Determining whether you’re an employee or a contractor is a critical decision with important consequences for both the worker and payer (the company, employer or individual paying for the work).
Employee or contractor? It might sound like an easy distinction to make, but it is not. This article covers both the factors CRA uses to determine the tax treatment, and the advantages and disadvantages for the individual in each circumstance.
CRA Factors in determining independent Contractor vs Employee
A payer should clearly understand the distinction between the two because if they are reported incorrectly, the Canada Revenue Agency (CRA) could levy financial penalties and impose substantial tax liabilities.
This is an area that CRA continues to monitor closely and offers the following four factors to help determine whether a person is an employee or a contractor:
• Degree of control;
• Ownership of tools;
• Financial risk;
• Extent of integration with payer.
1. Degree of control
There are a number of indicators that a worker is an employee; some of these indicators include whether the:
• Relationship is one of subordination;
• Payer controls the worker with respect to both results and method (whether exercised or not);
• Worker requires permission to work for someone else concurrently.
There are also a number of indicators a worker is a contractor, and they include whether the:
• Worker generally works on their own schedule but within a prearranged timeframe;
• Worker has no one overseeing them;
• Worker is free to provide services for numerous payers concurrently;
• The worker has the right to accept and refuse work.
2. Ownership of tools
Some indicators that the worker is an employee involve tools, and include:
• The payer supplies required tools and equipment;
• The payer is responsible for the maintenance, repair and insurance costs of the tools and equipment;
• The worker is reimbursed for any costs incurred with respect to the supplies and equipment;
• The payer retains the rights over the equipment.
Some indicators that the worker is self-employed, in regard to ownership of tools, include:
• The worker supplies required tools and equipment;
• The worker is responsible for the maintenance and repair of said tools and equipment;
• The worker retains the rights over the equipment;
• The worker supplies their own workspace, incurs all costs to maintain it, and performs a substantial amount of work from said workspace.
3. Financial risk and reward
Indicators that the worker is an employee also include:
• The worker is not responsible for operating costs;
• The payer/worker relationship is continuous, not contract-based;
• The payer determines and controls the payment method;
• The worker is not financially liable if obligations of contract are unfulfilled.
Indicators that the worker is a contractor include:
• The worker has the ability to hire assistants or subcontractors at their own expense;
• The worker is financially liable if they don’t complete the job;
• The worker does not receive any protection or benefits from the payer;
• The worker markets their services and incurs the cost of the advertising.
4. Extent of integration with payer
An employee’s job is a pivotal part of the employer’s business. The tasks they perform could directly impact the client base of the business and the company’s bottom line.
On the other hand, a self-employed individual, or a contractor, would be less likely linked to the clientele.
(‘Integration,’ is more a combination of the previous three than a separate category).
Advantages and Disadvantages of Independent Contractor vs Employee classification
Advantages and Disadvantages for Employees and Contractors
Employee Advantages
• Automatic enrolment for Employment Insurance (“EI”)
• 50 percent of Canada Pension Plan (“CPP”) contributions is paid by the employer
• Participation in employee benefits program
• Severance pay if terminated
• No record keeping required
• Tax withheld at source
• Enhanced job stability
Employee Disadvantages
• Very few tax deductible expenses
• Less control over working conditions
• Less control over working hours
Contractor Advantages
• Opportunities for increased profits
• Ability to work for more than one payer at a time
• More flexibility in work hours
• Ability to hire sub-contractors
Contractor Disadvantages
• No severance pay if terminated
• Limited benefits available under EI program
• More record keeping required
• Risk of loss
• Cost of health benefits borne by contractor
• Risk the contract does not get renewed
Contractors can choose to perform their services as individuals or through a corporation. The decision to incorporate will depend on a number of factors, all specific to the contractor’s own unique situation, and should be discussed with their advisor.
For further information on how to make the decision to incorporate, check out “Incorporation of Professionals in Ontario”.
Getting it right can be a challenge but when in doubt, don’t guess. A qualified financial professional can help determine what arrangement is in the best interests of both employer and worker.
Kody can be reached at krw@ggfl.ca or 613-728-5831
