Skip to main content

Is it an employee or contractor? Learn CRA’s rules to be sure

  • Home
  • Is it an employee or contractor? Learn CRA’s rules to be sure

If you hire someone under a contract relationship, no matter what your written or verbal contract may state, it is important to know the Canada Revenue Agency (CRA) can deem the person to be an independent contractor or your employee. CRA’s decision determines who is responsible for remitting EI, CPP and income tax: you or the worker. That’s why we recommend that you request a written ruling from CRA.

Failure to correctly understand the CRA’s rules for independent contractors may result in costs increases and penalties that are greater than the cost of hiring the contractor in the first place.

Contract relationships can be viewed differently by Manitoba Employment Standards and the Workers’ Compensation Board of Manitoba. While CRA may consider their decisions, their rules are not influenced by them.

CRA's Two-Step Analysis

CRA examines the total working relationship. The key question is whether or not the person is engaged to perform services as a person in business on his/her own account, or as an employee.

Step One CRA considers the intent of both parties and the actual employment terms and conditions. The intention is either a contract of service (employer-employee relationship) or a contract for services (business relationship). Sometimes there is common intent and agreement, but sometimes there is not. No matter how the worker and payer set up and define their affairs, they must ensure the chosen status is reflected in the actual employment terms and conditions. Although a verbal or written contract may exist, that agreement does not legally or conclusively ensure the chosen status.

Step Two CRA asks both parties questions about:

  • the level of control the payer has over the worker's activities;
  • whether the worker provides the tools and equipment;
  • whether the worker can subcontract the work or hire assistants;
  • the degree of financial risk the worker takes;
  • the degree of responsibility for investment and management the worker holds;
  • the worker's opportunity for profit; and
  • any other relevant factors, such as written contracts.

 

These factors are considered separately and together. CRA considers how the answers reflect the stated intention and decides if the actual working conditions are more consistent with a contract of service or with a contract for services.

Indicators the worker is an employee

  • The relationship is one of subordination. The payer will often direct, scrutinize, and effectively control many elements of how and when the work is carried out.
  • The payer controls the worker with respect to both the results of the work and the method used to do the work.
  • The payer chooses and controls the method and amount of pay. Salary negotiations may still take place in an employer-employee relationship.
  • The payer decides what jobs the worker will do.
  • The payer chooses to listen to the worker's suggestions but has the final word.
  • The worker requires permission to work for other payers while working for this payer.
  • Where the schedule is irregular, priority on the worker's time is an indication of control over the worker.
  • 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 the worker is a self-employed individual

  • A self-employed individual usually works independently.
  • The worker does not have anyone overseeing his or her activities.
  • The worker is usually free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time.
  • The worker can accept or refuse work from the payer.
  • The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.

 

Tools and equipment What is relevant is the significant investment in the tools and equipment along with the cost of replacement, repair and insurance.

Indicators 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 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 his or her own workspace, is responsible for the costs to maintain it, and does substantial work from that site.

 

Subcontracting work or hiring assistants Can the worker subcontract work or hire assistants? The answer can help decide a worker's business presence because subcontracting work or hiring assistants can affect their chance of profit and risk of loss.

Indicators 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 themselves.

 

Indicators the worker is a self-employed individual

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

 

Financial risk Consider the degree of financial risk taken. Usually, employees will not assume any financial risk, as their expenses are reimbursed, and they will not have fixed ongoing costs. Self-employed individuals can assume financial risk and incur losses because they usually pay fixed monthly costs even if work is not currently being done.

Indicators the worker is an employee

  • The worker is not usually responsible for any operating expenses.
  • Generally, the working relationship between the worker and the payer is continuous.
  • The worker is not financially liable if he or she does not fulfil the obligations of the contract.
  • The payer chooses and controls the method and amount of pay.

 

Indicators 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 his or her own workspace and incurs expenses relating to the operation of that workspace.
  • The worker is hired for a specific job rather than an ongoing relationship.
  • The worker is financially liable if he or she does 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 his or her services.

 

Responsibility for investment and management Consider the degree held by the worker. Is the worker required to make any investment in order to provide the services? A significant investment is evidence that a business relationship may exist. Is the worker is free to make business decisions that affect his or her profit or loss?

Indicators 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 the worker is a self-employed individual

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

 

Opportunity for profit Can the worker realize a profit or incur a loss? Employees may have expenses directly related to their employment but normally these would not place employees at risk of incurring a loss. Self-employed individuals normally have the chance of profit or risk of loss, because they have the ability to pursue and accept contracts as they see fit.

Indicators 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 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.

 

Requesting a Ruling

If either you or your contractor are not sure of the employment status, either party can request a ruling to receive written clarification from CRA. Employers registered with My Business Account can use its "Request a CPP/EI ruling" service, or either party can submit a CPT1 Request for a Ruling as to the Status of a Worker under the Canada Pension Plan and/or the Employment Insurance Act form to the CRA.

Penalties

If your company is audited and CRA rules that your self-employed independent contractors are actually your employees, each party will be responsible for a minimum of:

Payer:

  • CPP and EI employer and employee contributions for the current year and the previous year.
  • A penalty equal to 10 per cent of the total assessment, plus interest (at CRA’s prescribed interest rate in effect at the time of the assessment) from the date each of the contributions were due.

 

Employee:

  • Personal back-taxes, if unpaid.

 

Special situations

Hairdressers/barbers who provide services in establishments offeringhairdressing/barbering

For EI purposes, those who provide services in a barbershop/hairdressing business are always considered employees even if they meet self-employed criteria. The owner or proprietor is considered the employer and must deduct/remit both employer and employee EI premiums. This obligation is stated in EI legislation, and has been challenged and defeated in Court on many occasions.

For CPP and income tax, CRA considers an individual NOT employed under a contract of service to be self-employed, and he/she is responsible for paying his/her CPP and income tax deductions.

For EI purposes, those who provide services in a barbershop/hairdressing business are always considered employees even if they meet self-employed criteria. The owner or proprietor is considered the employer and must deduct/remit both employer and employee EI premiums. This obligation is stated in EI legislation, and has been challenged and defeated in Court on many occasions.

For CPP and income tax, CRA considers an individual NOT employed under a contract of service to be self-employed, and he/she is responsible for paying his/her CPP and income tax deductions.

Drivers of taxis/other passenger-carrying vehicles, placement agency workers, temporary-help service firm employees, power saw/tree trimmer employees, fishers and Status Indian employees

CRA has special rules for the above regarding EI, CPP and income tax. For more information, check CRA’s Employers’ Guide to Payroll Deductions.