Employee or self-employed contractor status: Canada Revenue Agency (CRA) in Manitoba

If you hire someone with the understanding that he/she is an independent contractor, we recommend you request a ruling from the Canada Revenue Agency (CRA) about the employment status. Have written clarification is important as CRA’s decision determines if you are responsible for remitting EI, CPP, income taxes, or if the worker is responsible for those obligations.

Failure to correctly understand the CRA’s rules for independent contractors may result in costs increases and penalties that are greater than the cost of hiring the contractor in the first place.

Contract relationships can be viewed differently by Manitoba Employment Standards and the Workers Compensation Board of Manitoba. While CRA may consider their decisions, CRA’s rules are not influenced by them.

CRA's Two-Step Analysis

CRA examines the total working relationship. The key question is whether or not the person is engaged to perform services as a person in business on his/her own account, or as an employee.

Step One: CRA considers the intent of both parties and the actual employment terms and conditions. The intention is either a contract of service (employer-employee relationship) or a contract for services (business relationship). Sometimes there is common intent and agreement, but sometimes there is not. No matter how the worker and payer set up and define their affairs, they must ensure the chosen status is reflected in the actual employment terms and conditions. Although a verbal or written contract may exist, that agreement does not legally or conclusively ensure the chosen status.

Step Two: CRA asks both parties questions about:

• the level of control the payer has over the worker's activities;
• whether the worker provides the tools and equipment;
• whether the worker can subcontract the work or hire assistants;
• the degree of financial risk the worker takes;
• the degree of responsibility for investment and management the worker holds;
• the worker's opportunity for profit; and
• any other relevant factors, such as written contracts.

These factors are considered separately and together. CRA considers how the answers reflect the stated intention and decides if the actual working conditions are more consistent with a contract of service or with a contract for services.

Factors to consider

CRA studies 6 factors. Below are some questions you should ask yourself. If you answer yes to the majority of the questions, there is a good chance your worker is an employee and not a self-employed contractor.

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.

Requesting a Ruling

If either you or your contractor are not sure of the employment status, either party can request a ruling to receive written clarification from CRA. Employers registered with My Business Account, can use its "Request a CPP/EI ruling" service, or either party can submit a CPT1 Request for a Ruling as to the Status of a Worker under the Canada Pension Plan and/or the Employment Insurance Act form to CRA.

Special Situations

Hairdressers/barbers who provide services in establishments offering hairdressing

For EI purposes, those who provide services in a barbershop/hairdressing business are always considered employees even if they meet self-employed criteria. The owner or proprietor is considered the employer and must deduct/remit both employer and employee EI premiums. This obligation is stated in EI legislation, and has been challenged and defeated in Court on many occasions.

For CPP and income tax, CRA considers an individual NOT employed under a contract of service to be self-employed, and he/she is responsible for paying his/her CPP and income tax deductions.

Drivers of taxis/other passenger-carrying vehicles, placement agency workers, temporary-help service firm employees, power saw/tree trimmer employees, fishers and Status Indian employees

CRA has special rules for the above regarding EI, CPP and income tax. For more information, see CRA’s Special Situations.

Penalties

If your company is audited and CRA rules that your self-employed independent contractors are actually your employees, each party will be responsible for a minimum of:

Payer:

1. CPP and EI employer and employee contributions for the current year and the previous year.
2. A penalty equal to 10 per cent of the total assessment, plus interest (at CRA’s prescribed interest rate in effect at the time of the assessment) from the date each of the contributions were due.

Employee:

1. Personal back-taxes, if unpaid.

Still have questions?

More details are available from CRA’s Employee or Self-employed?  video and Guide.

CFIB members can contact a CFIB Business Advisor at 1-888-234-2232 or cfib@cfib.ca.