Employee vs Independent Contractor

Question 1

Employee vs Self-employed - Tax Treatment

Answer 1

Employee vs Self-employed – Tax Treatment

• Employees are entitled to limited specific deductions whereas self-employed individuals are allowed to deduct a wide range of expenses (similar to business income deductions).
• Employment income is subject to source withholding.
• Employment income is taxed on a cash basis. Business income is taxed on an accrual basis.

Question 2

Employee vs Self-employed - Determination

Answer 2

• No specific rules.
• It is necessary to evaluate the facts of each case.
• Economic Reality Test – Control, Risk of Financial Loss and Ownership of Tools
• Integration (Organization) Test
• Specific Result Test
• The above 5 tests must be looked at individually. Often, the answer is not overwhelmingly conclusive and the factors must be weighed to arrive at a conclusion.

Question 3

Control

Answer 3

Control exists if the person for whom services are performed has the right to control the amount, the nature, and the management of the work to be done and the manner of doing it.

Question 4

Ownership of tools

Answer 4

If the taxpayer doing the work supplies neither funds nor equipment needed to do the work, takes no financial risks or managerial responsibility and has to liability, the taxpayer is most likely an employee.

Question 5

Chance of profit or risk of loss

Answer 5

Self-employed or independent contractor if:

• chance of making a profit
• risks incurring a loss from:
  
  • bad debts
  • damages to assets
  • delivery delays
  • must cover operating costs

Question 6

Intergration or organization test

Answer 6

Employee if the individual is economically dependent on the organization. Considerations are:

• proportion of the individual’s income derived from the organization
• availability to the individual of benefits available to employees of the organization
• are services performed as an individual in business on his or her own account?

Question 7

Specific Result Test

Answer 7

Employee:

• no specific results required
• services provided on an ongoing basis

Independent Contractor:

• worker and payer agree on certain specified work to be done
• possible use of assistants provided by worker
• CRA’s view: “a person is engaged to achieve a defined objective and is given all the freedom to obtain the desired result”.

Question 8

Other considerations

Answer 8

The relevance of the intention of the parties as stipulated in a contract as to the legal nature of the relationship created by the contract.

Question 9

What are the three employee vs self-employed tests?

Answer 9

1. economic reality or entrepreneur test
   
   1. control
   2. ownership of tools
   3. chance of profit/risk of loss
2. integration or organization test:
   
   1. how economically dependent is the individual?
   2. what percentage of income is derived from the organization?
3. specific result test: a specified work, possibly with assistants implies an independent contractor.