Are you worried about independent contractor status in Ontario? Common intention plays an important role in determining employee vs independent contractor status.
For Canadian business owners, knowing the difference between an employee and an independent contractor is very important as the employment status affects the worker’s entitlement to EI and how he is treated under CPP and the Income Tax Act.
Business owners would generally prefer hiring an independent contractor to an employee because it requires less paperwork and responsibility. In an employer-employee relationship, the business owner is responsible for deducting CPP and EI contributions, withholding income tax and remitting them to the Canada Revenue Agency (CRA).
An Independent contractor will not receive any employee benefits and must pay their CPP contributions. However, working as an independent contractor also offers a major tax advantage because a wider variety of business expenses are deductible.
Legal test for contractor status in Ontario
The legal test to decide whether a worker is hired as an independent contractor or an employee is set out by the Federal Court of Appeal in 1392644 Ontario Inc. v The Queen (Connor Homes). The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. The court laid out a two-step test:
1. Whether there is a subjective intention between the payor and worker regarding the working relationship;
2. Whether the objective reality sustains the subjective intention of the parties by examining the factors set out in Wiebe Door Services Ltd v The Queen (Wiebe Door) and 671122 Ontario Ltd v Sagaz Industries Canada Inc. (Sagaz). The factors generally include:
a. Level of control – who has the right to control the work?
b. Ownership of tools & equipment – does the worker bring his own tools or are they provided by the payor?
c. Chance of profit or risk of loss – does the worker have an opportunity to make a profit or run the risk of incurring losses?
Common intention in the first step affects the application of the second step
Recently the Tax Court of Canada clarified in Insurance Institute of Ontario v MNR that the subjective intention between the two parties affects the application of the second step even if the objective reality does not support that intention.
In this case, the Insurance Institute of Ontario (the “Institute”) entered into a series of contracts with Mr. Barlow which clearly set out the intention between the parties that he would work as an independent contractor. However, the CRA concluded that Mr. Barlow was an employee and issued a ruling to that effect. The Institute then appealed the decision to the tax court.
Both the Institute and the CRA agreed on the two-step legal test set out in Connor Homes, but disagreed on the application of the second step. The CRA’s position was that the second step
should be entirely independent of the first step, while the appellant argued that if there was a common intention between the parties, then the second step test must involve something other than a routine application of the factors.
Contractor status in Ontario
The tax court sided with the Institute’s interpretation of the two-step test and found the CRA’s position illogical. If the employment status can be solely decided by the second step, then the first step will be meaningless. Therefore, for the first step to mean something, it must have an effect on the second step. The tax court then set out the new modified test:
a. Where the payor and the worker do not share a common intention, their relationship will be the relationship indicated by the factors in Weibe Door and Sagaz.
b. Where the payor and the worker share a common intention:
i. If the Wiebe Door and Sagaz factors are consistent with that common intention, then their relationship will be the relationship that they intended;
ii. If the Wiebe Door and Sagaz factors are completely inconsistent with that common intention, then their relationship will be the relationship indicated by those factors; and
iii. If the Wiebe Door and Sagaz factors are inconsistent with that common intention but the parties nonetheless act and carry on their relationship in a manner that is similar to what one would expect from their intentions, then their relationship will be the relationship that they intended.
The tax court also rejected the CRA’s position that the integration test should be a factor and clarified that it should no longer be relevant because it tended to artificially skew the determination towards a conclusion that the worker was an employee.
Pro tax tips – always draft a written agreement if there is a common intention
If parties intend to have a working relationship as payor/independent contractor, it is strongly recommended that they draft a written agreement that expresses that common intention as it can affect the application of the second step.
If you have been mischaracterized as an employee by the CRA or want to discuss the potential benefits of working as an independent contractor, feel free to contact our office to speak with an experienced Canadian tax lawyer for a consultation.
When you are concerned about contractor status in Ontario, contact a tax law firm.
Counsel at Barrett Tax Law firstname.lastname@example.org