In recent years, more and more businesses and individuals are attempting to reclassify their working relationships from that of employee and employer to that of two independent businesses. The reasons are several. As an employer, you might save on mandatory deductions such as Employment Insurance, Canada Pension Plan, Employer Health Tax, Workers Compensation, vacation pay and other discretionary items such as private health insurance and pensions. From an individual’s perspective, real or perceived tax deductions may available if one is classed as self employed as opposed to employed. Both parties must realize however, despite their mutual wishes on treatment, they may not have the final say. Canada Revenue Agency has been aggressively challenging independent contractor relationships and both individuals and business have had some significant unexpected reassessments. There are no specific rules which address every situation as to treatment and each case is looked at individually. Over the years, many of these cases have reached the courts and several principles have been established. CRA uses these guidelines when assessing each case.
Economic Reality Test
This test examines several economic factors and determines the nature of the relationship. This test is sub-divided into four sub-tests:
- Control – In simple terms, this test looks at whether the individual is directed only as to what is to be done or whether the individual is directed how it the work is to be done.
- Ownership of tools – Does the individual own the tools used to complete the work or are they provided?
- Chance of profit – Does the individual have an opportunity to earn additional money based on performance?
- Risk of Loss – Is the individual at risk of bad debts, covering unforeseen costs, damage to equipment?
Integration or Organization Test
This test examines whether or not the individual is economically dependent upon the organization. If a significant portion of an individual’s income is from one source, that would indicate an employee relationship.
Specific Result Test
An employee-employer relationship contemplates the employee putting his or her services at the disposal of the employer for a variety of tasks for a period of time without reference to one specific task. If an individual is hired for a specific task without any further work contemplated, then it indicates independent contractor status.
Canada Revenue Agency produces a guide RC4110 – Employee or Self-employed with checklists to assist you in determining the relationship you have. If you are unsure, you may request a ruling from the government.