It is important when you are doing business to ensure that you are not incorrectly characterized as being an employee vs. independent contractor. And just because you have a corporation does not guarantee that the CRA will not see you as an employee. You may still be classified as a Personal Services Business.
There is no one absolute test to determine if somebody is acting in the capacity of an employee vs. independent contractor. It is the combination of a variety of factors which will lead the CRA to make a determination that one is an employee or a contractor. And if they come to a conclusion that you are acting in the capacity of an employee, then there could be serious tax ramifications to you.
If you put a sign on a duck painted to look like a camel, which reads “camel” and the CRA looks at the camel and sees that it walks like a duck and quacks like a duck and has webbed feet like a duck and swims like a duck, they will declare the camel to be a duck and may also impose penalties at the same time. The problem is sometimes they also get it wrong and will actually declare a real camel to be a duck. This sometimes has to be challenged.
To determine if one is an employee vs. independent contractor, the CRA looks at a variety of factors including:
An employee can never lose money by showing up to work. They will get paid regardless.
Imagine an employee only getting paid on some days and not others. Imagine an employee owing the company $5,000 at the end of the month for a screw up. This would never happen.
But this is not the case for an independent contractor. They can lose money on a job. There is risk. They need insurance to help address certain risks. There is no guarantee of profit.
When an auditor examines one’s status they look for signs that make somebody look like an employee. The degree of financial risk is an important part of this test.
Most contractors have invested resources in tools, equipment, etc. and have no guarantee of profit just by showing up each day.
You are likely a contractor if you have control. A company usually doesn’t control what a contractor wears. Nor do they control who a contractor brings to the job with them. A contractor also can usually send a replacement if they are sick.
I know that if my assistant Robyn couldn’t come to work one day and sent her cousin Fred to answer my emails and do her work, I would be a) pretty shocked that she would so something like that, and b) pretty irritated with her lack of judgment and would be thinking of letting her go.
However, if my plumber or my phone provider or my computer technician or my bookkeeping company send over cousin Larry to replace the normal person, I wouldn’t be so concerned. And that is the key.
Similarly, an independent contractor is allowed to hire (and pay for) their own assistant. An employee is not. Even though she’s my mom, I can’t imagine my office manager hiring her own assistant out of her own pocket. This would be strange. But if the plumber brought along an apprentice, or the photocopier repair guy brought along his assistant that would be just fine. And that is a fundamental difference between an employee and a contractor. And that is not to say that all contractors have assistants or do send replacements from time-to-time. It is to say that if they were to do that, nobody would care.
When the dishwasher at my office breaks down, we call Joe the appliance repair guy. He generally gives us a window of time in which he will arrive for the service call.
I have no control over when Joe will arrive.
No control over how Joe will make his assessment of the problem.
I have no control over how Joe will make the repair.
No control over what tools Joe will use to make the repair.
(This would likely not be the case if Joe were my employee)
Because of the very low level of control that I have over how Joe does his work, the odds of Joe being considered an employee are lower than they otherwise would be.
Another factor considered by the CRA is whether workers provide their own tools. While not necessarily absolutely indicative of the relationship, it is clear that a contract worker is much more likely to have their own tools and equipment than an employee. So, by the worker providing tools and equipment this will help sway the CRA towards them to be independent. And yes, sometimes employees do provide their own tools (such as a computer or a stethoscope) but not as habitually as contractors do. It is a far rarer occurrence.
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