Tax Deductions: Employee or Self-Employed Contractor

Robert E. Flux
| 2/4/2021

Are you a self-employed contractor or employee?

The question of whether a person is in a business relationship (self-employed independent contractor) or in an employee-employer relationship is not one that is always easy to answer. The answer to this question will involve responsibilities in income tax, Canada Pension Plan, Employment Insurance, labor relation, and perhaps even other implications.

Even more confusing is the fact you could be considered an employee under labor relation rules but still be considered independent for income tax.

When examining whether or not a person is an employee or a self-employed individual, the key question that is asked is whether or not the person is engaged to perform services as a person in business on his or her own account, or as an employee. To do this, the relationship between the worker and the payer is examined using a two-step approach.

Step 1 - Know the agreed working arrangement

What was the intent of the worker and payer when they entered into 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)?

Sometimes the intention is clear, and both parties are in agreement (common intent). Sometimes the intent can be found in a written agreement. Sometimes the two parties have a different understanding as to the status of their working relationship, in which case there is no common intent.

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 employment. To make the intention clear it is extremely important for there to be a written and signed employment agreement or independent contractor agreement in place.

Step 2 - Understand the working facts

The working relationship between the worker and payer is verified to determine whether the intent of the parties is reflected in the facts.

The following elements are considered:

  • Level of control the payer has over the worker’s activities
  • Whether or not the worker provides the tools and equipment
  • Whether the worker can subcontract the work or hire assistants
  • Degree of financial risk taken by the worker
  • Degree of responsibility for investment and management held by the worker
  • Worker's opportunity for profit
  • Other relevant factors, such as written contracts

The facts are considered separately for each element and then together.  A determination is made as to whether or not the facts reflect the stated intention. When there is no common intent, a decision is made as to whether the answers are more consistent with a contract of service or with a contract for services.

Are you still unsure if you are a self-employed contractor or employee?

In real life situations, there are typically factors supporting both sides such that this topic is much debated between Canada Revenue Agency and Taxpayers in the Tax Courts, a rather costly endeavor in hindsight. Accordingly, when setting up your agreement to review the considerations and ensure your agreement includes factors that support the intention of the parties.

This topic is further explained in the CRA publication RC4110 Employee or self-employed. A comprehensive checklist is also provided in this publication. This checklist is useful for a worker or a payer (employer/client) to help determine whether their relationship is a business relationship or an employer/employee relationship.

CRA also has information on the following categories of workers to help determine whether they are employees or self-employed for purposes of CPP and EI, in their web page CPP/EI Explained:

  • real estate agents
  • workers who own and operate heavy machinery
  • workers engaged in construction
  • workers engaged in fishing

Note that a payer only needs to concern themselves with the above determination if they are paying you as an individual. If the payer is contracting with you through your personal corporation (by written agreement), then the employee-independent contractor determination does not impact the payers' tax responsibilities. The determination, however, is still relevant to you if you are determined to be an employee contracting through your corporation then your corporation will be subject to certain negative tax rules.

Rob has over 20 years of accounting and tax experience, working with a wide range of businesses in various industries. Specializing in owner-manager taxation and estate planning since 2005, Rob ensures clients are properly structured from a tax and business perspective, while considering their future succession, retirement, and estate planning goals. Believing in a team approach, he works regularly with clients’ investment advisors and lawyers on planning matters. Rob has extensive experience with trusts and estates, investments, personal and corporate taxes, advising his clients throughout all stages of life.
Robert E. Flux
Partner, Incorporated
Sunshine Coast