Employee Versus Independent Contractor Status

This risk assessment tool simulates the inquiries that may posed by the Canada Revenue Agency (the”CRA“) when assessing whether an individual is serving as an employee of a particular company.

Upon completion of the assessment, you will be provided with a “risk rating”, which reflects the relative risk that the CRA might seek to characterize the individual as an employee of the company for tax purposes.

Take The Tax Risk Assessment (click here)

Background

In Canada, the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act each require an employer to withhold amounts on account of income tax, Canada Pension Plan, and Employment Insurance obligations from the wages and other remuneration paid to employees, and remit such withholdings to the CRA.

Where withholdings are required to be made, employers are also obligated to issue and file certain information returns and reporting slips.

Failure to comply with the withholding, remittance and reporting obligations imposed on employers can give rise to onerous interest charges and penalties.

Certain provincial statutes also impose specialized taxes that are based on the remuneration paid to employees in a particular year. For instance, employers with a permanent establishment in the Province of Ontario may be liable for tax under the Employer Health Tax Act in circumstances where the total Ontario remuneration paid in a year exceeds a specified threshold.

By contrast, withholding and remittance obligations do not generally arise in respect of payments made to independent contractors that are resident in Canada.

What is the difference between an employee and an independent contractor?

The distinction between an employee and an independent contractor for tax purposes is not always clear.

The tax case law that has addressed whether a person is serving as an employee or an independent contractor has stressed that the appropriate characterization is highly dependent on the facts.

Over the years, hundreds of judicial decisions and revenue authority statements have described the facts that must be considered when distinguishing between an independent contractor relationship (a “contract for service”) and an employment relationship (a “contract of service”).

The case law has acknowledged the significance of the intention of the parties to a working arrangement, but regularly focusses on four primary factors in distinguishing between those serving as employees and those acting as independent contractors

1. Control
   What is the degree of control exercised over the person performing the subject services? (The greater the level of control exercised over a person, the greater the likelihood they are serving as an employee.)
2. Ownership of Tools
   Who provides the tools/equipment necessary to perform the services? (Independent contractors are generally not provided with tools/equipment by their client when performing contracted services).
3. Chance of Profit / Risk of Loss
   Does the individual providing the services have the opportunity to generate profit or suffer a financial loss? (Employees generally do not bear the risk of profit or loss on the performance of services beyond their stated rate of remuneration).
4. Integration
   Is the individual providing the services integrated into the operations of the recipient of the services? (Independent contractors are generally not integrated into the operations of their clients).

The courts have also identified other factors to consider when distinguishing between employees and independent contractors, including whether the worker may hire his/her own helpers and the degree of responsibility borne by the worker.

Ultimately no one factor is considered to be determinative of whether a person is serving as an employee or an independent contractor; instead, the courts have stressed that all of the relevant facts need to be considered.

Take The Tax Risk Assessment (click here)