Business Management Articles
Hiring Contractors? Ensure this is Clear to CRA
Stephen Meek
The Voice
December 2009
Ken was taken aback when he received a call from a representative of the Canada Revenue Agency (CRA) wanting to ask him some questions about his company’s relationship with a contractor who, a few months previously, had completed some technology work. It seems that the contractor had recently applied for Employment Insurance, claiming that he had been an employee of Ken’s company and was thereby eligible for benefits.
This is far from a rare situation. As business owners strive to control costs and stay flexible in an unsettled economy, many are hiring external service providers on a contract basis. But problems can arise if employers and contractors do not clarify this relationship for tax purposes.
The CRA views a “contract for services” (a business relationship) quite differently than a “contract of service” (an employer-employee relationship). The Agency frequently reclassifies contractor relationships as employee relationships because there are significant tax dollars at stake. For example, when hiring a contractor, a company does not deduct Canada Pension Plan contributions, Employment Insurance premiums, or income tax from the worker’s pay and does not remit the employer’s share of an employee’s CPP contributions and EI premiums to the CRA. If a contractor is in fact an employee, however, this means the CRA would miss out on this significant amount of revenue.
Thus if a contractor later claims to be an employee and the employer cannot prove otherwise, the CRA may reclassify the business relationship and impose significant costs and penalties on the employer. These could include both the employer’s and employee’s share of CPP and EI premiums and withholding taxes, and possibly penalties and interest on these taxes. A company could also be liable for employer health tax, Workplace Safety and Insurance Board premiums and employee holiday and vacation pay.
In Ken’s case, the CRA representative asked him a number of questions to determine the relationship between his company and the worker. These questions related to the following areas, which are typically the focus of a CRA assessment to determine whether a worker is in fact a contractor or an employee.
- Control – which party decides how, when and where the work will be performed
- Integration – whether the individual performs work that is integral to the operation of the business; the CRA also looked at whether there was a contract between the company and the worker and if the worker provided services to more than one organization
- Profit/loss – whether the employer alone assumed the risk of incurring losses (from bad debts, delays, under-estimating, etc) or whether the worker assumed part of this risk
- Equipment and tools – which party supplied the equipment to perform the work and covered the costs related to their use, such as insurance, repairs and maintenance
Ken was fortunate. He was able to provide the CRA with sufficient evidence to clarify the contractor relationship with his company. But he had to spend considerable time providing this evidence and responding to detailed questioning.
To reduce the risk of having a CRA assessment or the reclassification of a contractor as an employee, companies can take a number of preventive steps. For example, they should understand how the CRA determines employment status. The CRA booklet Employee or Self-employed? (publication RC4110) sets out the factors to consider when hiring a contractor rather than an employee and how the Agency may assess the difference. The publication is available online at www.cra-arc.gc.ca.
Also, request invoices for work a contract worker performs; these should include the name of the contractor’s business and a GST number if it is a GST registrant.
The best protection is a written agreement. Before commencing work, ask the contract worker to provide you with a document that specifies the work that is to be performed and indicating that he/she is an independent contractor who has not entered into an employment contract with your company.
By taking proactive steps to clarify your company’s business relationship with contract workers, you can reduce the risk of a CRA investigation and optimize the value your company receives from these important workers.
Stephen Meek is a partner of BDO Dunwoody LLP (www.bdo.ca). He works with private, public and nonprofit organizations, providing assistance with income tax, corporate, personal and estate tax planning as well as the tax aspects of purchases, sales, mergers, reorganizations and succession. You can reach Stephen in the Markham office at (905) 946-1066 or smeek@bdo.ca.
