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How to avoid the employee or self-employed trap?


Your business is growing - bravo! You’ve decided you need help however do not want the worker to be on payroll. No problem. You can subcontract your work and have them submit invoices to you for their services. A year later, the worker claims you were their direct employer for the entire time and therefore were responsible for their government remittances. Was there a way to avoid it from the beginning?


Yes! The number one reason it is important to establish the type of relationship you have is because, as an employer, you are responsible for making CPP, EI and income tax remittances on your employee’s behalf, therefore, even if you think you’re hiring a subcontractor, CRA might still consider them as an employee. Furthermore, failing to do make the CPP and EI remittances (in the case of employer-employee relationship), would lead to you, the employer, paying both - your portion and the employee’s plus penalties and interest.

There are two steps CRA uses to make that consideration when reviewing the situation:


Step 1: clarifying the initial intent of the relationship. Was it an employer-employee relationship or a business one (contract for services)?


Step 2: going through the following questions to establish the answer to step 1.

  • Level of control – does the payer have control over the way the work is done and choosing the work

  • Tools and equipment – does the worker own the tools and equipment and is responsible for cost of maintenance / replacement

  • Subcontracting work or hiring assistants – can the worker hire assistants or subcontract their own work?

  • Financial risk – who is responsible for the business’ operating costs? Who is financially liable if the obligations of a contract are not met?

  • Responsibility for investment and management – who is responsible for making investment decisions for the purpose of providing the services?

  • Opportunity for profit (from the worker’s perspective) – can they make a profit or lose money personally from providing the services?

Once the answers to these questions have been established, CRA will make a ruling and decide on the nature of relationship. Setting up a contract prior to beginning of employment is always recommended and will come in handy if this situation ever arises.


Resource: CRA website


For additional information and for a free consultation meeting, contact MLHC today.


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