Many individuals choose to categorize themselves as an independent contractor (self-employed) rather than an employee because of the various tax advantages. The Canada Revenue Agency (CRA) has its own rules regarding whether a person is in a business relationship (independent contractor), or in an employee-employer relationship. If your contract states you are an independent contractor, that does not mean the CRA will agree with your classification.
The courts look at a number of factors in making the determination as to whether someone is an independent contractor or an employee.
- Who is in control of the work being done;
- Who has the chance of profit and risk of loss;
- How integral is the worker; and
- Who purchases and/or owns the tools and equipment?
The CRA follows the Courts guidance, but also consider other criterion which they expand on in RC4110 Employee or self-employed.
- Eligible for Canada employment tax credit;
- Qualify for Employment Insurance;
- 50% of Canada Pension Plan premiums paid by employer;
- Vacation pay;
- Overtime pay;
- Worker’s compensation coverage;
- Harder to be fired; and
- Severance if fired.
- Paying employment insurance premiums;
- Little to no expenses are tax deductible; and
- Little to no control over work hours and conditions.
Independent Contractor Advantages
- No employment insurance premiums;
- More expenses are tax deducible;
- Freedom in working hours;
- Typically can work for multiple clients;
- Small business deduction if incorporated; and
- Can recover GST/HST paid.
Independent Contractor Disadvantages
- No severance pay if terminated;
- Cannot collect employment insurance;
- Must pay employee and employer portions of Canada Pension Plan contribution;
- Must keep detailed records;
- No overtime;
- Costs of purchasing ones own equipment and tools;
- Liable if one does not fulfill contract obligations;
- Typically will have to make tax instalment payments;
- Must register to collect GST/HST, except for small suppliers; and
- More costly accounting.
If you work on an infrequent basis and the work you are doing does not benefit the employer’s work directly or indirectly, then you may be employed in casual employment. If this is the case then your employment would not be pensionable or insurable.
Personal Services Business
Are you employed in a personal service business? Please see our article here for more details.
If you do not know whether you are employed in pensionable or insurable earnings, or whether you are an employee or an independent contractor, give us a call today!
671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 – Employee Integral to Organization
Preddie v. The Queen, 2004 TCC 81 – Relationship between Employer and Employee
1392644 Ontario Inc. O/A Connor Homes v. Minister of National Revenue, 2013 FCA 85 – Test for Independent Contractor or Employee
Khan v. All-Can Express Ltd., 2014 BCSC 1429 – Notice may be required if contractor is a dependent contractor
Detailed case law analysis may be found here.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.