Is your Canadian charity’s staff person an employee or independent contractor?

December 15, 2009 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Canadian Charity Law

Whether a staff person is an employee or independent contractor is an important distinction that can have huge ramifications for charities and their boards of directors.  To understand CRA’s position you should review RC4110 Employee or Self-employed? at http://www.cra-arc.gc.ca/E/pub/tg/rc4110/  Charities that mistakenly classify people as independent contractors when in fact they are employees can be on the hook for the source deductions plus interest and penalties.  If the charity does not have the funds then board members can be jointly and severally responsible.  If in doubt call the CRA or speak to legal counsel.

here is the text of the publication RC4110 Employee or Self-employed? at http://www.cra-arc.gc.ca/E/pub/tg/rc4110/


*** Transcriber’s Note: Please set your voice synthesizer to read most
punctuation. ***

Canada Revenue Agency

(Front cover)

Employee or Self-Employed?

RC4110(E) Revision 08


PAGE 2

Is this guide for you?

Use this guide if you are:

- a payer; or
- a worker.

It will help you understand how to determine a worker’s employment status. 

If you have a visual impairment, you can get our publications in braille,
large print, etext (CD or diskette), or MP3. For more information, visit our
Web site at http://www.cra.gc.ca/alternate or call 1-800-959-2221.


PAGE 3

Before you start

Employee or self-employed workers?

It is important to determine whether a worker is an employee or a self-
employed individual. Employment status directly affects a person’s
entitlement to Employment Insurance (EI) benefits. It can also have an impact
on how a worker is treated under other legislations such as the Canada
Pension Plan, the Employment Insurance Act, and the Income Tax Act.

The facts of the relationship as a whole will determine employment status.

If the worker is an employee, (employer-employee relationship) the payer is
considered an employer. Employers are responsible for deducting Canada
Pension Plan (CPP) contributions, Employment Insurance premiums, and income
tax from remuneration or other amounts they pay to their employees. They have
to remit these deductions along with their share of CPP contributions and EI
premiums. 

An employer who fails to deduct the required CPP contributions and EI
premiums has to pay both the employer’s share and the employee’s share of any
contributions and premiums owing, plus penalties and interest. For more
information, visit our Web site at http://www.cra.gc.ca/payroll.

Note
Non-arm’s length relationship - If an employee is not dealing at arm’s length
with the employer, it is possible that their employment is not insurable
under the Employment Insurance Act. For more information, read the
interpretation article on this subject at http://www.cra.gc.ca/cppeiexplained.

If the worker is a self-employed individual (business relationship), he or
she is considered to have a business. For more information, visit our Web
site at http://www.cra.gc.ca/business.

My Business Account (MyBA)

My Business Account provides business owners (including partners, directors,
and officers) secure, online access to a growing range of payroll, GST/HST,
corporation income, and other account information.

If you have a payroll account with CRA, you can view your payroll account
balance and transactions, view the status of your T4 return, provide a nil
remittance, request a CPP/EI ruling, register a formal dispute (Appeal) and
view your payroll remitting requirements. You can also authorize an employee
or representative to have online access to your information. For more
information, visit our Web site at http://www.cra.gc.ca/mybusinessaccount.

Requesting a ruling

If a worker or payer is not sure of the worker’s employment status, either
party can request a ruling to have the status determined. If the business is
registered for My Business Account, a payer can request a ruling
electronically by visiting the CRA Web site at
http://www.cra.gc.ca/mybusinessaccount. An authorized representative for the payer
can request a ruling electronically at http://www.cra.gc.ca/representatives.

You can also use Form CPT1, Request for a Ruling as to the Status of a Worker
Under the Canada Pension Plan and/or the Employment Insurance Act. You can
get this from our Web site at http://www.cra.gc.ca/forms or by calling 1-800-959-
2221.

Note
This guide does not replace a formal request for a ruling.

Determining a worker’s employment status

Certain factors have to be considered when determining if a worker is an
employee or a self-employed individual.

These factors differ if the contract is formed in the province of Quebec or
in another province or territory. Usually, the province or territory where
the contract was formed will determine which set of factors to use.

Note
In a written contract, the parties may state that in the event of a
disagreement respecting the contents of the contract, it is to be interpreted
under the Québec law (Civil Code), even though the contract was formed for
example in Ontario (Common Law). Depending on where the contract is formed,
unless it is stated differently in the written contract, use the set of
factors appropriate for your situation. More information on the treatment of
self-employed workers in Quebec may be located in the following Revenue
Quebec publication entitled IN-301-V Employee or Self-Employed Person? 

Determine a worker’s employment status in a province or territory
(other than Quebec)

When we examine whether or not a person is an employee or self-employed
individual, the key question we ask is whether or not the person is engaged
to perform services as a person in business on his or her own account, or as
an employee. To do this, we examine the total relationship between the worker
and the payer, using a two-step approach.

Step 1

We ask the worker and the payer what their intent was when they entered into
the working arrangement. Did the two parties intend to enter into a contract
of service (employer-employee relationship) or did they intend to enter into
a contract for services (business relationship)?

We need to know how they defined their working relationship and why they
defined it as such.

Sometimes the intention is clear, and both parties are in agreement (common
intent). Sometimes the intent can be found in a written agreement.


PAGE 4

Sometimes the two parties have a different understanding as to the status of
their working relationship, in which case there is no common intent.

Workers and payers can set up their affairs as they see fit; however, they
have to ensure that the status they have chosen is reflected in the actual
terms and conditions of the employment.

Step 2

We ask the worker and the payer questions that will help us understand the
working relationship and allow us to verify whether the intent of the parties
is reflected in the facts.

These questions relate to:

- the level of control the payer has over the worker;
- whether or not the worker provides the tools and equipment;
- whether the worker can subcontract the works or hire assistants;
- the degree of financial risk taken by the worker;
- the degree of responsibility for investment and management held by the
worker;
- the worker’s opportunity for profit; and
- any other relevant factors, such as written contracts.

We look at the answers separately and then together.

We consider whether or not they reflect the stated intention. When there is
no common intent, we decide if the answers are more consistent with a
contract of service or with a contract for services.

Factors you should consider

To help you understand the process, we explain each factor and show some
indicators that the worker may be an employee or a self-employed individual.

Control

Control 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.

Degree of control or autonomy

Consider the degree of control held by the payer or the degree of autonomy
held by the worker.

The actual degree of control will vary with the type of work and the skills
of the worker.

The determination of the degree of control can be difficult when examining
the employment of professionals such as engineers, doctors, and IT
consultants-because of their expertise and specialized training, they may
require little or no specific direction in their daily activities. When
examining the factor of control, it is necessary to focus on both the payer’s
control over the worker’s daily activities, and the payer’s influence over
the worker.

Payer’s right to exercise control

It is the right of the payer to exercise control that is relevant, not
whether the payer actually exercises this right.

It is the control of a payer over a worker that is relevant, and not the
control of a payer over the end result of a product or service purchased.

Indicators that the worker is an employee

- The relationship is one of subordination. The payer will often direct,
scrutinize, and effectively control many elements of how the work is
performed.

- 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. Salary
negotiations may still take place in an employer-employee relationship.

- The worker requires permission to work for other payers while working for
this payer.

- Where the schedule is irregular, priority on the worker’s time is an
indication of control over the worker.

- The payer determines what jobs the worker will do.

- The worker receives training or direction from the payer on how to do the
work. The overall work environment between the worker and the payer is one of
subordination.

- The payer chooses to listen to the worker’s suggestions but has the final
word.

Indicators that the worker is a self-employed individual

- A self-employed individual usually works independently within a defined
framework.

- The worker does not have anyone overseeing them.

- The worker is usually 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.

- The worker can accept or refuse work from the payer.

- The working relationship between the payer and the worker does not present
a degree of continuity, loyalty, security, subordination, or integration, all
of which are generally associated with an employer-employee relationship.

Tools and equipment

Consider if the worker owns and provides tools and equipment to accomplish
the work. Contractual control of, and responsibility for, an asset in a
rental or lease situation is also considered under this factor.

What is relevant is the significance of the investment in the tools and
equipment along with the cost of replacement, repair, and insurance. A worker
who has made a significant investment is likely to retain a right over the
use of these assets, diminishing the payer’s control over how the work is
performed. In addition, a significant investment in tools and equipment and
the maintenance and replacement costs associated with these assets may place
the worker at the risk of a loss.


PAGE 5

Note
Tools and equipment can vary widely in terms of value and can include
everything from wrenches and hammers, to costumes, appliances, stethoscopes,
musical instruments, computers, and vehicles such as trucks and tractors.

Self-employed individuals often supply the tools and equipment required to
complete a contract. As a result, the ownership of tools and equipment by a
worker is more commonly associated with a business relationship.

However, employees can also be required to provide their own tools. The
courts have acknowledged that because a worker is required to provide tools
of the trade, this does not in itself place that worker in the status of a
self-employed individual. For example, many skilled tradespeople such as auto
mechanics are required to supply their own tools, even if they are full-time
employees.

Indicators that the worker is an employee

- The payer supplies most of the tools and equipment required by the worker.
In addition, the payer is responsible for repair, maintenance, and insurance
costs.

- The worker supplies the tools and equipment and the payer reimburses the
worker for their use.

- The payer retains the right of use over the tools and equipment provided to
the worker.

Indicators that the worker is a self-employed individual

- The worker provides the tools and equipment required for the work. In
addition, the worker is responsible for the costs of repairs, insurance, and
maintenance to the tools and equipment.

- The worker has significant investment in the tools and equipment and the
worker retains the right over the use of these assets.

- The worker supplies his or her own workspace, is responsible for the costs
to maintain it, and performs substantial work from that site.

Subcontracting work or hiring assistants

Consider if the worker can subcontract work or hire assistants. This factor
can help determine a worker’s business presence because subcontracting work
or hiring assistants can affect their chance of profit and risk of loss.

Indicators that the worker is an employee

- The worker cannot hire helpers or assistants.

- The worker does not have the ability to hire and send replacements. The
worker has to perform the services personally.

Indicators that the worker is a self-employed individual

- The worker does not have to perform the services personally. He or she can
hire another party to either complete the work or help complete the work, and
pays the costs for doing so.

- The payer has no say in whom the worker hires.

Financial risk

Consider the degree of financial risk taken by the worker. Determine if there
are any fixed ongoing costs incurred by the worker or any expenses that are
not reimbursed.

Usually, employees will not have any financial risk as their expenses will be
reimbursed, and they will not have fixed ongoing costs.

However, self-employed individuals can have financial risk and incur losses
because they usually pay fixed monthly costs whether or not work is currently
being performed.

Employees and self-employed individuals may be reimbursed for business or
travel expenses. Consider only the expenses that are not reimbursed by the
payer.

Indicators that the worker is an employee

- The worker is not usually responsible for any operating expenses.

- Generally, the working relationship between the worker and the payer is
continuous.

- The worker is not financially liable if he or she does not fulfil the
obligations of the contract.

- The payer determines and controls the method and amount of pay.

Indicators that the worker is a self-employed individual

- The worker hires helpers to assist in the work. The worker pays the hired
helpers.

- The worker performs a substantial amount of work from their own workspace
and incurs expenses relating to the operation of that workspace.

- The worker is hired for a specific job rather than an ongoing relationship.

- The worker is financially liable if he or she does not fulfill the
obligations of the contract.

- The worker does not receive any protection or benefits from the payer.

- The worker advertises his or her services and actively markets himself or
herself.

Responsibility for investment and management

Consider the degree of responsibility for investment and management held by
the worker. 

Is the worker required to make any investment in order to provide the
services?

A significant investment is evidence that a business relationship may exist.
You should also consider if the worker is free to make business decisions
that affect his or her profit or loss.

Indicators that the worker is an employee

- The worker has no capital investment in the business.

- The worker does not have a business presence.


PAGE 6

Indicators that the worker is a self-employed individual

- The worker has capital investment.

- The worker manages his or her staff.

- The worker hires and pays individuals to help perform the work.

- The worker has established a business presence.

Opportunity for profit

Consider whether the worker can realize a profit or incur a loss, as this
indicates that a worker controls the business aspects of services rendered
and that a business relationship likely exists. To have a chance of a profit
and a risk of a loss, a worker has to have potential proceeds and expenses,
and one could exceed the other.

Employees normally do not have the chance of a profit and risk of a loss even
though their remuneration can vary depending on the terms of their employment
contracts. For example, employees working on a commission or piece-rate
basis, or employees with a productivity bonus clause in their contract can
increase their earnings based on their productivity. This increase in income
is not normally viewed as a profit, as it is not the excess of proceeds over
expenses.

Employees may have expenses directly related to their employment, such as
automobile expenses, board and lodging costs. Normally, expenses would not
place employees at risk of incurring a loss because it is unlikely that the
expenses would be in excess of their remuneration.

Self-employed individuals normally have the chance of profit or risk of loss,
because they have the ability to pursue and accept contracts as they see fit.
They can negotiate the price (or unilaterally set their prices) for their
services and have the right to offer those services to more than one payer.
Self-employed individuals will normally incur expenses to carry out the terms
and conditions of their contracts, and to manage those expenses to maximize
net earnings. Self-employed individuals can increase their proceeds and/or
decrease their expenses in an effort to increase profit.

This factor has to be considered from the worker’s perspective, not the
payer’s. It is for the most part an assessment of the degree to which the
worker can control his or her proceeds and expenses.

Employees generally do not share in profits or suffer losses incurred by the
business.

The method of payment may help to determine if the worker has the opportunity
to make a profit or incur a loss. In an employer-employee relationship, the
worker is normally guaranteed a return for the work done and is usually paid
on an hourly, daily, weekly, or similar basis. 

However, some self-employed individuals may be paid on an hourly basis. When
a worker is paid a flat rate for the work performed, it generally indicates a
business relationship, especially if the worker incurs expenses in performing
the services.

Indicators that the worker is an employee

- The worker is not normally in a position to realize a business profit or
loss.

- The worker is entitled to benefit plans which are normally only offered to
employees. These include registered pension plans, and group accident,
health, and dental insurance plans.

Indicators that the worker is a self-employed individual

- The worker can hire a substitute and the worker pays the substitute.

- The worker is compensated by a flat fee and incurs expenses in performing
the services.

Determining a worker’s employment status in the province of Quebec

When we examine whether or not a person is an employee or self-employed
individual in the province of Quebec, we examine the relationship between the
worker and the payer, using a three-step approach.

Step 1

We ask the worker and the payer what their intent was when they entered into
the working arrangement. We need to know how they defined their working
relationship and why they defined it as such.

Sometimes the intention is clear, and both parties are in agreement (common
intent). Sometimes the intent can be found in a written agreement. Sometimes
the two parties have a different understanding as to the status of their
employment relationship, in which case there is no common intent.

Workers and payers can set up their affairs as they see fit; however, they
have to ensure that the status they have chosen is reflected in the actual
terms and conditions of the employment.

To determine the parties’ intentions, we obtain a copy of the contract, or a
testimony by the parties and examine the parties’ actions. Both parties’
intentions form part of the context that we analyse.

Step 2

We look to see if the employment meets the definition in the Civil Code of
Québec of a contract of employment, or of a business contract (contract for
services) by considering the following factors:

- performance of work;
- remuneration; and
- relationship of subordination.

It is important to gather the facts and analyse each of them in light of the
specific context of the employment and the intent of the parties.

Step 3

We compare each party’s intentions with their actual working relationship. We
confirm that the conditions of the working relationship meet the status that
the parties have chosen and that they are consistent with the definitions of
the Civil Code of Québec.


PAGE 7

Factors you should consider

Examine the relationship between the worker and the payer by considering the
factors outlined in Step 2.

To help you understand the process, we explain each factor and show some
indicators to display whether or not a relationship of subordination exists.

Performance of work

Whether or not there is an employer-employee relationship or a business
relationship, the worker has to perform the work. It can be part-time or
full-time for a specified or indeterminate period.

Remuneration

Remuneration means all considerations and benefits having a monetary value.
Whether or not there is an employer-employee relationship or a business
relationship, the worker will receive remuneration in exchange for work. The
remuneration can be calculated by time, by the piece or another manner.

Relationship of subordination

This factor helps distinguish the employer-employee relationship from a
business relationship.

The relationship of subordination is the capacity, the authority or the right
of a payer to exercise a control over the worker’s activities and the manner
in which the work is done.

Degree of control or autonomy

Consider the degree of control held by the payer or the degree of autonomy
held by the worker. 

The actual degree of control will vary with the type of work and the skills
of the worker.

The determination of the degree of control can be difficult when examining
the employment of professionals such as engineers, doctors, and IT
consultants-because of their expertise and specialized training, they may
require little or no specific direction in their daily activities. When
examining the factor of control, it is necessary to focus on both the payer’s
control over the worker’s daily activities, and the payer’s influence over
the worker.

Payer’s right to exercise control

It is the right of the payer to exercise control that is relevant, not
whether the payer actually exercises this right.

It is the control of a payer over a worker that is relevant, and not the
control of a payer over the end result of a product or service that he or she
has purchased.

Indicators that the worker is an employee

- The payer directs and controls many elements of how the work is performed
(such as what, who, where, when and how).

- The payer controls the worker’s absences, such as sick leave or vacation
leave.

- The payer controls the worker with respect to the results of the work and
the method used to do the work.

- The payer creates the work schedule and establishes the worker’s rules of
conduct.

- The worker has to perform the work.

- The worker has to remit activity reports to the payer.

- The worker’s activities are reserved to a single payer (exclusivity of
services).

- The payer can impose disciplinary actions on a worker.

- The worker receives training or direction from the payer on how to perform
the work.

- The worker accepts integration in the payer’s business to have the latter
benefit from his work.

- The parties have inserted a non-competition clause in their written
contract.

Indicators that the worker is a self-employed individual

- The worker is usually free to work when and for whom he chooses and may
provide his or her services to different payers at the same time.

- The worker does not have to perform the services personally. He or she can
hire another party to either complete the work or help complete the work.

- The worker can generally choose the time and the manner the work will be
performed.

- The worker does not need to be at the payer’s premises.

- The worker can accept or refuse work from the payer.

- The working relationship between the payer and the worker does not present
a degree of continuity, loyalty, security, subordination, or integration, all
of which are generally associated with an employer-employee relationship.

Special situations

Special rules concerning CPP, EI and income tax for workers engaged in
certain occupations apply. Here are a few examples:

- barbers and hairdressers;
- taxi drivers and drivers of other passenger-carrying vehicles;
- fishers;
- placement and employment agency workers;
- employees outside of Canada.

For more information on special situations, see Guide T4001, Employers’ Guide
-Payroll Deductions or Remittances or visit our Web site at
http://www.cra.gc.ca/payroll.


PAGE 8

For more information

If you need more help after you read this guide, visit http://www.cra.gc.ca or call
1-800-959-5525.

You can get forms and publications from http://www.cra.gc.ca/forms or by calling 1-
800-959-2221.

Teletypewriter users

If you use a teletypewriter (TTY), you can call our bilingual enquiry service
at 1-800-665-0354.

Interpretive articles

To view articles that will help you understand the requirements of the Canada
Pension Plan and the Employment Insurance Act, visit our Web site at
http://www.cra.gc.ca/cppeiexplained.

Court decisions

- Sagaz Industries Canada Inc. v. 671122 Ontario Ltd. 2001 SCC 59 (27820)

- Royal Winnipeg Ballet v. Canada (M.N.R.) [2006] F.C.J. no. 339 (A-443-04)

- Wolf v. Canada 2002 FCA 96 (A-563-00) 

- Standing v. Canada (M.N.R.), [1992] F.C.J. no. 890 (A-857-90)

- Wiebe Door Services Ltd. v. Canada (M.N.R.) [1986] 3 F.C. 553 (A-531-85)

- 9041-6868 Québec Inc. v. Canada (M.N.R) [2005] A.C.F. no. 1720 (A-559-04)

Legislative references

- Paragraph 5(1)(a) of the Employment Insurance Act

- Paragraph 6(1)(a) of the Canada Pension Plan

- Articles 2085 to 2129 of the Civil Code of Québec

Legal material

ARCHAMBAULT, Pierre. “Contract of Employment: Why Wiebe Door Services Ltd.
Does Not Apply in Quebec and What Should Replace It.” The Harmonisation of
Federal Legislation with Quebec Civil Law and Canadian Bijuralism: Second
Collection of Studies in Tax Law. Montreal. APFF. 2005.

Your opinion counts

If you have any comments or suggestions that could help us improve our
publications, we would like to hear from you. Please send your comments to:

Taxpayer Services Directorate
Canada Revenue Agency
750 Heron Road
Ottawa ON K1A 0L5

Addresses

Shawinigan-Sud Centre
4695 - 12th Avenue
Shawinigan-Sud QC G9N 7S6

St. John’s Tax Centre
290 Empire Avenue
St. John’s NL A1B 3Z1

Sudbury Tax Centre
1050 Notre-Dame Avenue
Sudbury ON P3A 5C1

Summerside Tax Centre
275 Pope Road
Summerside PE C1N 6A2

Surrey Tax Centre
9755 King George Highway
Surrey BC V3T 5E1

Winnipeg Tax Centre
66 Stapon Road
Winnipeg MB R3C 3M2

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

Contact

Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

mark@blumbergs.ca
416.361.1982
Download vCard

Connect

Locate

Blumberg Segal LLP
Barristers & Solicitors
#1202 - 390 Bay Street
Toronto, Ontario
M5H 2Y2 Canada

Charity Law List

Join Blumbergs' non-profit and charities newsletter
View recent issue: December 2014