Employee or contractor Part 2 – The CRA six-point test

Last time, we talked about some reasons why companies often like to hire contractors instead of employees, and why many workers prefer to be paid as contractors. Tax treatment and employee benefits are two of the biggest advantages for both sides of the agreement. As you would expect, where taxes are involved, CRA will have something to say about who can and can’t be considered a contractor.

Unfortunately, like many CRA matters, the difference between an employee and a contractor isn’t always clear, and it can change over time if the worker’s role changes.

The CRA uses a six-point test to determine whether they will accept the contractor designation on your tax file. Be aware that the final decision about whether an individual is an independent contractor or an employee always depends on the facts and circumstances of each case.

Let’s have a quick look at each of these six determining factors.

1. Control

This factor focuses on who’s ‘running the ship’. An independent contractor is responsible for delivering a result and making their own decisions about how they fulfill their responsibilities. If the employer dictates how, when, and where the work gets done, it’s an employee relationship.

2. Ownership of tools

According to CRA, “Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.”.  This can be a gray area because many employees (i.e., auto mechanics) are required to own their own tools, and contractors (i.e., IT programmers and consultants) are often required to use of the company’s systems and tools.

3&4. Financial risk and the chance of profit.

(2 deciding factors) Contractors aim to make a profit. They usually cover their own operating costs, and they run the risk of losing money. Employees usually don’t share in the business risk or returns.

5. Subcontracting work or hiring assistants

If the worker can subcontract work or hire assistants, they are accepting the possibility of profit and risk of loss (see points 3&4). This suggests an independent contractor role. If the worker does not have this authority, they will likely be considered an employee.

6. Integration

CRA considers how integral the work is to the business of both parties. This factor isn’t clearly defined, but the main consideration is the number of clients the contractor serves. A contractor who only has one client might be classified as an employee by the CRA.

Safeguard Your Tax Status

If you decide to hire contractors, it’s important to safeguard the tax status of both parties by describing the relationship in a contract. When you are writing up a contractor agreement, focus especially on the first four points of this six-point test. Make a strong case that the contractor is independent and in control of their work. You need to explain the intentions of both parties in a written agreement to protect yourselves in case you or your employee have different memories or expectations of the relationship later on.   

The written agreement can prevent the CRA from recategorizing the relationship sometime in the future. That can help you avoid huge financial penalties.

Visit the CRA website for more information