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Employees or independent contractors—what’s the difference?

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More and more companies are using temporary workers, contractors and freelance workers. Using self-employed workers can be a great way to save on HR costs and gain workforce flexibility.

But it’s important to know whether the people doing work for you are employees or self-employed contractors in the eyes of the government.

A person’s employment status affects not only their income tax status, but also their contributions for Employment Insurance and the Canadian or Quebec pension plan.

CRA offers a guide

“Employers are responsible for deducting Canada Pension Plan contributions, Employment Insurance premiums, and income tax from remuneration or other amounts they pay to their employees,” according to the Canadian Revenue Agency’s (CRA) online guide Employee or Self-Employed?

Of course, the crucial issue is whether or not the people doing work for you are employees or self-employed contractors. This is not clear cut.

According to CRA, the intent you had going into your relationship and the degree of control you have over the person are important factors in determining whether you have an employer-employee or a business relationship. Factors differ if the work relationship is in Quebec.

Questions to ask

Here are some questions you can ask to help you determine a person’s employment status.

  • What was the intent of the parties? Did you intend to enter into a contract of service (employer-employee relationship) or did you intend to enter into a contract for services (business relationship)?
  • Is he or she given instructions, supervised, controlled or subject to discipline?
  • Is he or she told what to do, how to do it and when to do it?
  • Does the person have to do the work himself or herself, or could that person have it completed by someone else?
  • Does the person perform work normally or previously performed by an employee?
  • Does the person use tools, space, supplies and equipment that you own?
  • Is the worker’s income always the difference between the cost of providing the service and the price charged for the service? If so, the worker may not be an employee.
  • Is the person at risk of losing money if the cost of doing a job is more than the price charged for it? If not, this would indicate an employment relationship.
  • Does the person receive regular payments of regular amounts, regardless or customer satisfaction or customer payment? This would indicate an employment relationship.

CRA will review workers’ status

For more information, consult CRA’s guide. It states that if a worker or a payer/employer is not sure of the worker's employment status, either party can request a CRA ruling to have the status determined.

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