Employee vs Contractor (Self-Employed)

To determine whether an individual is a contractor or an employee, the Canada Revenue Agency (CRA) will look at the following factors.

Step 1 – Intention of the Parties

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)?

It is always good to have a written agreement that provides evidence of the intent of the parties.

Step 2 – Questions to Ask

The CRA will ask these questions.

1. Control – the level of control the payer has over the worker’s activities
2. Tools and Equipment – who provides
3. Subcontracting work – whether the worker can subcontract the work or hire assistants
4. Financial Risk – the degree of financial risk the worker takes
5. Degree of responsibility for investment and management the worker holds
6. Opportunity for profit – will the worker realize a profit or incur a loss

CRA will examine each case on its particular facts and evaluate these factors in combination, rather than stating one factor is more important than the others.

1. Control or Independence

Indicators showing that the worker is an employee

• The payer will direct, scrutinize, and effectively control many elements of how and when the work is carried out
• The payer decides what jobs the worker will do
• The worker requires permission to work for other payers while working for this payer
• The worker receives training or direction from the payer on how to do the work. The overall work environment between the worker and the payer is one of subordination

Indicators showing that the worker is a self-employed individual

• A self-employed individual usually works independently
• The worker does not have anyone overseeing their activities
• The worker is usually free to work when and for whom they choose and may provide their services to different payers at the same time
• The worker can accept or refuse work from the payer

• Tools and Equipment

Indicators showing that the worker is an employee

• The payer supplies most of the tools and equipment the worker needs. In addition, the payer is responsible for repair, maintenance, and insurance costs
• The payer retains the right of use over the tools and equipment provided to the worker
• The worker supplies the tools and equipment and the payer reimburses the worker for their use

Indicators showing that the worker is a self-employed individual

• The worker provides the tools and equipment needed for the work. In addition, the worker is responsible for the costs of repairs, insurance, and maintenance to the tools and equipment
• The worker has made a significant investment in the tools and equipment and the worker retains the right over the use of these assets
• The worker supplies their own workspace, is responsible for the costs to maintain it, and does substantial work from that site

• Subcontracting Work or Hiring Assistants

Indicators showing that the worker is an employee

• The worker cannot hire helpers or assistants
• The worker does not have the ability to hire and send replacements. The worker has to do the work personally

Indicators showing that the worker is a self-employed individual

• The worker does not have to carry out the services personally. They can hire another party to either do the work or help do the work, and pay the costs for doing so
• The payer has no say in whom the worker hires

• Financial Risk

Indicators showing that the worker is an employee

• The worker is not usually responsible for any operating expenses
• The worker is not financially liable if they do not fulfil the obligations of the contract

Indicators showing that the worker is a self-employed individual

• The worker hires helpers to assist in the work. The worker pays the hired helpers
• The worker does a substantial amount of work from their own workspace and incurs expenses relating to the operation of that workspace
• The worker is financially liable if they do not fulfil the obligations of the contract
• The worker does not receive any protection or benefits from the payer
• The worker advertises and actively markets their services
• Responsibility for investment and management

Indicators showing that the worker is an employee

• The worker has no capital investment in the payer’s business
• The worker does not have a business presence

Indicators showing that the worker is a self-employed individual

• The worker has capital investment
• The worker manages their staff
• The worker hires and pays individuals to help do the work
• The worker has established a business presence

• Opportunity for Profit

Indicators showing that the worker is an employee

• The worker is not normally in a position to realize a business profit or loss
• The worker is entitled to benefit plans that are normally offered only to employees. These include registered pension plans, and group accident, health, and dental insurance plans

Indicators showing that the worker is a self-employed individual

• The worker can hire a substitute and the worker pays the substitute
• The worker is compensated by a flat fee and incurs expenses in carrying out the services

Main differences in tax and financial implications

For employees:

• The payer will be required to withhold and remit CPP, EI and income taxes to CRA.  The payer will also pay an employer portion of CPP and EI.
• The worker is restricted with respect to expenses that may be deducted from the employment income. 
• The worker has EI and has more protection and job security under Employment Standards in the province of where they work. 
• The worker is entitled to company benefits.

For independent contractors:

• The payer does not pay or withhold Canada Pension Plan (CPP) and Employment Insurance (EI) premium.
• The payer has no long term liability to the worker, no employment standards to follow, no payroll administration, and does not provide employee benefits.
• The worker can deduct related business expenses against the income. 
• The worker does not have to pay mandatory EI premiums. 

Audit Risk

It is generally more advantageous to characterize the income being generated as self-employed income.  However, CRA may look at it differently and determine the relationship to be one of employment.  If this situation happens, the payer will be liable for past unremitted CPP and EI, along with penalty and interest.  The payer may also be liable for the worker’s unpaid income taxes.  On the worker side, the worker will be assessed for any additional taxes resulting from unremitted/unpaid income tax and disallowed business expenses.

Requesting a Ruling

If a worker or payer is not sure of the worker’s employment status, either can ask the CRA for a ruling. A ruling shows whether a worker is an employee or self‑employed, and whether that worker’s employment is pensionable or insurable.

To ask for a CPP/EI ruling, you can:

• log in to My Business Account if you are a payer and select “Request a CPP/EI Ruling”
• log in to My Account if you are a payer or a worker and select “Request a CPP/EI Ruling”
• ask your authorized representative to request a ruling for you. They can log in to Represent a Client and select “Request a CPP/EI Ruling”
• write a letter or print and complete Form “CPT1, Request for a CPP/EI Ruling – Employee or Self-Employed?” and mail it to your designated tax services office