In times of outsourcing, downsizing and economic cutbacks, it may be advantageous for a company to hire individuals as independent contractors to perform some of the functions that are being performed by that company’s employees. However, simply calling someone an independent contractor does not make it so. CRA will look behind the title of an individual to determine whether that person is in fact an independent contractor or an employee. Basically, CRA will determine whether a master-servant relationship exists which indicates that an employer-employee relationship exists.
While there are significant benefits to hiring an independent contractor to perform certain services rather than using employees, a company should be very cautious in its decision to engage an individual acting as an independent contractor. The risk in having a court or tribunal determine that an independent contractor is in fact an employee can be significant because the employer may face fines, penalties, and interest under various legislation such as the Income Tax Act. A written agreement can go a long way to clarifying the intentions of the parties.
Some advantages of hiring an independent contractor:
- The employer’s portion of premium under the Employment Insurance Act does not have to be remitted for an independent contractor in addition, since the employer does not have to deduct and remit premiums payable by an independent contractor under the Act, this may result in decreased administrative costs to the employer.
- Income tax does not have to be deducted and remitted for an independent contractor.
- An employer is not required to deduct and remit employee contributions to the Canada Pension Plan for is the employer required to make any contributions on behalf of someone who is an independent contractor. This results in significant savings to the employer in addition to decreased administrative costs.
- Independent contractors are not entitled to legislated benefits under provisions of the Employment Standards Code. Specifically, independent contractors are not entitled to minimum wage requirements, overtime pay, hours of work, vacation pay and the benefit of the termination and severance pay provisions under the Code.
- Premiums under the provisions of the workers’ Compensation Act do not have to be paid on behalf of an independent contractor. These premiums can be significant depending on the type of business in which the employer is engaged.
- Benefits that are provided to employees don’t have to be provided to an independent contractor.
CRA has established a guide on their criteria for employer-employee relationships. In determining whether someone is an employee or an independent contractor, the courts or specialized tribunals such as the Alberta Labour Relations Board usually look at the following factors:
The court or tribunal will attempt to determine who controls the manner in which services are provided by examining a number of criteria, including the amount of discretion that the individual exercises. Consequently, if your company directs the work done and the manner in which it is done, then it’s more likely will be found that the individual is an employee rather than an independent contractor. In a contract of service, an employer has a good deal of control over what is to be done and how it is done.
The control test has inherent weaknesses. For example, an otherwise independent contractor situation may have conditions in the contract detailing specifications and work to be performed. Additionally, in cases where employees are highly skilled and who possess knowledge, skills, and expertise beyond the employer’s sphere of competancy, it may be difficult for the employer to direct the functions that they must perform.
It does not matter whether or not the payor has actually exhibited control. What is important is whether the payor has the ability to exercise control. For example, if the payor has the power to stipulate matters such as time and place of work, it does not matter that it is actually exercised. As well, the general right to supervise and reject unsatisfactory work does not in itself constitute sufficient control for the purposes of establishing employer-employee relationships.
CRA generally considers the control test the most important test.
Ownership of Tools
An individual is more likely to be an independent contractor is he or she owns the tools used to provide the service. However, this test is not of great importance since in many cases there are no “tools” used in the work and in other cases, it is customary for employees to use their own tools.
Chance of Profit
If the relationship between the individual and recipient of the services results in the individual having the opportunity to make a profit for providing the service then it’s more likely that the individual will be found an independent contractor.
Risk of Loss
If the party for whom the service is provided assumes all of the risks associated with the individual providing the service and individual who provides the service assumes very little or no risk then the relationship is more likely to be characterized as an employment relationship rather than that of an independent contractor.
Degree of Integration
It is more likely for a relationship to be characterized as that of independent contractor if the services provided are not integrated into the business of the recipient of the services but are only accessory to it. If the services are determined to be critical to the business, an employer-employee relationship is implied. Generally, the courts do not consider this an important test and usually considers the test only relevant if the control test is also met.
Consider These Questions
An answer of YES to these questions indicates an independent contractor relationship
- Does the recipient control when, where, and how the work is done?
- Does the recipient have other business activities that are integrated with the activities provided to the payor?
- Is the recipient able to work for other companies without the consent or knowledge of the payor?
- Does the recipient have the power to hire substitutes and assistants to perform the services without the payor’s prior knowledge or approval? Is the recipient responsible for the remuneration of these assistants?
- Does the recipient assume any risks or supply any funds in the recipient’s activities?
- Is the recipient responsible for any losses, expenses, or damages that the recipient causes?
- Is there a foreseeable end to the project on which the recipient is working as opposed to a relationship that envisions a continuation of work?
- Does the recipient provide their own supplies and equipment or reimburse the payor for the use of their equipment?
- Does the recipient have a separate office not on the payor’s premises?
- Is the recipient ineligible for rights, privileges, and benefits enjoyed by employees of the payor?
- Is the payor able to survive without the recipient’s services? Can the payor easily replace the recipients services?
- Does the recipient issue invoices to the payor and receive cheques from the payor?
- When an invoice is issued, are the terms and conditions similar to other independent contractors for similar services?
- If a written contract exists, does it support an independent contractor status?
If you are considering engaging an independent contractor to provide services for your company, then it’s recommended that you consider the following:
- There should be a written agreement in place stipulating that the relationship is one of independent contractor rather than employment; the contract is for a definite term; the independent contractor is responsible for deducting and remitting income tax, Canada Pension Plan contributions and Employment Insurance contributions, and that your company will not be making any remittances on behalf of the independent contractor with respect to these contributions.
- Your company should have very little control over how the independent contractor is to perform the service. You should not instruct the independent contractor as to when, where, and how these services are to be performed.
- The independent contractor should be required to have his or her own Workers’ Compensation Board account.
- The independent contractor should be allowed to provide his services to other companies or to the public.
- The independent contractor should not be reimbursed for any expenses, rather, his expenses should be covered in the remuneration paid.
- The independent contractor should have his or her own equipment or tools to provide the service for your company.
- The independent contractor should have the ability to use others to provide the services, and be allowed to hire employees to provide the services contracted for.
Given the complexity and the punitive nature of these Rules, taxpayers should consult with their tax accountant, preferably one that has a CPA (Chartered Professional Accountant) or CA (Chartered Accountant) designation to ensure that business practices are in-line of these Rules. Our CPA – CA accounting firm based in Edmonton are highly experienced in income tax matters and would be pleased to assist in your personal or business tax matters.
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Keith M.J. Anderson* BCom, CPA, CA-IT, CITP
Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation