“For tax purposes, the answer is very important.”
For tax purposes, the answer is very important. Generally, being an independent contractor is preferable from a tax point of view:
- You can deduct more expenses;
- You will not have tax withheld at source (though you may have to pay installments);
- You are more likely to be able to deduct home office costs;
- Your tax return is due June 15 instead of April 30; and
- You do not have to pay EI premiums (though you also don’t qualify for EI benefits, unless you “opt in” to the self-employment EI system). You will have to pay high CPP premiums though, and once your revenues over the preceding four calendar quarters exceed $30,000 you normally must charge and collect GST or HST. In some provinces, other sales taxes may be applicable.
Being an employee or an independent contractor does not just depend on what you and the company call your relationship. If you want to be an independent contractor, you have to establish that you are in fact independent and not an employee.
There is no clear or definitive test to apply. The Courts have come up with a number of guidelines, no one of which is determinative:
- If you receive typical employee benefits, you are more likely to be considered an employee;
- If the payer controls your work environment, you are more likely an employee;
- If you use the payer’s equipment or tools, you are more likely an employee;
- If you are an integrated part of the company, you are more likely an employee; and
- If you have a contract stating that you are an independent contractor, the Courts may accept that, but not if the other criteria point towards an employment relationship.
If you are trying to characterize yourself as an independent contractor, keep the above tests in mind and try as much as possible to stay away from the things that would make you an employee.
For example, you should decline the traditional employment benefits (e.g., pension plan, drug plan, dental plan, sick leave, life insurance, stock options, use of a company car), and simply opt to issue regular invoices to the company to pay for your services, plus disbursements such as travel or long-distance phone charges that you incur. Of course, you will want to discuss with the company how your compensation is calculated; normally, as an independent contractor, you would charge a significantly higher hourly rate than as an employee, to make up for the lack of benefits and the lack of severance protection if your contract expires and is not renewed.
You should have a contract signed by both parties that states that you are an independent contractor and not an employee. The contract should let you hire your own assistants to do part of the work. As well, you should avoid having a business card with the company’s name on it, and appearing on the company’s internal telephone list. That makes you look more an integrated part of the company, and less like an outside consultant or contractor.
Finally, if you are an independent contractor and your total billings exceed $30,000 per year, do not forget to register for and invoice the GST or HST and, depending on the province and what services you provide, you need to consider provincial sales tax as well). The company generally will not care about this; most businesses recover all the GST/HST they pay out by claiming input tax credits, so the GST/HST you add to your invoices will not cost the company anything unless it is in the business of making “exempt” supplies (such as financial services, residential rent or certain health care services).
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.