Chapman

Self-Employed or Employee: How to Tell the Difference?

It is well known that a worker’s status can be that of an employee or a self-employed person, i.e. an independent individual. The nature of the relationship between the worker and the person providing the work is essential for determining this status. The tax consequences, such as eligible deductions and withholding, vary depending on the status, as do the social implications, including labor standards, health and safety at work, and unemployment insurance. The worker’s status, whether salaried or self-employed, also impacts both the worker and the person providing the work (the work provider) since the rights and obligations associated with each status differ considerably. In order to avoid confusion, misunderstandings, or costly tax audits, it is crucial to clearly and unambiguously define the status of each worker.

 

There is no magic recipe, but rather criteria and tests.

 

To determine whether a worker is an employee of the payer or a self-employed worker, federal and Quebec tax authorities use a list of criteria and tests based on decisions rendered by the courts (including the landmark decision rendered by the Federal Court of Appeal on June 18, 1986 in the Wiebe Door Services case). We will discuss these criteria in more detail in another article, but it is important to know that tax authorities have drafted certain publications presenting the criteria and tests to determine a worker’s status.

The Canada Revenue Agency (CRA) has published a detailed guide (RC4110) entitled “Employee or Self-Employed?” On the other hand, Revenu Québec has published a fairly comprehensive interpretation bulletin (RRQ. 1-1/R2) on the subject, entitled “Worker Status.” Reading these two documents can help distinguish between the two statuses, thanks to the numerous questions expressed in them. We strongly encourage you to consult these aforementioned articles.

However, these two government documents will not answer all questions related to the tax consequences of either worker status. This is the goal of this tax bulletin and the articles that will follow. Although each situation is unique, let us recall the main tests used by tax authorities to make the distinction:

  • The effective subordination of work (“control test” on the worker);
  • The risk of profits and losses;
  • The ownership of work “tools”;
  • The integration of the worker (does he have multiple clients, etc.);
  • The attitude of the parties as to their relationships.

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