Calgary, Alberta, Canada
Tel. (403)276-4841 (Calgary) or 1-800-663-4576 (Alberta/BC)
  Fax. (403) 276-9430 E-mail.info@accutax.com


"For small business owners that need more than just a tax return, business consulting and guidance as well."


The distinction 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.
Although 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.
Although 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.
In trying 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.
It should 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.
The CCRA 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.
-Note:- November 1,1999 Revenue Canada became Canada Customs Revenue Agency (CCRA).
The preceding information is for educational purposes only.
As it is impossible to include all situations, circumstances and exceptions in a web site such as this, a further review should be done by a qualified professional. Although every reasonable effort has been made to insure the accuracy of the information contained in this web site, no individual or organization involved in either the preparation or distribution of this web site accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
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