Business Income

How to Determine if You are an Employee or Independent Contractor

Your employment status impacts your employment insurance eligibility and your entitlements and obligations under other statutes, such as the Income Tax Act and Canada Pension Plan. So, it pays to know whether you’re an employee or an independent contractor. If you work for an employer, you’re an employee. If you’re self-employed, you’re an independent contractor. However, things are rarely that simple. To figure out which category you fall into, you may use the general guidelines developed by Canadian government agencies and courts.

If you're unsure about your employment status, consider consulting an attorney.

If you’re unsure about your employment status, consider consulting an attorney.


Nature of Work Relationship

Your employment status depends on the nature of your work relationship. If there’s a contract of service, meaning the payer controls what type of work you do and how it should be done, you have an employer-employee relationship. If there’s a contract for service, meaning the payer can control only the outcome of the work, you’re an independent contractor for the payer. Whether the relationship is a contract of service or a contract for service is generally based on various tests, which include control, ownership of tools and equipment and opportunity for profit or risk of loss.


Level of Control

Tax attorney and consultant David Sherman says, “Control is one of the most important factors. In practice, I’ve found that a very strong indicator of whether the relationship is employment or independent contractor is whether the person providing the services can hire a subcontractor to do some of the work. Employers generally prohibit this, while someone hiring an independent contractor generally accepts that someone else might perform some of the work.”

Typically, if the payer controls how and where the work should be completed, you’re an employee. Your employer provides training, sets your work hours and pay rate, and withholds and submits your taxes. You may receive benefits, such as vacation pay and pension under the Canada Pension Plan. If you’re an independent contractor, you largely control how and where the work is done. You normally choose your own work hours and pay rate, but in most cases, you aren’t entitled to company benefits. You’re also responsible for reporting your own income and paying the appropriate taxes.


Ownership of Tools and Equipment

You may be an employee if your employer provides you with tools and equipment to do your job. Your employer can use those tools and equipment as it sees fit and is responsible for repairing, maintaining and insuring them. If you’re an independent contractor, you own the tools and equipment you work with. You have the right to use them and must repair, maintain and insure them yourself. You must also create your own work space and absorb the cost of maintaining it. Certain employees, such as carpenters and mechanics, sometimes use their own tools even though they are classified as employees.


Opportunity of Profit or Risk of Loss

Your employment status also depends on who takes the profit or loss from the business. As an employee, you’re not responsible for paying the overhead and operational costs that come with running a business. You’re also not liable for the employer’s debts. Though you may earn more through bonuses and other incentive pay plans, you typically won’t encounter opportunity of profit or risk of loss. Your additional income is not regarded as extra proceeds above expenses, so it’s not generally viewed as profit. As an independent contractor, you would have some level of financial risk and more chance for profit. For example, a chance for profit may happen if you finish a job ahead of time, which results in savings and the chance to quickly move on to other opportunities. You’re likely to make less money if the project takes longer than you anticipated or during slow periods. You’re also responsible for any debts you incur as an independent contractor.


Considerations for Determining Employment Status

It’s important to note that different government agencies and the courts may have other considerations for assessing whether you’re an employee or independent contractor. “The determination of who is an independent contractor isn’t easy to make, as there are several criteria the courts will consider and balance,” says Sherman. Further, having a signed contract stating that you’re an independent contractor does not automatically make you a contractor. Sherman explains, “It’s not enough to agree to have the relationship be one of independent contractor. There have been many decisions from the Tax Court where the parties had a written contract confirming an independent contractor relationship but the Tax Court found the actual relationship was one of employment.”


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