When dealing with the Canada Revenue Agency (CRA), you need to find out whether your worker is considered to be an employee or a self-employed contractor. This is essential because the employment status dictates which party is responsible for remitting EI, CPP and income tax. Failure to understand these government rulings on independent contractors can, in some instances, result in cost increases and penalties that may be greater than the cost of hiring the contract labour in the first place.
To determine a worker's status, CRA examines the total working relationship and takes six main factors into consideration. None of the following factors on their own are conclusive, but all contribute to the decision on whether a worker is an employee or an independent contractor. Listed below are some questions that you should consider asking yourself when determining the status of a worker. If you answer yes to the majority of the questions, there is a good chance your worker is an employee.
- Control over the worker - Authority to exercise control over what will be done and the manner of doing it is one of the most important criteria for an employee. It does not matter if the control is actually exercised. A master/servant relationship exists if the right to control exists.
- Do you often direct, scrutinize, and effectively control many elements of how the work is performed?
- Do you control the worker with respect to both the results of the work and the method used to do the work.
- Do you determine and control the method and amount of pay?
- Does the worker require permission to work for other payers while working for you?
- Do you have priority on the worker's time when his/her schedule is irregular?
- Do you determine which jobs the worker will do?
- Does the worker receive training or direction from you on how to do the work?
- Do you choose to listen to the worker's suggestions but often have the final word regarding a decision?
- Ownership of tools and equipment - Where the payer supplies tools, materials, etc., it is indicative of control over the worker. This supports an employer/employee relationship.
- Do you supply most of the tools and equipment required by the worker?
- Are you also responsible for repair, maintenance, and insurance costs of the tools and equipment?
- Does the worker supply the tools and equipment but do you reimburse the worker for their use?
- Do you retain the right of use over the tools and equipment provided to the worker?
- Subcontracting work or hiring assistants - This factor can help determine a worker's business presence because workers that have the ability to subcontract work or hire assistants may affect their chance of profit and risk of loss.
- Is the worker not allowed to hire workers or assistants?
- Does the worker not have the ability to hire and send replacements for their job?
- Degree of financial risk taken by the worker - The higher the degree of financial risk, the more likely that the worker is will be deemed a self-employed contractor as the worker may not be reimbursed for any fixed ongoing costs incurred by the worker.
- Is your business the workers only source of income?
- Is the worker usually not responsible for any operating expenses?
- Is the working relationship between the worker and yourself continuous?
- Is the worker not financially liable if he or she does not fulfill the obligations of the contract?
- Do you determine and control the method and amount of pay?
- Responsibility for investment and management held by the worker - A significant investment is evidence that a business relationship may exist. You should also consider if the worker is free to make business decisions that affect his or her profit or loss.
- Does the worker have no capital investment in the business?
- Does the worker not have a business presence?
- Worker's opportunity for profit or loss - Consider whether the worker can realize a profit or incur a loss, as this indicates that a worker controls the business aspects of services rendered and that a business relationship likely exists. Employees normally do not have the chance of a profit and risk of a loss. Self-employed individuals normally have the chance of profit or risk of loss, because they have the ability to pursue and accept contracts as they see fit.
- Is the worker not normally in a position to realize a business profit or loss?
- Is the worker entitled to benefit plans which are normally not offered to employees? These include registered pension plans, and group accident, health and dental insurance plans.
If individual contractors do not have optional personal coverage for the full period of your contract, you can be held responsible for costs incurred in the event of a work-related injury.
Penalties:
If your company is audited and the CRA rules that your "contract workers" are actually employees each party will be responsible for the following:
Payer:
- CPP and EI employer and employee contributions for the current and previous year.
- 10 % penalty on the total assessment and interest of approximately prime plus one 1% from the date each of the contributions were due.
It is important to note that the CRA's definition of a contractor or employee is different than that given by the Employment Standards Branch and the Workers Compensation Board.
If a worker or payer is not sure of the worker's employment status, either party can request a free ruling from the CRA to have the status determined.