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Employee or self-employed contractor status: Canada Revenue Agency (CRA) in Manitoba

If you hire someone with the understanding that he/she is an independent contractor, we recommend you request a ruling from the Canada Revenue Agency (CRA) about the employment status. Have written clarification is important as CRA’s decision determines if you are responsible for remitting EI, CPP, income taxes, or if the worker is responsible for those obligations.

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, CRA’s 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.

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Control – Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done.

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

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

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

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?

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.

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 CRA.

Special Situations

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:

  1. CPP and EI employer and employee contributions for the current year and the previous year.
  2. 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:

  1. Personal back-taxes, if unpaid.

Still have questions?

More details are available from CRA’s Employee or Self-employed?  video and Guide.

CFIB members can contact a CFIB Business Counsellor at 1-888-234-2232 or msman@cfib.ca.