When paying a worker, there are generally two different methods. The worker is either considered an employee of the company or considered an independent contractor. The employment status of a worker has drastic effects on the tax treatment for both the worker and the payer of that worker. The most notable is the treatment of the worker under the Employment Insurance Act, the Canada Pension Plan, and the Income Tax Act.
If the worker is considered an employee, the payer of that worker is deemed the employer. Employers are responsible for deducting and remitting Canadian Pension Plan (CPP) contributions, Employee Insurance (EI) premiums and income tax from the remuneration and other amounts paid to the employee. In addition the employer must also remit their share of CPP contributions and EI premiums.
If the employer fails to deduct the required CPP contributions and EI premiums, they are required to pay not only the employer’s share, but also any employee share of contributions and premiums (in addition to any penalties and interest). To avoid such as cost it is crucial that you determine whether your workers are employees or independent contractors.
Generally speaking there is not always a right or wrong answer to the question of employee vs. independent contractor however the CRA has outlined a number of factors to consider:
Control – how much autonomy or control does the worker have concerning the manner in which the work is done?
Tools and equipment – does the worker provide the tools and equipment that are required to accomplish the work?
Subcontracting work or hiring assistance – is the work able to hire on subcontractors or assistants?
Financial risk – what level of financial risk that the worker is taking on?
Responsibility over investment and management – what is the degree of investment required by the worker?
Opportunity for profit – can the worker realize a profit or suffer a loss?
There is generally no single factor or factors that can determine the nature of the relationship. In some situations it can be very difficult to determine whether a worker is an employee or contractor however the CRA provides some guidance and examples. However as mentioned it can be costly to inappropriately conclude employee or contract. As such, if you are unsure you can request a ruling through the CRA.