Employee or 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:

control - more control is generally exercised by an employer over an employee than by a client over a self-employed person
chance of profit/risk of loss - self-employed persons usually have some degree of financial risk, and more opportunity for profit than employees
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
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 Canada Revenue Agency (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 Canada Pension Plan (CPP) and Employment Insurance (EI), in their web page CPP/EI Explained:

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

Court cases:

From Life in the Tax Lane February 2024:
- IBI Behavioural Services Inc. v. M.N.R., 2023 TCC 159 - the Court found that the worker was an employee, not an independent contractor.
From Life in the Tax Lane September 2023:
- Beach Place Ventures Ltd. v. The Queen, 2019 TCC 24 - the Court found that the taxi drivers were independent contractors under the Income Tax Act.
- Beach Place Ventures Ltd. v. Employment Standards Tribunal, 2022 BCCA 147 - the BC Court of Appeal found that the same taxi drivers were employees under the BC Employment Standards Act.
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.
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.

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. The worker was a salesperson for the insurance brokerage.
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. 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. The individuals included child and youth workers, social workers, certified therapists and psychologists, providing services in foster homes and group homes for children with serious behavioural and development disorders.
Tax Court of Canada Independent Contractor vs Employee - 1065438 Alberta Ltd. v. M.N.R. 2018 TCC 191. The worker was a courier driver, and the Court deemed that he was an independent contractor.

Employee advantages

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

Employee disadvantages

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

Self-employed advantages

no employment insurance premiums, unless voluntarily paid
more expenses are tax-deductible - for example, expense of travelling to and from clients' places of business is tax-deductible
more freedom to choose own working hours
can work for more than one client
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
opportunity for increased profits
can recover GST or HST paid by registering to collect GST/HST, even small suppliers

Self-employed disadvantages

no severance pay if terminated - but notice may be required if contractor is a "dependent contractor" - see 2014 BC Supreme Court decision Khan v. All-Can Express Ltd. 2014 BCSC 1429. Mr. Khan, using his own vehicle, operated as a courier truck driver for All-Can Express Ltd. doing business as Ace Courier. Mr. Khan was entitled to an award of damages in lieu of notice.
cannot collect employment insurance, except special benefits
must pay employee and employer portions of Canada Pension Plan contribution - see CPP contribution rates
more record-keeping required
often work longer hours with no extra pay
cost of purchasing and maintaining own equipment
risk of loss
liable if contract obligations not fulfilled, thus liability insurance may be needed
no employee benefits, including disability insurance (make sure you get your own disability insurance policy!)
after first year-end, usually must make income tax installment payments
must register to collect GST, except for small suppliers - see who has to collect GST on our GST page
must register to collect PST in most provinces - see our PST page.
cash management and planning required to ensure funds available for tax remittances
may require services of bookkeeper or accountant for the record-keeping and government reporting
not eligible for Canada employment amount tax credit

Is the Employment Casual?

If the worker would be considered an employee, the employment would not be considered pensionable for CPP or insurable for EI if:

the work is done on an infrequent basis with no set schedule or time; and
the employment is casual and does not directly or indirectly benefit the employer's business

See the CRA information on Casual Employment for more information.

Getting a Ruling on Employee vs Contractor

Are you unsure of your employment status, or of the employment status of someone who works for you? A payer, employer, self-employed worker or employee can request a ruling from the CPP/EI Rulings Program as to the worker's employment status. See How to obtain a ruling for CPP and EI purposes on the CRA website.

TaxTips.ca Resources

Business topics for self-employed individuals (business owners)

Employee Tax Topics on our Personal Income Tax page

EI premiums are not payable on some wages

CPP Non-pensionable earnings

Canada Revenue Agency (CRA) Resources

RC4110 Employee or self-employed

How to obtain a ruling for CPP and EI purposes

Casual Employment - whether pensionable and insurable

Tax Tip: Determine whether you are an employee or self-employed contractor at the start of your work contract. This is not a choice - it is a question of fact.