I am constantly amazed at the number of times we are asked to pay an individual as an Independent Contractor
when they clearly are not. There is a myth out there that you save on taxes. In truth, if one is being honest, an independent contractor pays more, as that individual becomes responsible for their own share of Canada Pension Plan and Employment Insurance premiums. Then the next thing asked is what kind of benefit programs we offer, and the answer is, to Independent Contractors – none. All of our plans are for employees. Benefit plans are extremely difficult to obtain for individuals, and what is available out there is costly and generally not as comprehensive as those available through an employer.
For the Employer
who is paying an individual as an Independent Contractor when that person is really an employee, the costs can be very heavy. These cases come to light frequently when during a payroll audit Canada Revenue Agency (CRA) discovers the Independent Contractors are declaring the income earned with CRA. When CRA rules that the person is in fact an employee, they can assess the “Employer” both the Employer
and the Employee
portions of Canada Pension Plan and Employment Insurance premiums, plus interest and penalties, and
unless the “employee” gives permission, the employer cannot recover the employee portion of the premiums.
Canadian Case law has generally determined who is an employee and who is a contractor in Canada, and as an employer, you must be very careful when determining how to treat an individual who is providing services to you.
Each of the Income Tax Act, the Canada Pension Plan Act and Employment Insurance provides some sort of definition, but more importantly they provide for various duties and obligations on the employer.
Case law has resulted in what is commonly called the "four-in-one-test" in Canada to assist in establishing status.
- does the employer establish hours, supervise how and when the work is done, require regular reporting to one or more sites, require exclusivity, and is the worker required to perform the services personally?
2. Ownership of Tools
- does the company supply the tools needed to complete the work?
3. Chance of profit or risk of loss -
is the worker paid a salary or a wage, does the worker get paid if deadlines are not met or quality of work is not up to expectations, is the worker not required to pay expenses to get the job done, are there company paid benefits, bonuses paid to performance, and some form or retirement plan provided for?
4. Total Relationship
- is there no written contract outlining the relationship, no invoices rendered, no GST charged by the worker, and are payments made through payroll?
If you can answer positively to most or all of the above, then the individual is clearly an employee, and must be treated as such for taxation purposes, including being covered for Canada Pension Plan and Employment Insurance.
CRA - Canada Revenue Agency has a pamphlet entitled "Employee or Self-Employed" - the publication number is RC4110 - or go to the CRA web site and download the publication from their forms and publications section www.ccra-adrc.gc.ca
- Bill Smyth CPA, FCGA, FCPA
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