Is your Contract Worker really your Employee? Part 1

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Why is this important to know? If Canada Revenue Agency audits your company & determines the contract workers you have employed should have been treated as employees, then you are responsible for paying all source deductions (CPP, EI, EHT & WSIB) for both the employer & employee portions with late penalties plus interest. The main difference to the employer between a contract worker (self-employed) and an employee is the employer cost of taxes & benefits.

Canada Revenue Agency has published RC4110 defining a list of factors to assist in determining the status of a person working for you. The first factor is the province the contract is formed in. There are different factors to consider when the contract is formed in Quebec or the contract states in the event of a disagreement to interpret using Quebec law.  Quebec will be discussed in Part 2 next month.

Determining a worker’s status not in Quebec:

The key question is whether the person is engaged to perform services as a person in business on his own account or as an employee. The total relationship between the worker and the payer is done using a two-step approach.

Step 1 – What was the intent of the working arrangement?

Did the two parties intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)? Workers and payers can set up their affairs as they see fit; however, they have to ensure that the status they have chosen is reflected in the actual terms and conditions of the working relationship.

Step 2 – Questions to verify the working relationship and intent of the parties

Below are the 7 questions used in the verification process:

  1. the level of control the payer has over the worker’s activities;
  2. whether the worker provides the tools and equipment;
  3. whether the worker can subcontract the work or hire assistants;
  4. the degree of financial risk the worker takes;
  5. the degree of responsibility for investment and management the worker holds;
  6. the worker’s opportunity for profit; and
  7. any other relevant factors, such as written contracts.

Canada Revenue Agency looks at the answers separately for each element and then together. They consider whether they reflect the stated intention and then decide if the actual working conditions are more consistent with a contract of service or with a contract for services.

A more detailed explanation of the factors and the process to request a ruling can be found using the link below:

 

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html

 

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