The CRA will first look to the intent of the parties when the relationship was formed. In order to get down to the crux of this issue, the CRA engages a two part test. The central and overarching question the CRA asks in determining the distinction between an employee and an independent contractor is whether the person is engaged to carry out services as a person in business on his own account, or as an employee. In order to avoid an aggressive audit, it is important to understand how the CRA distinguishes between an employee and an independent contractor at law, and ensure that employees are properly paid as such. On the employee side, he or she may be assessed for unremitted income tax and past claimed business expenses may be disallowed resulting in a massive tax bill. In that case, they will demand the employer remit all past unremitted EI and CPP, together with penalty charges and interest.įurther, the employer’s directors may be held personally liable for the failure to remit the source deductions. The Canada Revenue Agency (“CRA”) may audit the business and determine that the relationship is actually one of employment. Be careful though, mischaracterizing an employer-employee relationship to avoid taxes and source deductions may run afoul of the law and result in serious penalties.Įven if both the business and the worker consider the relationship to be one of contract, this does not mean the Canada Revenue Agency (CRA) will agree.
It also permits the worker to be able to deduct business expenses from his or her income. At the start of a business relationship, a worker and business often set up their relationship as an independent contractor which provides the business with the advantage of not having to deduct and remit source deductions of EI, CPP, and income taxes nor pay workplace safety insurance premiums.
Whether you are starting up a new business or manage an existing business, it is important to understand the distinctions between an employee and an independent contractor at law. The Difference Between An Employee and Independent ContractorĪre you an employee and an independent contractor? What is the difference, what are the tax advantages of each and how does the CRA make the assessment in determining what your status is?
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