When the Canada Revenue Agency (CRA) attempt to determine the correct classification, they consider, among other things,
Employee vs Independent Contractor
Whether you are working for an organization or are the one arranging those workers, it is really important that these workers have the correct classification, namely, employees or independent contractors. From the employers’ perspective, when they employ independent contractors they would not be obligated to remit taxes, Employment Insurance (EI), nor Canada Pension Plan (CPP) premiums (both the employer and employee portions) on their behalf; have more flexibiltity in terminating the terms of work; and generally require lower administration work as opposed to employing employees. Therefore, there can be a motivation on the part of employers to designate their workers as independent contrators; however, often times this is not a completely free decision to make and only based on the nature of the working relationship can that decision be made. When the Canada Revenue Agency (CRA) attempt to determine the correct classficiation, they consider, among other things, the following criteria.
Control entails which party determines the manner for the work to be completed. An independent contractor is usually given a scope of work that needs to be completed within a specific timeframe without any direction from the employing organization. In essence, they have complete control on how the work will be done. An employee, on the other hand, is more intgrated with the employing organization; and collectively with its other members, controls and completes the work on an organization-wide basis.
Ownership of Tools/Equipment
This criterium considers who owns the tools and equipment used in order to complete the work that needs to be done. In normal circumstances, independent contractors supply their own tools and equipment in the course of completing their work. It would not be typical for an organization to provide independent contractors with work laptops.
Risk of Profit/Loss
An employee is given a fixed compensation for the work they perform. Aside from working overtime, there is no real opportunity to increase their income. On the other hand, independent contractors look at their bottom line in order to assess the need to increase their income or not. Perhaps they can work harder or more efficiently to reduce their costs and increase their net income. Ultimately, the nature of the work of an independent contractor should create the risk of being in a loss position.
In summary, the CRA considers who controls the work to be done and equipment used in that process; and if the employee or independent contractor has a risk to their profit/loss when designating workers employees or independent contractors. If they were to determine that one is in fact an employee and not an independent contractor, the employing organization would be liable to remit taxes, EI and CPP on the employee’s behalf, and can be assessed penalties and interest for those under remittances. From the employees’ perspective, although they would be able to claim the Canada Employment credit and only require to pay 50% of CPP premiums as opposed to 100%, they can have their previously claimed business expenses become disallowed and pay the respective taxes on them. Therefore, we highly encourage to use these criterium and make the correct classification when employing workers in your organization. Whether you’re working for an employer and feel are classified incorrectly and want to argue your way, or employing workers and want to correct the situation, reach out to us and we can help.