An organization can hire people either as employees or contractors. The benefit to
contractors is that a company does not have to pay into their EI or CPP. The company also requires the contractor to be the one to pay their own insurance and contribute to their own pension plan. An employee is also more difficult to fire if they end up not being a good fit.
CRA uses favourable tax treatment to reward contractors for the risk that they face in earning an income. Contractors can write-off expenses that employers cannot. In addition, they are given more flexibility with paying income taxes and deciding how to build their retirement savings.
CRA uses several broad criteria to establish the facts of a situation, then interprets those facts to make a ruling on what they feel is happening in the situation. Here are the criteria:
- Ownership of Tools and Equipment
- Ability to Subcontract or Hire Assistants
- Financial Risk
- Responsibility for Investment and Management
- Opportunity for Profit
Who controls what work is done, where it is done, how much is done and when it is done? The first issue is whether the company controls what products are made and how they are constructed.
A company may be very particular with regards to the work completed. They may have very high standards or require that the work is performed a certain way. A high level of control may indicate a demanding customer for the contractor, or it may be a sign that the contractor is operating as an employee.
Ownership of tools and equipment
Who owns and maintains the tools and equipment used to create the product or service? Tools and equipment represent an element of risk that the contractor is willing to make to perform the service or produce the goods. If the contractor has no risk they are more likely going to be considered an employee in CRA’s eyes.
Ability to hire assistants
Does the employee / subcontractor have the authority to hire and fire assistants? An indication of the responsibility and independence of the contractor is their ability to hire assistants. If the organization demands that authorization be given to hiring assistants, it indicates that the contractor holds no risk or autonomy and would be considered more of an employee.
Generally employees do not have any financial risk associated with their work.
Subcontractors can have a risk and can incur losses. Can the contractor make decisions and risk losing customers or market share value? If so, they are less likely to be considered an employee.
Responsibility for investment
Does the employee / contractor have capital invested in their business and/or do they participate in management decisions? The more a person invests in their venture, the more they plan to leverage their business’ future.
Opportunity for profit
Is the employee/contractor entitled to their full salary or wages regardless of the financial health of the business? Or will their personal/business income suffer with the quality or quantity of work provided.
A contractor is exposed to the market and has the opportunity to make profit or be faced with financial loss. An employee doesn’t earn more profit if they are more successful at their tasks, therefore if a worker is shielded from any ability to earn a profit, they will be considered an employee.
The underlying factor in all of these categories is the risk that an individual is willing to take for the hope of earning a greater amount of profit.
Whether you are the owner of a company or the contractor in question you may have questions that our team can advise you on. Contact Shaun today to book a private consultation and get some peace of mind with your situation.