Does Canada Revenue Agency Think You Are Self-Employed?

With the economy going the way it is practically everyone is becoming self-employed these days. According to Industry Canada’s Small Business Quarterly, the number of self-employment workers increased by 40,000 to 2.633 million from 2008 to 2009, an increase of 1.5 percent. But are you really self-employed? Yes, of course the guy who is paying you tells you, ‘its ok, you are self-employed’. He calls you a contractor and even has you sign a contract but does CRA (Canada Revenue Agency) think you are self-employed. It is an important question to ask yourself because you may end up being reassessed on the basis of your employment status. This would mean some or all of your deduction may be disallowed by CRA.Employment status directly affects your entitlement to EI (Employment Insurance) and CPP (Canada Pension Plan). If you are an employee, the payer is considered an employer. Employers are responsible for deducting CPP contributions, EI premiums, and income tax from amounts they pay to their employees. They have to remit these deductions along with their share of CPP contributions and EI premiums.Certain factors have to be considered when determining if you are an employee or self-employed individual. In all provinces or territories except Quebec, the following determine your employment status. When examining whether or not you are an employee or self-employed individual, the key question is whether or not your were engaged to perform services as a person in business on your own account, or as an employee.The intent of you and the payer when you both entered into the working arrangement is very important. Did the two parties (you and the payer) intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)? The best way to show clear intent is to have a written agreement- the terms and conditions of the work to be performed. Note: In a written contract, the parties may state that in the event of a disagreement regarding the contents of the contract, it is to be interpreted under the Quebec law (Civil Code), even though the contract was formed for example in Ontario (Common Law).Aside from the contract, you have to answer the following questions and if possible answer them in the contract. CRA uses these same questions to determine whether or not a business relationship existed.What level of control the payer has over the workerControl is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done. If the payer exercises a high level of control (especially on the worker’s daily activities) then an employer-employee relationship may exist. Some of the indicators that the worker is an employee are; the relationship is one of subordination; the payer controls the worker with respect to both the results of the work and the method used to do the work; the payer determines and controls the method and amount of pay; the worker requires permission to work for other payers while working for this payer; the payer determines what jobs the worker will do; the worker receives training or direction from the payer on how to do the work; and the payer chooses to listen to the worker’s suggestions but has the final word. Some of the indicators that the worker is a self-employed individual are; worker usually work independently within a defined framework; does not have anyone overseeing them; free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time; can accept or refuse work from the payer; and the relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration.Did the worker provide the tools and equipment used?If you own and provide tools and equipment to accomplish the work or have contractual control of and responsibility for, an asset in a rental or lease situation.Can the worker subcontract the works or hire assistants?If you have to perform the services personally and can not send a replacement then you are an employee. So the payer has no say in whom the worker hires.What degree of financial risk taken by the worker?If you made a significant investment in the tools and equipment along with the cost of replacement, repair, and insurance may place you at a risk of loss. There must not be any reimbursement by the payer for use of these tools and equipments supplied by the worker. With a risk of loss, you are taking high degree of financial risk.What degree of responsibility for investment and management held by worker?You had to invest capital to in order to get the contract. You manage your staff- you hire and pay individuals to help perform the work.Is there an opportunity for profit by the worker?You can realize a profit or incur a loss, as this indicates you control the business aspects of services rendered and that a business relationship likely exists.Let’s look at the above statements from a cash-flow prospective. For example, if John Doe is the employee above and makes $19.31 per hour. His latest paycheck has the following information:Gross Earnings $1057.22CPP ($ 46.24)EI ($ 18.32)FED Tax ($ 120.38)Take Home $ 872.28Now if John Doe was self-employed then this is what his cash-flow would look like:Gross Earnings $1057.22Fed Tax ($ 120.38)Take Home $ 936.84There is a definite advantage to being self-employed over being employed from a cash-flow perspective. The disadvantage is you have to create your own retirement plan (CPP) and a cushion (EI) in the event of a slowdown or shut-off of revenue.

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