This question bothers the minds of consultants, CRA officers and tax courts judges.
The question of whether a person is in a business relationship (self-employed or incorporated independent contractor) or in an employee-employer relationship is not one that is always easy to answer.
In making the determination, the CRA considers factors that played out in numerous court cases:
- Whether you are required to work a certain number of hours a day
- How much control your contractor has over the work you do – more control is generally exercised by an employer over an employee than by a client over a self-employed person
- Who supplies the tools and the office you use
- Whether you invoice for services rendered
- Who carries the risk of business loss – self-employed persons usually have some degree of financial risk, and more opportunity for profit than employees
- Whether you provide services to more than one source
- Whether you have the flexibility to determine your own work schedule
Depending on what type of work you are doing, some of the factors may be given more weight than the others.
The recent case of Connor Homes v Canada represents the latest word on the troublesome employee-independent contractor characterization question. Beyond the traditional factors noted above, judge’s discussion included a discussion of subjective intention of the parties and how this intention is reflected in objective reality (the intent could have been as independent relationship, however if applying the factors that play role in the determination, it proves that the reality is of an employee – employer relationship).
Another recent case Gomez v The Queen dismissed the appeal of CRA decision to deny all expenses deductions taken in the corporation and to disallow the small business deduction that reduces the corporate tax rate to 15.5%. The Tax Court used all the above discussed tests and the subjective intention of the parties in determination of the status of the appellant as incorporated employee and not an independent contractor.
While you may consider yourself being an independent contractor, the CRA may view you as an employee/incorporated employee. The distinction can make a significant difference in your taxable income, thus it is very important to obtain a professional advice.