I am a Contractor, Unless CRA Says Otherwise

While we may be uncomfortable with a little bit of gray in our business relationships, the Canada Revenue Agency (CRA) is not. One issue that has fuzzy boundaries, but must be defined for tax purposes, is the issue of employee versus contractor.

Business owners need to be concerned about the distinction because they must remit payroll taxes on behalf of employees and provide employees with reasonable notice of termination. However, these rules do not apply to contractors (although there are some cases of reasonable notice for contractors). Individuals need to be concerned about the distinction because there are certain tax write-offs that are permitted for contractors (self-employed individuals) that are not permitted for employees.

In a perfect world, without CRA, (how utopian is that?), both the employer and employee would have a predilection to achieve monetary savings by ensuring work agreements are structured as independent contractor agreements. In fact, especially in the computer consultant world, many companies require the worker to incorporate a company to further insulate the payer company from CRA.

Many employers however ignore other factors that come into play. Since they are not withholding income taxes, Workers Compensation and Employee Health Tax, the contractor (or their corporation) is liable for these taxes. I have seen many cases where the contractor does not deal with these taxes and instead comes back to the employer asking for help in paying these liabilities.

In addition, I have seen cases where the “employee” requests to be a contractor for tax purposes, but when the company no longer requires their services and their request for Employment Insurance (“EI”) is turned down (since they are self employed) they often make a claim against the employer saying they did not understand they would not be covered for EI and they really were employees. A recent case involving the Royal Winnipeg Ballet focussed on the expressed intention of the arrangement and maybe helpful in this regard in future cases.

I generally advise my clients to treat workers as employer/employee relationships when the individual is working for them several days a week. I also generally advise my contractor clients to avoid the use of corporations due to Personal Service Business (“PSB”) concerns. If CRA considers a PSB to be in place a punitive income tax is applied to the corporation. Where a contractor agreement comes under CRA’s scrutiny, the first thing CRA does is examine the agreement between the payer and the employee/self-employed contractor to determine the intent of the relationship; but intent alone is not enough. The CRA then applies 4 tests to determine if the relationship is a business relationship or an employer-employee relationship. CRA has issued RC 4110 to communicate their position.

It should be noted that much of CRA’s position is drawn from two notable cases Weibe Doors and 671122 Ontario Ltd. vs Sagaz Industries.

The tests are as follows:

Control test: A lack of control over how work is done is evidence that there is an employer-employee relationship – e.g. the payer determines how the work should be done, what work should be done and provides training. In a business relationship, the contractor would work independently and accept or refuse work at his/her own discretion.

Tool test: Generally contractors supply their own tools. “Tools” is not limited to hammers – it includes instruments, computers, vehicles and any other items that the worker uses to perform his/her job. 

Subcontractor test: The ability to hire assistants or contract work out is evidence that there is a business relationship.

Risk/Opportunity test: Risk of loss and opportunity for profit are indicators that there is a business relationship.

Integration test: This test examines whether the payer’s activities are incorporated into the worker’s business or whether the worker is integrated into the payer’s activities.

The employee versus contractor issue is a minefield and employers and employees alike should consult their advisors before entering into a new agreement.

FORD VS TORONTO STAR

The Toronto Star has been consistently and vigorously attacking Toronto mayoral candidate Rob Ford in an attempt to get anyone other than Ford elected. In an article called “Waking up on October 26 with Mayor Rob Ford”, Heather Mallick likens voting for Ford to “sleeping with someone to get revenge on your spouse” and when you wake up the next day (after election day), you regret it.

I have never met Mr. Ford, although I heard him  a couple of months ago when he was having a fundraising dinner at a restaurant where I was eating. His group was not the quietest group of diners, but that appears to be consistent with what we know about Ford: he will be heard and noticed for good or bad.

Based on the above, you may think I would be sympathetic to Mallick’s cause, however, that is not the case. You see, I am in the group Mallick refers to as Ford’s “monstrous regiment of angry, old white male voters,” although the old part certainly doesn’t apply to me. In my opinion, this group of Ford supporters includes many middle-aged voters of all colours who are sick and tired of leftist leaning Toronto politicians with no backbone, no vision and a history of overseeing a mess of a Toronto council.

Like many, I am not sure if Ford if up for the job or not. But unlike Ms. Mallick, many Torontonians are not happy with the status quo where Toronto panders to every civil servant and union, while taxing its residents to death and allowing the city to deteriorate.