There are benefits to both being an Employee and Contractor. If you aren't sure what your new endeavor treats you as an employee or a contractor than the below should help you clear out some of the confusion.
Determining whether a worker is an employee or a contractor is based on a few CRA tests that need to be passed. Typically an employee would have their taxes withheld at the source being the Provincial & Federal taxes plus the remittances for EI and CPP. The Contractor has the responsibility to remit the income taxes and CPP (contractors are EI exempt) to the government. If the Contractor elects to pay themselves as an employee they will have to pay both the employee and employer piece of the CPP. The CRA uses the following approach to determine if you are an employee/contractor.
First test: Showing your Intention What's the intent? The intention of both the worker and payer must be clearly defined. If the contract defines the duties required to perform then the CRA will view this typically as an employer/employee relationship. However if the intent was to enter a service agreement then the CRA will view this as a business relationship. We strongly suggest seeking legal consultation to draft your service agreements.
Second Test: Testing the facts Once the CRA confirms that the intention is to be in a "business relationship" based on the contract the CRA move over to testing the 5 pillars.
Control - Who has the control over the activities is it the worker or the payer
Financial Risk - Does the worker carry a Financial risk and more importantly is there an opportunity for a profit?
Tools - The tools and equipment are they being supplied by the worker?
Subcontracting - If the worker can subcontract or hire help
# of clients - You must have more than just one client and the time spent needs to be reasonable.
Putting it together:
If you answer yes to any of these then you are more likely considered an Employee.
Do you have a set number of hours you have to work? i.e. 9AM to 5PM
Have accounted for the hours worked? i.e. Timesheets
Under supervision and told what job next to do? i.e. Task 1, 2 3
Part of the company insurance plan? i.e. Medical/Pension
Using the company tools? i.e. Computers/Supplies
If you answer yes to all of these then you are more likely considered a Contractor
Agree to have the work completed based on your scheduling?
Work on your own with no supervision but reporting back on progress?
Issue invoices and receive cheques?
Not part of the insurance plan? (Medical/supplies)
Use your own equipment?
Provide services to more? then just one company
There are many "Taxvantages" to you being a Contractor. You can claim any reasonable business expenses incurred to generate the revenue (Meals, Car Expenses, Telephone, Promotion etc). You also get to dodge the EI premiums but get stuck with paying the CPP employer and employee portions. People love hiring contractors because it is less expensive to hire a contractor. Employees traditionally carry other hidden nonsalary costs such as pensions, insurances and added admin paperwork.
Caution: Misusing the system carries hefty penalties and interest charges. Incorporating your business can carry a negative tax consequence where the CRA might deem your corporation as a PSB (Personal Services Business) which is a double taxation hit at about 46%. If the CRA determines that you did not satisfy the rules stated above you will be required to pay the Income Taxes, EI premiums, CPP deductions and penalties/interest.
It is strongly recommended to seek consultation from an Accountant who can discuss your particular situation to ensure you don't get hit with a potential tax liability for the future.
Click on the link below to book a meeting.
- Written by: Jag Bath