Employee? Contractor? For taxes, it matters

Article content

Employee or self-employed? This is one of the most litigated issues in tax law, with decisions handed down regularly based on facts in cases that can best be described as shades of grey.

For a business, being able to classify a worker as an independent contractor instead of an employee relieves it of the administrative burden of making deductions such as income taxes, and the economic cost of paying the employer’s portion of CPP contributions and EI premiums.

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Employee? Contractor? For taxes, it matters Back to video

For the worker, being considered an independent contractor can seem attractive since someone who is self-employed can write off a wider variety of business expenses.

A case decided last month dealt with an individual who worked at a family-run hot-yoga studio in Delta, B.C., for six months, after which he was terminated. He then applied for employment insurance benefits, which led the government to conclude he was considered an employee and the yoga studio should have been withholding CPP and EI on his earnings. The studio contested this and claimed the worker was engaged as an independent contractor.

[np-related]

The court had to apply the classic legal tests to answer the question of employee vs. independent contractor, as previously established by the Supreme Court. As the court wrote: “The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor.”

Other factors include: whether the worker must provide her own equipment; has the ability to hire helpers to get the work done; bears some financial risk and has the opportunity to make a profit or loss when performing her work. While an independent contractor generally assumes the risk of loss and chance for profit, when it comes to an employee, it is the employer that takes that responsibility and can ultimately make a profit.

The judge considered each of these factors, beginning with control, and found that since the studio worker was assigned full-time shift work, including such front-desk duties as opening the studio, cleaning and monitoring students coming in, he had little control over his hours. Also, oral testimony along with various email exchanges produced as evidence demonstrated that he was working under the detailed instructions of the studio owner and had little input into how his work was to be done, suggesting the factor of control strongly pointed to an employment relationship.

Similarly, regarding all the other factors, the judge ruled the individual was indeed an employee for purposes of remitting CPP and EI. As the judge concluded, “If parties wish to have an independent contractor relationship respected for purposes of the Employment Insurance Act and the Canada Pension Plan, their actions need to be consistent with their intent.”

Jamie Golombek is the managing director, tax & estate planning at CIBC Private Wealth Management in Toronto.