Whether you are an individual looking for a broader range of tax deductions than employees are ordinarily entitled to, or an employer looking for a more flexible working arrangement with your “employees”, you need to understand the rules around employment.
The employer-employee relationship is dealt with by a number of different legislative regimes. These include:
- Income Tax Act (Canada)
- Canada Pension Plan
- Employment Insurance Act
- BC Employment Standards Act (or other relevant provincial act)
It is important to understand that simply wanting to qualify for enhanced tax deductions as an independent contractor isn’t enough. Similarly employers can’t avoid the obligations of an employer merely by stating that a person providing services is self-employed.
Tax authorities – as well as other regulators – will look to the specifics of the relationship itself and make their own determination. This is true whether or not both parties intended to avoid the characterization of the relationship as an employment contract.
If you wish to establish a relationship that isn’t an employer-employee relationship, you should understand the position of the CRA with respect to this issue.
The CRA publication:
Employee or Self-Employed?
The document above explains how this issue is perceived by both the CRA and the courts.
It is possible for the employer and the employee/contractor to contract out of the employee relationship, but it must be done thoughtfully and should be in writing. Regardless of whether or not the contract is in writing, the terms must clearly avoid the appearance of a “master-servant relationship”, or the courts (and the CRA) will look through the contract and assess accordingly.
If an employer pressures an employee to agree to a position as an independent contractor, the government may side with the employee if the self-employed contractor seeks employment insurance and severance when he or she is dismissed.
In a situation like this the employer could be required to pay severance and be subject to an assessment for a shortfall in CPP and EI withholdings.
The website TaxTips.ca has a decent explanation of many of the issues: TaxTips.ca
If an “employee” forms a corporation to provide services to his or her employer, the corporation may be considered as a Personal Services Business – which would have significant implications. These are potentially more onerous than what an individual would face if he is deemed to be an employee without the complication of a corporation.
The case of Walter Pielasa and his wife, Susan (758997 Alberta Ltd. v. The Queen – 2004 TCC 755) illustrates some of the problems that an “incorporated employee” can face if his corporation is found to be a personal services business.
IMPLICATIONS TO A CORPORATION OF CLASSIFICATION AS A ‘PERSONAL SERVICES BUSINESS’
LIMITS TO ALLOWABLE DEDUCTIONS
Paragraph 18(1)(p) of the Income Tax Act restricts the deduction of expenses of a personal services business of a corporation to the following allowable deductions:
The above amounts are only deductible by a personal services business if they would be deductible by a business other than a personal services business.
|the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation the cost of any benefit or allowance provided to an incorporated employee any amount expended in connection with the selling of property or the negotiating of contracts by the corporation, as long as the amount would have been deductible if it had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered|
LOSS OF THE SMALL BUSINESS DEDUCTION
A personal services business is not eligible for the small business deduction, and thus pays tax at full corporate tax rates.