The CRA views employees and consultants (or contractors) very differently. When you are using the services of another person, you need to seriously consider which would be better for your company…to hire the person as an employee or contract as a consultant.
Contractors
For the employer, a contractor is less paperwork. The contractor is not entitled to any benefit packages, pensions, insurance, or other common benefits. Payments to the contractor will not involve any income tax withholding or employment insurance (EI). You also get to assume that the contractor is thoroughly skilled at their job, so you don’t need to worry about offering ongoing education or in-service training.
You have the ability to use them or not. So, if your business is in a slump (seasonal or otherwise), you can simply discontinue the consultant’s services. The downside of that is when your business picks up again, they may or may not be available to work for you. You would then need to find and orient another consultant.
While you only pay them for the time or work produced, they can take on other clients, including your competitors. They may also decline a project or take time off (like vacation or sick leave) without your permission. A lot of it depends on the contract you negotiate.
Employees
For an employee, there is a defined relationship called “boss/worker” that lets the employer have control over the individuals work. The employer is also responsible for complying with all legislation dealing with minimum wages, holidays, leave status, etc. The employer is also responsible to deduct for taxes and other items.
Employees fall into two basic categories. Indefinite is when the individual has a specific start date and goes on until either the employer or employee terminates. Fixed Term is when the individual has both a start date and end date, like for seasonal employees. Either Indefinite or Fixed Term can be part time or full time.
Problems
A serious situation can develop if you have an individual that you think is a contractor but is later determined to be an employee. In that case you, as the employer, will need to deal with any unpaid taxes, CPP, EI, and possibly penalties and interest. For the individual, they would be liable for any business expenses they claimed but are no longer entitled to.
Status
The CRA has some criteria to decide if the person is an employee or not.
Control – For an employee status, the employer decides the salary and where and how the work is done. A contractor gets to choose the hours they will work and planning on how it will be completed.
Tools – It depends on who owns the “tools”. For someone in a repair or construction line of work, this is pretty obvious. However, for an office employee that could mean who owns the computer/laptop, phone and other devices.
Finances – If you are responsible for your own operating costs and take responsibility to have anything repaired, you are a contractor.
Integration – If you have multiple clients, this is a pretty good indication that you are a consultant/contractor. If you only have a single client, the area is rather grey.
Whether you hire a person as an employee or contractor, or want to be an employee or consultant, depends on the way you want to conduct your business and how you want to deal with the financial aspects and benefits. If you have any concerns, just contact us to set up a consultation.
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- The Capex Team