Self employed or Employee?

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  Michael Evans, CPA, CA, LPA

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  September 1, 2018

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  Corporate / Corporate Tax / Personal / Personal Tax

Often times a company will hire an individual with the stipulation that the person hired will be considered self employed rather than an employee.  By doing this, the hiring company can avoid various issues regarding employees, such as the requirement to pay payroll taxes like the Canada Pension Plan (CPP) and Employment insurance (EI).

Employers are happy because they don’t have to pay additional payroll taxes.  The individual is happy because they get a bigger paycheque since no payroll taxes are withheld.

Unfortunately, what I have seen happen is that the company no longer requires the services of the individual.  The individual then goes to the government (either out of malice or ignorance) to collect Employment insurance and is told they are not entitled to EI.  The individual kicks up a fuss, and the government starts looking into the matter.  Sometimes the outcome favours the company, sometimes it doesn’t and payroll taxes have to be paid going back a couple of years.

There is no hard and fast set of rules that one can turn to, to definitively say whether someone is self-employed or an employee.  Over time, case law has evolved with regard to this issue.  There are basically 4 tests that are applied to determine whether someone is self employed or an employee:

• Control – How much control does the hirer have over the work performed by the individual. The more control, the more likely an employee.
• Tools and equipment – Does the hirer provide the tools used by the individual in performing their duties. Self employed persons are more likely to be providing their own tools and equipment.
• Chance of profit/risk of loss – self employed individuals providing the services have a better chance of profit, as well as the risk of loss.
• Integration – How integral is the individual to the company’s operations. Employees are likely to have their jobs be more integral to the company than a self employed individual.

The Canada Revenue Agency provides a 12 page PDF guide RC4110 Employee or Self Employed that goes into the above 4 tests in more detail.