Tax Tip Thursday

Employees vs. Contractors

Employees

Employees generally work under the business owner’s direction and control.

• The business determines how, when, and where work is performed.
• The worker may receive training, supervision, benefits, vacation pay, and company equipment.
• The business typically withholds and remits required payroll deductions.
• Employment standards, workers’ compensation, and termination obligations may apply.
• Employees offer greater continuity and control but create higher administrative and compliance costs.

Independent Contractors

Contractors generally operate their own businesses and control how they deliver agreed-upon results.

• They often set their own schedule and methods.
• They may work for several clients and supply their own tools.
• They invoice the business and generally handle their own taxes and insurance.
• Their compensation is governed mainly by the service agreement.
• Contractors offer flexibility and specialized expertise, but the business has less control over their work.

Key Classification Factors

Authorities generally consider the actual working relationship, not simply the title in a contract:

• Degree of control
• Ownership of tools and equipment
• Ability to subcontract or hire assistants
• Financial risk
• Opportunity for profit
• Integration into the business
• Exclusivity and duration of the relationship

Why Classification Matters

Misclassifying an employee as a contractor can lead to:

• Unpaid payroll taxes and remittances
• Interest and penalties
• Retroactive vacation or overtime claims
• Termination-pay obligations
• Workers’ compensation liabilities

Can this be fixed by incorporating?

In Canada, being classified as a personal services business (PSB) can create several problems:

• Higher corporate tax: PSBs are generally subject to an additional federal tax and may lose access to the small business deduction and general corporate tax reduction.
• Limited expense deductions: The corporation may deduct only a narrow range of expenses, such as salary and benefits paid to the incorporated employee and certain costs directly related to obtaining contracts.
• Large reassessment risk: If PSB status is discovered later, previously claimed deductions and lower tax rates may be reversed, creating tax, interest, and possible penalty liabilities.
• Greater compliance costs: The corporation may need professional help to assess contracts, amend returns, respond to reviews, and maintain supporting documentation.
• Contract wording is insufficient: The CRA examines the actual working relationship. Significant client control, reliance on one client, limited financial risk, and integration into the client’s business can support PSB treatment.

Incorporation alone does not establish contractor status. If the worker would reasonably be considered the client’s employee without the corporation, PSB rules may apply. Because the consequences are significant, the arrangement should be reviewed based on its specific facts.

Call us at 905 862 2727 to make an appointment or you can google The Mad Accountant and you can make an appointment through my website.  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.