The distinction between being treated as an employee or independent contractor is a frequently contended issue between taxpayers and the Canada Revenue Agency (CRA), and in turn a matter that often proceeds to court. It has implications on both sides of the contracted relationship, including:
- Tax rates and reporting obligations of the respective parties,
- Generation of RRSP contribution room,
- Premium obligations for employment insurance and Canada Pension Plan, and entitlement to associated EI and CPP benefits,
- Requirement to collect, report and remit GST/HST, and
- Entitlement to and constraints upon tax deductions.
Though independent contractor characterization may more often be viewed from the working party perspective, it may also affect tax cost and administrative burden to the otherwise employer party. Furthermore, that working party may be able to receive payments through a corporation, enabling a greater degree of flexibility in ultimately distributing net receipts into personal hands.
But being treated as employment or an independent contract is not merely a matter of the parties saying so. The CRA or the courts may concur, but often will see it otherwise.
Gomez Consulting v. R., 2013 TCC 3
Gomez Consulting provided information technology (IT) consulting services to two federal agency clients: the Canada Revenue Agency and the Canada Mortgage and Housing Corporation (“the Clients”). In reporting its taxes for the relevant years, it claimed entitlement to the small business deduction, as well as certain deductions in calculating its tax liability.
On reassessment, the Minister of Revenue treated the corporation as a personal services corporation, but for which Mr. Luis Gomez Almeida (shareholder and employee of Gomez Consulting) was simply an employee of the Clients in his personal capacity.
In appealing the reassessment, Gomez Consulting relied heavily on the intentions of the parties, suggested to be inferred in part from the business contracts. As well, another IT consultant was called as a witness, testifying that he had been recognized as an independent contractor by the CRA appeals division.
The judge reviewed and adopted the position of a number of cases expressing the view that intent is not a relevant consideration in the personal services business analysis. On the facts, given the hourly pay rate, provision of tools and work space, and requirement to complete the work personally, the judge concluded that it was a personal services business. Small business rate and all deduction claims denied.
Wiebe Door Services Ltd v. M.N.R., 87 DTC 5025
This is the oft-cited and followed case from the Federal Court of Appeal that lays out a test for determining whether a person is an employee or an independent contractor.
The case was cited with approval by the Supreme Court of Canada in 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. The summary in this latter case affirms that each situation must be evaluated on its own facts, within a framework that considers:
- Control the employer has over the worker’s activities,
- Whether the worker provides his or her own equipment,
- Whether the worker hires his or her own helpers,
- Degree of financial risk taken by the worker,
- Degree of responsibility for investment and management held by the worker, and
- Worker’s opportunity for profit in the performance of his or her tasks.
- Though detailed, this is not necessarily an exhaustive list, and the weight to be accorded to each factor depends on the facts in issue.
- Facts matter, and substance trumps form. Where an employment arrangement is dressed up to appear as something else – whether intentionally or inadvertently – the tax system will inquire and attempt to treat it in accordance with its true nature.
- Whether or not rendered into a written contract, the intentions of parties may very well bind them vis-à-vis one another. The parties should not however assume that this will thereby bind the taxing authority.
- The interposition of a corporation as the working party contractor in no way assures availability of the small business rate and deductions. The personal services business rules may apply as a look-through to effectively treat the individual as an employee. >