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.
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.
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:
- Chance of Profit / Risk of Loss;
- Integration; and
- Tools and Equipment.
CRA publication RC4110 Employee or self-employed provides detailed explanation of the above in addition to other factors that are considered in the analysis.
|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|
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.
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/
RC4110 Employee or Self-employed? – rc4110-e.html