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Employee vs Contractor

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Personal Tax -> Employee vs contractor
Business -> Employee vs contractor

Are you an employee or a self-employed independent contractor?

The question of whether a person is in a business relationship (self-employed independent contractor) or in an employee-employer relationship is not one that is always easy to answer.  There have been many court cases on this subject.  The courts generally look at the following criteria in making their decisions:

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bullet control - more control is generally exercised by an employer over an employee than by a client over a self-employed person
bullet chance of profit/risk of loss - self-employed persons usually have some degree of financial risk, and more opportunity for profit than employees
bullet integration - an employee's job will be an integral part of an employer's business, where the tasks performed by a self-employed person will likely be less integrated with the client's business
bullet tools and equipment - self-employed persons are more likely to be supplying their own tools and equipment, as well as being responsible for their maintenance

These topics are further explained in the CRA publication RC4110 Employee or self-employed.  A comprehensive checklist is also provided in this publication.  This checklist is useful for a worker or a payer (employer/client) to help determine whether their relationship is a business relationship or an employer/employee relationship.

CRA also has information on the following categories of workers to help determine whether they are employees or self employed for purposes of CPP and EI, in their web page CPP/EI Explained:

bullet real estate agents
bullet workers who own and operate heavy machinery
bullet workers engaged in construction
bullet workers engaged in fishing

Court cases:

bullet Supreme Court of Canada 671122 Ontario Ltd. vs Sagaz Industries Canada Inc., June 2001 - although this is a vicarious liability case, not a tax case, it sets out the above criteria in determining the differences between employee and self-employed person.
bullet Tax Court of Canada Preddie v. the Queen, March 2004 - appellant was working as a tutor.  The Tax Court determined that he was self-employed, not an employee.
bullet Tax Court of Canada Woodland Insurance vs Minister of National Revenue, February 2005 - this is an Employment Insurance and Canada Pension Plan case, where the Court ruled that Woodland Insurance was liable for EI and CPP premiums, because the worker was an employee, not self-employed.
bulletFederal 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.  This is an appeal of decisions of the Tax Court of Canada regarding Employment Insurance and Canada Pension Plan.  The Tax Court determined that certain individuals, who had contracts as independent contractors with the appellants, were employed by the appellants in pensionable and insurable employment.  The Tax Court decision was upheld on appeal.

Employee advantages

bullet qualify for employment insurance
bullet Canada Pension Plan premiums paid 50% by employer
bullet participation in employee benefits, including:
bullet vacation pay
bullet provincial medical plan
bullet extended health benefits - medical, dental, vision care
bullet disability insurance
bullet pension plans
bullet workers' compensation coverage
bullet higher rate of pay for overtime hours
bullet more difficult to be terminated
bullet severance pay if terminated
bullet no record keeping required
bullet eligible for Canada employment amount tax credit

Employee disadvantages

bullet must pay employment insurance premiums - see EI premium rates
bullet very few expenses are tax-deductible - see our article on deductible employment expenses
bullet less control over working conditions and hours

Self-employed advantages

bulletno employment insurance premiums, unless voluntarily paid
bullet more expenses are tax-deductible - for example, expense of travelling to and from clients' places of business is tax-deductible
bullet more freedom to choose own working hours
bullet can work for more than one client
bullet in first year of operation, income tax not payable until April 30th following first year end - see choosing a year-end on our Small Business page
bullet opportunity for increased profits
bullet can recover GST or HST paid by registering to collect GST/HST, even small suppliers
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Self-employed disadvantages

bullet no severance pay if terminated
bullet cannot collect employment insurance, except special benefits
bullet must pay employee and employer portions of Canada Pension Plan contribution - see CPP contribution rates
bullet more record-keeping required
bullet often work longer hours with no extra pay
bullet cost of purchasing and maintaining own equipment
bullet risk of loss
bullet liable if contract obligations not fulfilled, thus liability insurance may be needed
bullet no employee benefits, including disability insurance (make sure you get your own disability insurance policy!)
bullet after first year-end, usually must make income tax installment payments
bullet must register to collect GST, except for small suppliers - see who has to collect GST on our GST page
bullet must register to collect PST in most provinces - see our PST page.
bullet cash management and planning required to ensure funds available for tax remittances
bullet may require services of bookkeeper or accountant for the record-keeping and government reporting
bullet not eligible for Canada employment amount tax credit

For more information for self-employed individuals, see our Business page.

 

Tax Tip:  Determine whether you are an employee or self-employed contractor at the start of your work contract.

 

Revised: March 30, 2014

 

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