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If you are an independent contractor, you must operate a business and establish a business relationship with the payer. The credit rating agency describes this relationship as a « service contract ». Compensation means how an employee is paid. It includes all the considerations and benefits that have monetary value. Whether there is an employer-employee relationship or a business relationship, the employee receives compensation in exchange for a job. Remuneration may be calculated on time, on a case-by-case basis or by other means. Independent contractors are generally not entitled to dismissal under the Labour Standards Act or customary law, unless their contract contains a provision for some form of termination. We ask the worker and the payer what their intention was when they entered into the employment agreement. Did both parties intend to enter into a service contract (employer-employee relationship) or did they intend to enter into a service contract (business relationship)? If you are an entrepreneur, you can deduct the cost of certain business expenses from your income, reducing your tax bill. We describe the main deductions below [read more on our blog « Tax Deductions for Small Business »] The employee relationship and the business relationship are gray areas that are constantly evolving, so it`s important to protect your status as an independent contractor. You must ensure that your work as a contractor remains independent of your employer by passing the four-point test.
In a recent decision, the Federal Court of Appeal reaffirmed the legal test for determining whether a person is an employee or an independent contractor.1 The current test, set out by the Federal Court of Appeal, is summarized by the following two-step investigation: Impact on industrial relations Under provincial labour laws, such as the Ontario Labour Relations Act, if a person is considered an « employee », a person may be included in an existing bargaining unit or be eligible to be included in an application for union certification. Under the Industrial Relations Act, only workers who, under the Act, include « dependent contractors » have the right to unionize and bargain collectively. Independent contractors would therefore not have the right to participate in the collective bargaining system. The relationship between an independent contractor and a payer is often limited to a specific job rather than an ongoing relationship. For businesses, payment is made directly to the independent contractor without the need for a deduction at source. In addition, businesses are not required to make deductions or employer premiums to various government programs, particularly for Employment Insurance (« EI ») or Canada Pension Plan (« CPP ») premiums. In the case of the contractor, deductions for operating expenses claimed in previous years must be reimbursed. This can have catastrophic financial consequences if the person has claimed deductions in several previous years, which were ultimately not approved by the credit rating agency. It could be a big tax bill. With respect to coverage of medical services, Canada`s employment standards legislation generally does not require companies to provide health insurance benefits to employees. However, treatment benefits are often offered to employees under a negotiated compensation plan. An independent contractor is unlikely to receive medical benefit coverage, which may include provisions for long-term disability, prolonged health, dental care, and other insurance coverage.
In particular, Canadians have general health insurance and are not required to pay directly for most non-optional medical procedures and examinations. Confusion surrounding the correct classification of workers (and the penalties that accompany misclassification) is a big part of why many companies choose to work with a partner like an International Professional Employers` Organization (PEO) when expanding abroad. As a Canadian employer, Velocity Global`s international PEO solution allows our growing experts to hire employees on your behalf, eliminating the risk of low-ranking independent contractors. One amendment to Bill 148 that could hit businesses hard is to tighten the law on who is an employee. In the event of a misclassification – of an independent contractor who should be classified as an employee – it is now up to the company to prove that the person is NOT an employee. The payer has no say in the hiring of the independent contractor. For the independent contractor, the absence of deductions means more money in his pocket. The full amount of income tax and premium deductions can be significant, so the independent contractor benefits greatly from the reduction and deferral of income tax payable and never having to pay EI or CPP premiums unless they are eligible for an appropriate program and choose to do so.
As a rule, employees have no financial risk because all expenses are reimbursed and they do not have a fixed operating cost. If the employee were considered an employee, the employment would not be considered pensionable for the CPP or insured for Employment Insurance if: Whether there is an employer-employee relationship or a business relationship, the employee must perform the work. It can be part-time or full-time for a fixed or indefinite period. Discuss the issue with your accountant or contact the Canada Revenue Agency if you have taken action but still do not know if you are actually an employee or an independent contractor. The difference between an independent contractor or an employee can have a huge impact on your Canadian income tax, especially if you think you`re a contractor but the Canada Revenue Agency (CRA) decides you`re not after you`ve already filed multiple tax returns. Note: There are situations where an employee has to provide their own tool – auto mechanics are an example of this. To help you understand the process, we explain each factor below and show some indicators that the employee may be an employee or self-employed. There are many tax benefits for businesses and individuals when employees are classified as independent contractors rather than employees. Your financial involvement also determines whether you are involved in an employer-employee relationship or a business relationship. Employees may have expenses that are directly related to their employment, such as the costs of .
B car, as well as food and accommodation costs. Normally, the expenses would not expose employees to the risk of loss, as the expenses are unlikely to exceed their remuneration. An employee`s work is an integral part of their employer`s business. Conversely, tasks performed by a self-employed person are less likely to be integrated into the payer`s business. Employing entrepreneurs instead of full-time employees gives companies much more flexibility to manage the ups and downs of the business, reduce their total labor costs, and help them better manage cash flow. This factor makes it possible to distinguish the employer-employee relationship from a business relationship. Often, such cases occur only at the end of a relationship, when a former employee classified as an independent contractor is not satisfied with the notice of termination he or she received at the end of the relationship. Although this person may have enjoyed the tax benefits of the status of independent contractor for years, unfortunately, under the above tests, he may be considered an employee or a dependent contractor and therefore be entitled to appropriate dismissal. In addition, even the conclusion of contracts with employees of an agency should not limit liability in certain legal places. For example, in certain circumstances, the contracting company may assume total or at least partial liability for an accident at work.
In addition, a contractor could file a human rights claim against the contractor. While using an agency offers some protection, these protections are not unlimited. Given the practical nature of employment relationships, a contractual relationship may be more useful for fixed-term work projects or temporary work. Yet Ontario has regularly filed class action lawsuits against companies that have misclassified their employees. Between 2015 and 2018, there were five notable cases, all with losses ranging from $30 million to $400 million. These figures do not include the massive legal fees that companies have accumulated, nor the negative publicity that is difficult to quantify. An independent contractor has a higher degree of control over their ability to profit from business activities because they can choose the work they want to pursue and negotiate the terms and payment for their work. Independent contractors charge the company for their work and issue their own orders to the government – income tax, HST, etc.
It is important to decide whether an employee is an employee or self-employed. Employment status has a direct impact on a person`s entitlement to Employment Insurance (EI) benefits under the Employment Insurance Act. It can also affect how an employee is treated under other legislation such as the Canada Pension Plan and the Income Tax Act. It may seem obvious that contractors provide their own tools, but it is also common for employees to deliver them in certain trades. Think of painters and garage mechanics. Entrepreneurs do not receive benefits or pensions. They must pay their own contributions to the CPP/QPP Canada Pension Plan. Companies don`t have to provide them with health insurance, life insurance, and other employee-shared benefits, which increases their costs. The biggest tax benefit for an independent contractor is the possibility of tax deductions that are not available to employees. .