DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Employee or Self Employed?

In Canadian Income Tax, Employee or Self-Employed on September 27, 2010 at 11:05 am

When faced with the recurrent question of whether an individual is an employee or a self employed contractor, we are invariably directed to the now familiar cases of Wiebe Door Services Ltd. v. the MNR. and the Supreme Court of Canada case of  Sagaz Industries Canada Inc. et al v. 671122 Ontario Limited. The main factors were originally outlined in Wiebe Door and cited with approval by the higher court in Sagaz.

Wiebe Door established what has come to be known as the “four-in-one test”. That test involves the factors of (i) control; (ii) ownership of tools; (iii) chance of profit; and (iv) risk of loss. No one factor is conclusive. Rather, the whole relationship must be weighed in light of these factors to determine its status.

Sagaz also cites the 1968 decision of Market Investigations Ltd, v. Minister of Social Security. In that case the issue is narrowed down to one central question: “Whose business is it?” According to the court, we must determine whether the person who has been engaged to perform the services is performing them as a person in business on his own account.

Market Investigations states that “In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks

Sagaz stresses that the above factors do not constitute an exhaustive list, and there is no set formula as to their application. Indeed, the “integration” test may apply as well. This test measures the integration of the alleged employee’s work into the alleged employer’s business.

The attitude of the parties to the contract with respect to their relationship has recently been given more weight by the courts since the Supreme Court of Canada’s decision on the case of Shell Canada v. The Queen et al. In the case of SARA Consulting & Promotions Inc. v. MNR, the court states that ..in the absence of clear and credible evidence that the description of a relationship is other than as agreed between arm’s length parties, the description agreed upon by those parties must stand.

Several recent federal tax court decisions have followed the line of reasoning in SARA Consulting, and have recognized that taxpayers have the right to arrange their affairs for tax purposes. Absent a sham, window-dressing, or an express provision to the contrary, the written agreement between the hirer and the worker must be respected.

It’s not hard to see why this area causes so much confusion. In an attempt to bring some order (or possible more chaos) to the chaos, both the CRA and Revenue Quebec have their own published guidelines. The CRA has published RC4110, which sets out their criteria, largely based on the above jurisprudence. In Quebec, the provisions of the Civil Code must be adhered to, so the criteria here differ slightly from the rest of Canada. You can access their criteria on publication IN-301.

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