It is important to determine whether a worker is an Employee/Personal Services Business henceforth referred to as (employee) or a Self-Employed or Canadian Controlled Private Corporation - Active business corporation henceforth referred to as (self-employed).
Determining a worker's employment status
When we examine whether a person is an employee or a self-employed individual, the key question we ask is whether the person is engaged to perform services as a person in business on his or her own account, or as an employee. To do this, we examine the total relationship between the worker and the payer, using a two-step approach.
Step 1
We ask the worker and the payer what their intent was when they entered into the working arrangement. Did the two parties intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)?
We need to know how they defined their working relationship and why they defined it as such.
Sometimes the intention is clear, and both parties are in agreement (common intent). Sometimes the intent can be found in a written agreement. Sometimes the two parties have a different understanding as to the status of their working relationship, in which case there is no common intent.
Workers and payers can set up their affairs as they see fit; however, they have to ensure that the status they have chosen is reflected in the actual terms and conditions of the working relationship.
Step 2
We ask the worker and the payer questions that will help us understand the working relationship and allow us to verify whether the intent of the parties is reflected in the facts.
These questions relate to the following elements:
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.
We look at the answers separately for each element and then together.
We consider whether they reflect the stated intention. When there is no common intent, we decide if the actual working conditions are more consistent with a contract of service or with a contract for services.
To help you understand the process, we explain each factor and show some indicators that the worker may be an employee or a self-employed individual.
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.
Consider the degree of control held by the payer or the degree of autonomy held by the worker.
The actual degree of control will vary with the type of work and the skills of the worker.
Determination of the degree of control can be difficult when examining the employment of professionals such as engineers, doctors, and IT consultants. Because of their expertise and specialized training, they may need little or no specific direction in their daily activities. When examining the factor of control, it is necessary to focus on both the payer's control over the worker's daily activities, and the payer's influence over the worker.
It is the right of the payer to exercise control that is relevant, not whether the payer actually exercises this right.
It is the control of a payer over a worker that is relevant, and not the control of a payer over the end result of a product or service purchased.
The worker receives training or direction from the payer on how to do the work. The overall work environment between the worker and the payer is one of subordination.
The payer chooses to listen to the worker's suggestions but has the final word.
Consider if the worker owns and provides tools and equipment to accomplish the work. Contractual control of, and responsibility for, an asset in a rental or lease situation is also considered under this factor.
What is relevant is the significant investment in the tools and equipment along with the cost of replacement, repair, and insurance. A worker who has made a significant investment is likely to retain a right over the use of these assets, diminishing the payer's control over how the work is performed. In addition, a significant investment in tools and equipment and the maintenance and replacement costs associated with these assets may place the worker at the risk of a loss.
Note
Tools and equipment can vary widely in terms of value and can include everything from wrenches and hammers, to specialized clothing, appliances, stethoscopes, musical instruments, computers, and vehicles such as trucks and tractors.
Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.
However, employees sometimes also have to provide their own tools. The courts have acknowledged that because a worker is required to provide tools of the trade, this does not in itself mean that the worker is a self-employed individual. For example, many skilled tradespeople such as auto mechanics have to supply their own tools, even if they are full-time employees.
The worker provides the tools and equipment needed for the work. In addition, the worker is responsible for the costs of repairs, insurance, and maintenance to the tools and equipment.
Consider if the worker can subcontract work or hire assistants. This factor can help determine a worker's business presence because subcontracting work or hiring assistants can affect their chance of profit and risk of loss.
Consider the degree of financial risk taken by the worker. Determine if there are any fixed ongoing costs incurred by the worker or any expenses that are not reimbursed.
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, on the other hand, can have financial risk and incur losses because they usually pay fixed monthly costs even if work is not currently being performed.
Employees and self-employed individuals may be reimbursed for business or travel expenses. Consider only the expenses that are not reimbursed by the payer.
Consider the degree of responsibility for investment and management 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. You should also consider if the worker is free to make business decisions that affect his or her profit or loss.
Consider whether the worker can realize a profit or incur a loss, as this indicates that a worker controls the business aspects of services rendered and that a business relationship likely exists. To have a chance of a profit and a risk of a loss, a worker has to have potential proceeds and expenses, and one could exceed the other.
Employees normally do not have the chance of a profit and risk of a loss even though their remuneration can vary depending on the terms of their employment contracts. For example, employees working on a commission or piece rate basis, or employees with a productivity bonus clause in their contract can increase their earnings based on their productivity. This increase in income is not normally viewed as a profit, as it is not the excess of proceeds over expenses.
Employees may have expenses directly related to their employment, such as automobile expenses, board and lodging costs. Normally, expenses would not place employees at risk of incurring a loss because it is unlikely that the expenses would be greater than their remuneration.
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. They can negotiate the price (or unilaterally set their prices) for their services and have the right to offer those services to more than one payer. Self-employed individuals will normally incur expenses to carry out the terms and conditions of their contracts, and to manage those expenses to maximize net earnings. Self-employed individuals can increase their proceeds and/or decrease their expenses in an effort to increase profit.
This factor has to be considered from the worker's perspective, not the payer's. It is for the most part an assessment of the degree to which the worker can control his or her proceeds and expenses.
Employees generally do not share in profits or suffer losses incurred by the business.
The method of payment may help to determine if the worker has the opportunity to make a profit or incur a loss. In an employer-employee relationship, the worker is normally guaranteed a return for the work done and is usually paid on an hourly, daily, weekly, or similar basis.
Similarly, some self-employed individuals may be paid on an hourly basis. However, when a worker is paid a flat rate for the work performed, it generally indicates a business relationship, especially if the worker incurs expenses in performing the services.
The worker can hire a substitute and the worker pays the substitute.
One of the worst nightmares for contractors and consultants is if your small corporation is declared to be a personal services corporation. Then you have three major tax problems:
2) This will further restrict the deduction of expenses of a personal services business of a corporation:
the salary paid in the year to an incorporated employee
the cost of any allowance provided to an incorporated employee
legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered
3) Also, you will not be able to write off any expenses, such as accounting, supplies, office space, vehicle, etc. against your corporation income.
