business owners that need more than just a tax return, business consulting
and guidance as well."
between employees and self-employed individuals is sometimes a difficult
one. At the one extreme, if you work on a regular basis providing your
services to one person or company for a fixed amount, whether computed
hourly, weekly, monthly, or annually, you are an employee. At the other
extreme, if you provide services to a series of different payors at essentially
the same time, using your own expertise to determine the nature or degree
of service and to prioritize the demands of your clients, you are probably
operating a business.
in theory you might want to be assessed as an employee, in fact the issues
always arise in the case of individuals assessed as employees who want
to be treated as self-employed (i.e., as carrying on a business). This
occurs in the case of income tax assessments because the deductions allowed
to businesses are typically broader than those allowed to employees. Even
more commonly, the issue arises in Canada Pension Plan and Employment Insurance
assessments, where the CCRA seeks for its own convenience to classify all
the workers of a particular enterprise as employees, and the employer (and
very often the employees as well) resist this classification. Self-employed
workers will have to pay Canada Pension Plan contributions themselves in
any event, but EI is seen as an unnecessary cost by those who do not anticipate
claiming benefits. As well, individuals who feel themselves self-employed
will resist CPP/EI employment classification because they anticipate limitation
on income tax business deduction claims.
administered by the CCRA, CPP/EI is handled by a different division and
its judgments do not prevent a separate appeal on deduction issues. On
the other hand, since a CPP/EI ruling of employment will result in the
issuance of T4 slips, it does create a presumption of employment income
on the general tax return.
As a matter
of law, it is clear that the CCRA must judge every case from the point
of view of the person offering services (i.e., the potential employee and
not the employer), and must “search for the total relationship of the parties”.
The courts have cited with approval the dictum that “the fundamental test
to be applied is this: Is the person who has engaged himself to perform
these services performing them as a person in business on his own account?”
If the answer is yes, the person is self-employed.
to decide if a person offering services is an employee, two sets of tests
are primarily used. The first is a four-fold test of: (1) whether the worker
was subject to complete control of the payor as to the use of time and
the way in which services were to be performed, (2) whether the worker
provided his own tools, (3) whether the worker has an opportunity for profit
(in an accounting sense) from his services, and (4) whether the worker
has a risk of loss from his enterprise. These tests are overlaid with a
substantial history of case law and may require professional interpretation.
The other common test is the “organization” test, and may be summarized
as asking if the person offering services offers them in the context of
a coherent business enterprise rather than merely putting himself (herself)
in the service of a particular payor.
be obvious that these tests do not yield automatic answers. The trend of
judicial decisions recently has tended to favour the taxpayer, in large
part because the CCRA has been overly aggressive in assessing CPP/EI liability.
Unfortunately, this is often a dispute between the CCRA and the employer,
leaving the affected worker as a mere bystander. Where the issue is important
to the worker, however, independent advice and representation to the CCRA
should be considered.
has attempted to formalize the criteria for separating employees from the
self-employed with a series of check-lists, published as a guide called
Employee or Self-Employed? (RC4110), available from Tax Services Offices,
which will respond to telephone requests. It is not clear that checklists
can adequately analyze relationships which the courts have repeatedly said
depend on the facts of each case. The guide does, however, lay out the
lines of argument to which the CCRA will look in the first instance, and
it is, therefore, is a reasonable starting point for the argument.
November 1,1999 Revenue Canada became Canada Customs Revenue Agency (CCRA).
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