Employee or Self-Employed (CRA Explained)

 

Do you have employees or do you have ‘sub-contractors’?

At face value it may not appear to matter much, but the consequences of a run-in with CRA over the application of the employee vs. self-employed rules can be quite significant.

In today’s economy, many small business owners are doing whatever they can to save money, and many have turned to the use of ‘sub-contractors’ to avoid the costs of social benefits such as CPP and EI as well as payroll taxes such as Workers Compensation Premiums and health taxes.

But, are these people truly sub-contractors under the Income Tax Act?

When CRA looks, they will make a determination based upon 4 basic criteria:

1. Control: Who exercises control in the business relationship? Is there a master (employer) server (employee) relationship? Can the employer terminate the services of the employee? Does the employer control the method of work and where / when is it performed?
2. Degree of Integration: Is the employee an integral part of the employer’s organization? Would an outside person regard the relationship as that of employee / employer?
3. Economic Reality: Is the individual carrying on business for personal gain or for the benefit of someone else (employer)? Does the individual have an opportunity for profit? Does the individual have any risk of loss? Does the individual provide their own tools or equipment? Is there a lasting or permanent relationship between the parties? Does the individual provide similar services to other parties and does the individual actively seek out new business?
4. Specific Result: Is the work performed to obtain a specific result or for an indefinite period of time? Is the contract such that the individual must specifically do the work or provide the service, or are they only responsible to make sure it gets done (another party could do it)

When you take a look at the 4 points, it becomes a rare instance when an individual would be considered self-employed when working at your place of business on a regular and routine basis. CRA almost always rules against the self-employed scenario when there is any kind of doubt about the relationship.

Another belief by some business owners is that if their ‘sub-contractor is incorporated, that will alleviate the issue. True for the employer, they would not risk penalty. The employee however would likely be deemed a ‘Personal Services Corporation’ and would lose the benefit of claiming expenses against income as well as the small business deduction available on Corporate Taxes.

You really cannot win. If an individual resembles an employee, they are an employee! You cannot argue with CRA.

If you are utilizing ‘sub contractors’ in your business, beware of the penalties if you are caught. Not only will you be assessed any and all taxes that you failed to deduct from the individual, the social benefits of CPP and EI, and any additional payroll taxes, but you will be penalized and charged interest. The interest and penalties can easily DOUBLE the amount that you should have withheld from the individual’s pay.

Is it really worth the risk? You may save a few dollars today, but the financial penalties, the disruption of an audit, the stress to the employee and the frustration of dealing with CRA could destroy your business.

If CRA were to decide that your paying individuals as sub-contractors instead of employees was a deliberate attempt to avoid taxes, you could be charged with tax avoidance or tax evasion. These claims both carry fines and penalties that could involve incarceration.

If you are ever in doubt, err on the side of caution and treat EVERYONE as an employee, withhold taxes and remit them to CRA as required.

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Date published Mar 11, 2024 | Last updated Mar 11, 2024

This article contains general information only and should not be relied upon for accuracy or completeness. You should seek appropriate tax or accounting advice from a qualified accountant before you take, or refrain from taking, any steps based upon this article. This article should not be construed as tax, accounting or other professional advice and QX Franchise Limited (Master Franchisee for TaxAssist in Canada) disclaims liability for any loss, howsoever caused, arising directly or indirectly from reliance on the information in this article.