Detailed Casel aw analysis may be found here: http://ita-annotated.ca/RecentDecisions/category/substantive-provision/employement/
CRA Resources
RC4110 Employee or Self-employed? – rc4110-e.html