Seasonal Workers and Your Withholding Requirements
Geoff Garland, Tax Partner
Building Connections
In an effort to keep Canadians spending, thus improving current economic conditions, the government has introduced a Home Renovation Tax Credit. “Every time Canadians invest in home renovations, they are helping to create construction and building-supplies jobs in their own communities,” said the Prime Minister. “By providing an incentive for Canadians to invest in their homes, we are also encouraging them to invest in local jobs.”
I am often asked by individuals and corporations what their withholding requirements are when they hire seasonal or contract workers on their farms. The answer, as with so many tax questions, is “it depends.” The main issue to be determined is whether the worker is considered to be an employee or is an independent contractor. If he/she is an employee, then, as the payer, you are required to withhold and remit the statutory deductions, such as income tax, Canada Pension Plan, and Employment Insurance premiums. If he/she is an independent contractor, on the other hand, then there is no requirement to withhold these statutory deductions.
However, it is challenging to decipher the status of a worker. Over the years, the courts have created a number of factors which the Canada Revenue Agency relies upon to make their determination yet each circumstance and set of facts is ultimately reviewed separately. The main factors considered by the CRA are as follows:
Control – This relates to the degree of control exercised by the hirer. If the worker is an employee, the hirer can control not only what is done but also how it is done. Overall, what is relevant is if the hirer can exercise control, regardless of whether it is actually exercised. If the worker is an independent contractor, he/she has more control over the manner in which the tasks are performed.
Ownership of tools – If the worker owns his/her own tools, this tends to support the view that he/she is an independent contractor. If the hirer owns the tools, this supports the view that the person is an employee.
Chance of profit/risk of loss – This relates to the extent to which the worker can generate increasing profits and/or suffer financial losses from his/her activities. The greater the chance of profit or loss to the worker the more likely it is that the worker is an independent contractor.
Integration – This looks at how well the worker is integrated into the business of the hirer. Integration is to be considered from the point of view of the worker and is to be determined by answering the question “Is the person who has engaged him/herself to perform these services performing them as a person in business on his/her own account?”
Intention – There has been a fairly recent change in this area due to the Royal Winnipeg Ballet v. MNR case. This recent Federal Court of Appeal has placed greater prominence on the factor of common intention in the employee versus independent contractor determination. The court also focused on what the primary intention was between the parties to determine their legal relationship. The court indicated that intention had to be considered and was only to be disregarded if “the terms of the contract, considered in the appropriate factual context, do not reflect the legal relationship that the parties profess to have intended.” This does not displace the common law tests established above; however, it has added a new dimension to the employee versus independent contractor characterization.
No one specific factor will determine whether a worker is considered to be an employee or an independent contractor. Moreover, this list of factors is not exhaustive. One or more of the above tests may not apply when analyzing all the facts surrounding a particular relationship, or they may require different weightings in some cases. Therefore, whether the worker is employed or self-employed can only be determined by considering and assessing the factors specific to the situation.
If the tests currently indicate that a worker is an employee, then the payer will be required to withhold from the employees pay statutory withholdings. In addition to withholding income tax, employers are also responsible for deducting CPP contributions and EI premiums. If the employer fails to deduct CPP and EI amounts, he/she is liable for the amounts that should have been deducted from the worker’s remuneration, plus the employer’s share of CPP contributions and EI premiums that should have been paid on the worker’s behalf. In the same way, the employer is liable for the CPP contributions, EI premiums, and income tax amounts that he/she deducts but fails to remit.
Seasonal agricultural workers from foreign countries who have regular and continuous employment in Canada are subject to tax deductions in the same way as Canadian residents. If a tax treaty exists between Canada and a worker’s home country, a certain amount of employment income may be exempt from Canadian tax, based on the dependent personal services provision of the treaty. As long as the worker’s earnings are not more than the treaty amount, the employer is not required to withhold tax from the worker’s earnings. However, the employer must continue to deduct CPP contributions and EI premiums.
It is crucial to understand the factors of the employee versus independent contractor determination, as they impact an employer’s withholding requirements. If you have any concerns with respect to this article and the status of your workers, contact your professional advisor to review your specific situation.
Geoff Garland is a Tax Partner at BDO Dunwoody LLP, with over 8 years experience as a CA, and provides tax advice to entrepreneurial-minded businesses. With experience in general practice, Geoff is knowledgeable regarding tax compliance and planning services, and works out of the Winnipeg office. Over the years, Geoff has provided a range of tax and related services to a wide range of clients in the automotive, agriculture, manufacturing and construction industries. He works with clients to spark new ideas and find innovative solutions. He can be reached at 204.926.7263 or ggarland@bdo.ca.
