“This issue requires a review of all relevant factors..”
Whether an individual is to be treated as a contractor or an employee for tax purposes is a common question. There are implications for both the payor and the recipient. If the individual is an employee, the employer is required to withhold taxes, Canada Pension Plan and Employment Insurance contributions. If the individual is in Ontario, there could also be employer health tax or workers’ compensation payable. Implications for the recipient are whether he/she must make his/her own Canada Pension Plan contributions. For an individual contractor there are more allowable deductions available from taxable income than there are for an employee.
The factors to be considered in determining whether an individual is an employee or a contractor have been established by case law. According to the courts, the key factors in determining whether an individual is an employee or a contractor are:
- The degree of control over work;
- The ownership of tools;
- The chance of profit and risk of loss;
- The interpretation of taxpayer’s work in the business
The courts have made it very clear that there is no single test to determine if an individual is an employee. Instead, an analysis of all the relevant facts will result in the final determination. Even if an individual has a contract that states that he/she is a contractor, the CRA will still look at the facts in making their determination. It is recommended that all documentation should support the position that is being taken. Often a determination as to whether an individual is a contractor or an employee is made without the proper supporting documentation.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.