Are you self-employed or an employee? It is important that you understand and define your working relationship from the start, as it can be a costly mistake to make.
If you are an employer, who has wrongly assumed that you are working with a subcontractor, you will end up needing to provide the government with both sides of CPP and EI. Plus, they will add penalties and interest on top of that!
On the other side, if you are working for someone and wrongly assume that you are an employee. You may be surprised with your tax bill at the end of the year. As you now are a sole proprietor and owe both sides of CPP and all your income tax! You may even have needed to register for GST!
As with all things business, the CRA has rules to help you figure out if you are self-employed or an employee.
When the contract for the relationship was first established, was the intent for a contract of service (employee) or contract for services (self-employed)? It is important that both sides are of the same understanding of the intent of the relationship. Written agreements can help to make sure both sides have the same intent going in. In the event of the CRA looking at the business relationship, written contracts will be examined.
It is important to note that even if your intent was clearly stated, the actions of your relationship must follow along the same lines.
Once you have determined the intent of your relationship, there are six other factors that help to determine if your intent matches the reality of the working situation. You do not have to meet all six of them, they are merely metrics used to help the CRA understand your relationship. However, enough of them need to be met to show a trend towards either a contract of service or contract for service.
Amount of Control
How much say does the person doing the work have? In a typical employee-employer relationship, the employee will be under the direct control and subversion by the company. They may be told exactly how to do the job, and the employer will always have the final say on process and what jobs need to be done. The employer will also have authority over the employee when it comes to pay, as they will determine when and how much is paid.
In a subcontractor relationship, the person working does so independently. The company does not usually have a say on how/when the work is done, and if they can work for multiple other companies at the same time. They also retain the ability to refuse work from the company, something an employee can not do.
Tools and Equipment
Who owns the tools? If you are an employee, the company will usually provide you the tools to work with, or reimburse you for money spent. Whereas a subcontractor will have bought their own tools, and will be responsible for all upkeep and repairs on them. A subcontractor will also usually have their own workspace, where they are responsible for the entire cost.
As a subcontractor, you should be able to hire whoever you want to help with your work. The company does not have power over who you hire to do the job. If you are an employee, you will need to complete the job yourself, and you will not be able to hire someone to do the job without getting approval.
As an employee, you should experience no financial risk. Your employer will continuously pay you based on their schedule, and all expenses incurred for business will be reimbursed.
Subcontractors take on financial risk, as they are based off contracts with companies. They do not have a guaranteed continual agreement with a company, and are responsible for costs relating to a job. They also have a need to market their services to other companies.
Investment & Management
An employee will not have an investment stake in the company. They will not need to put their own money into the company for it to complete a job. Whereas a subcontractor has money invested in their company and may manage employees.
Opportunity for Profit
A subcontractor is able to lose money or make a profit from the business relationship. They have it within their control to negotiate the rate paid for the job. They also must pay for the expenses and possible employees time that relate to the project.
Whereas an employee is not able to realize a profit or a loss when the company does. They are paid a standard rate for their hours worked. Sometimes employees are paid by commission, however this is not deemed a profit because there are no expenses related to it that the employee must incur.