This document discusses the legal and tax implications of employing contractors versus employees. It outlines several tests used by courts and tax authorities to determine status, including control, ownership of tools, chance of profit/loss, integration, and permanency. The tax and legal obligations of employers differ significantly from those of businesses engaging independent contractors. Key areas that are addressed include payroll, benefits, insurance, termination issues, and intellectual property rights. The document provides advice on structuring relationships and contracts to minimize risks of a contractor being deemed an employee.

1. Employing Contractors and
Contracting Employees:
Sorting Out Tax and Legal Issues
Shane Onufrechuk, CA
Richard Press, LL.B.
November 10, 2011
5573299_1.ppt
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2. Employee vs. Independent Contractor
 Leading Case – Wiebe Door Services Ltd. V. MNR
• 4 tests (maybe 5)
 Control
 Ownership of tools
 Chance of profit
 Risk of loss
 Maybe “integration”
 Latest Case – Long et al v. MNR
• Tests too rigid
• Integration test not relevant
• Legal relationships matter – but not always followed in the
courts where inconsistent
 Other cases

3. Tax Implications of Employment - Individual
 Employee
• Limitation on deductions
 Tools
 Musical instruments
 Moving expenses etc.
• Not responsible for CPP and EI
• Not taxable supply for GST/HST
• Income reported on a cash basis
 Employer
• Obligation to withhold
 EI
 CPP
 Income Tax
• T4 Reporting

4. Implications of Independent Contractor -
Individual
 Contractor
• Likely has instalment obligation relating to taxes payable
• Expenses laid out to earn income deductible (subject to
limitations in the Income Tax Act “ITA”)
• Unless small supplier or exempt supply obligation to
collect and remit GST/HST
• Income reported on an accrual basis
 Service Recipient
• No obligation to withhold tax
• No obligation to report amount paid

5. Implications of Employee-Like Relationship
– Corporate Employees
 Personal Services Business
• Defined at 125(7) of the ITA
• Defined as
 Corporation carrying on business of providing services
where
• Individual performs services on behalf of the corp
• Individual or related person is a specified shareholder
• Individual would “reasonably be regarded” as an officer
or employee of the services recipient but for the
corporation
• Unless more than 5 full time employees or services are
provided to an associated corp.

6. Implications of Employee-Like Relationship
– Corporate Employee cont’d
 Implication of being a Personal Service Corporation
• Denied small business deduction
• Limited deduction of expense in Corp. (same as
employee)
 Purpose of legislation is to prevent the conversion of
salary income into corporate business income taxed at
a low rate
 Consider Criterion Capital Case for officers where
services provided outside of employment duties

7. Implications of Employee-Like Relationship
– Corporate Employee cont’d
 Employer
• No payroll costs i.e. EI and CPP
• No withholding obligations
• GST needs to be paid if not small supplier or
exempt supply

8. Personal Services Business
Tax Planning Opportunity?
 Income Tax Deferral
• 25% corporate tax rate in 2011
• 19% deferral over to personal rate
 Absolute tax savings
• Income splitting with family members
• Pay out retained earnings when not a top marginal rate
 Reduced Payroll costs
• No EI and CPP
• No T4’s etc.
 Consider for high income salaried employees who have
income in excess of personal needs, or a low income
spouse or other adult dependants

9. Personal Services Business
Disadvantages
 Administrative costs and time
 Loss of “earned income” for RRSP purposes
 Dealing with stock options
 Change in law??

10. Incorporated Contractors
 Similar benefits to Personal Services Business
 Enhanced deferral for Small Business Deduction
income
 SBD rate in BC presently 13.5% on first $500,000
 April 1, 2012 SBD rate will be 0% in BC for an 11%
effective rate of the first $500,000 of active business
income
 Creates a potential 32% tax deferral opportunity
 Creates liability protection

11. Personal Services Business
Implementation
1. Create family trust (if necessary)
2. Have trust or principal and related family members
incorporate corporation with proportionate
shareholding as desired
3. Have principal terminate existing employment contract
(subject to legal advice)
4. Have incorporation entity and employer enter into a
services contract with terms similar to previous
employment agreement (see employment advice)
5. Have principal enter into a contract with the
incorporated entity to perform services on behalf of
the entity.

12. Stock Options
 Treatment different for employees and
independent contractors
 Employees benefit from the stock options
rules found in section 7
 No 50% 110(1)(d) deduction for independent
contractors
 No deferral for independent contractors on the
issuance of stock options
 Treated as an in kind payment of fees for
independent contractors

13. Outside the tax regime: Legal tests
 Vary by tribunal
 Finding of one tribunal is influential, but not
determinative, for second tribunal
• e.g. may be a contractor for CRA purposes and
an employee for human rights
 All test based on facts
 An agreement between the parties as to status
is not determinative

14. Legal test for contractor or employee status
 There is no bright line test
 Vary by tribunal
 Finding of one tribunal is influential, but not
determinative, for second tribunal (e.g. may be
a contractor for CRA purposes and an
employee for human rights)
 All tests are fact specific

15. Key Factors
 Control
 Integration (but not importance)
 Investment
 Diversity
 Legal relationship (but not intent)

16. Control test
 Is there control over workers?
• Selection – employers select specific employees
• Dismissal and discipline – employers discipline
and dismiss an employee
• Method - employers control the method in which
the job is carried out
• Timing – employers set when the work must be
performed
• Remuneration - employers set and amend the
payment scale

17. Four-fold test
 Control (as per prior slide)
 Ownership of tools – investment in business
 Chance of gain – contractors have a chance of
windfall profits if job performed successfully
 Risk of loss – contractors have chance of loss
if services performed poorly

18. Organizational or integration test
 Is work integral to the operation of the
business?
 The more integrated the work is with the
business, the more likely it is that the worker is
an employee
 Considers control: can worker set own hours
and methods

19. Permanency test
 Based on duration of the relationship
 The longer and more continuous the
relationship, the greater chance that it is an
employment relationship
 Inapplicable for many common modern
contractor relationships – e.g. distributorships

20. Economic reality test
 Combines control test, four-fold test and
permanency test
 Adds Diversity
• Can worker perform similar services to other
parties?
• Can worker actively search out other work?

21. Recent Cases (other than tax cases)
 671122 Ontario Ltd. v. Sagaz Industries Canada
Inc.
• 2001 Supreme Court of Canada decision
• Integration and Control
 Smith v. Centra Windows Ltd.
• 2009 B.C. Supreme Court decision
• Continuum of arrangements
• No factor conclusive (i.e. no bright line)

22. Recent Developments in Human Rights
 McCormick v Fasken Martineau Dumoulin 2011
BCSC 713
 Pardy v. Earle & Zesty’s Restaurant 2011
BCHRT 101

23. Human Rights test for employee status
 Utilization: is one party using the services of
another for its own benefit
 Control: Does one party have the right to
exercise control over the other
 Financial Burden/Remuneration: Who controls
the amount of compensation received
 Remedial Purpose: Who has the practical
ability to remedy the discrimination in question

24. McCormick v. Fasken
 Law Firm: 650 equity partners worldwide; 60 in
Vancouver (including McCormick)
 Partnership agreement required mandatory
retirement at age 65
 Found to be an employment relationship

25. McCormick v. Fasken
 Firm utilizes partner to service clients and
generate IP
 Partnership agreement and managing
partner/executive committee control partner
 Remuneration of partner a judgment call of
other partners, not strictly based on billings
 Forced retirement engages remedial purposes
of Code

26. Pardy v. Earle & Zesty
 Stand-up comedian hosted an open mic in
exchange a $50 shared beer tab (all the comics
had to share the tab)
 Restaurant did advertising for open mic
 Comedian gets into dispute with lesbian
patrons
 Found to be an employment relationship
 Restaurant on hook for comedian’s damages

27. Pardy v. Earle & Zesty
 Restaurant utilized comedian to attract patrons
and to recruit some other comics
 Comedian needed restaurant’s permission to go
on-stage and restaurant controlled comedian by
preventing him from going on-stage again
 The shared $50 beer tab was sufficient
remuneration
 Restaurant had power to remedy comedian’s
wrong: could have stopped show; offered apology;
offered compensation

28. Why care?
 Tax and payroll liability
 Insurance liability (WCB and general)
 Employment standards
 Labour Code liability
 Human rights liability
 Privacy liability
 Civil liability (wrongful dismissal and vicarious liability)
 Intellectual property liability
 Post-relationship obligations

29. How to protect yourself
 If retaining a contractor:
• Contract with a company, not individual
• Have a written contract.
 If hiring an employee:
• Have a written contract.

30. Taxation
Employer Business
Must make income tax Contractor responsible for
withholdings own withholding and
deductions
Not taxable supply of Contractor usually must
GST/HST charge GST/HST
Limited allowable Greater income tax benefits:
deductions - more allowable deductions
- income splitting

31. Payroll
Employer Business
Have payroll costs as must Minimal payroll costs for
withhold and contribute on contractor (likely paid
CPP and EI through A/R)
Issues T4 Contractor bears payroll
costs for own payroll
Contractor should render
accounts

32. Benefits and Perquisites
Employer Business
Employers commonly Businesses should not
provide health and welfare provide health and welfare
benefits benefits to contractors
Contractors lose “earned
income” for RRSP purposes
Employers commonly Business may reimburse
provide perks (e.g. car contractors for expenses
allowance, club dues, etc.) - Costs or costs plus

33. Insurance and Health and Safety
Employer Business
Must establish WCB Contractor responsible for
account WCB
Must pay WCB premiums Should get clearance letter
for employees
Employee negligence Not insured for actions
usually covered by general (Should ensure have
insurance insurance)
Indemnity uncommon Indemnity common

34. Payment issues
Employer Business
Must usually pay wages at Can contract for any fee
least semi-monthly payment scheme
Deductions from wages Can contract to set-off
unlawful claims

35. Hours of work
Employer Business
Non-managerial employees Can establish flat rate
generally entitled to
overtime
Employees entitled to Contractors responsible for
leaves (jury duty to providing service
maternity leave)

36. Time off
Employer Business
Employees entitled to Contractor not entitled to
vacation vacation
Non-managerial employees Contractors not entitled to
entitled to statutory statutory holidays
holidays

37. Termination of relationship
Employer Business
Summary dismissal for just Summary termination for:
cause - non-curable or non-cured
material breach
- bankruptcy
- act of principal
Absent just cause, notice or Contracted term or
pay in lieu “reasonable” notice
ESA minimums

38. Civil liability
Employer Business
Wrongful dismissal claim Wrongful termination claim
exposure exposure
- approx. 24 month - approx. 12 month
maximum exposure maximum exposure
Vicarious liability issues Vicarious liability unlikely

39. Privacy
Employer Business
Obligation on employer to May be no obligation of
protect employee personal business to protect
information contractor information
Must implement privacy May need to obtain consent
policy on collection, use to share personal info with
and disclosure of employee contractor and ensure
information contractor protects that info

40. Human Rights
Employer Business
Must comply with human May discriminate against
rights re. hiring and contractor.
managing employment
relationship
Remedial legislation
Broad scope of who is
employee

41. Confidentiality and Post Relationship
Obligations
Employer Business
Employee has duty of Contractor may not have
confidence duty of confidence
Consider contracting for Can contract for
post-employment confidentiality; consider
obligations (e.g. non- contracting for post-
compete, non-solicit, etc) relationship obligations

42. Fiduciary duty and loyalty
Employer Business
Key employees owes Absent professional
fiduciary duty relationship, fiduciary duty
unlikely
All employees owe duty of No duty of loyalty
loyalty - May provide services to
- Conflict of interest usually competitor absent
cause contractual prohibition

43. Intellectual property
Employer Business
Employer automatically Business usually owns
owns most employee’s none of its contractor’s
works works
Should contract for Should contract for all IP
unowned rights rights
- e.g. moral rights

44. Common contractual terms for employees
 Compensation
 Position, duties and reporting
 Termination
 Benefits and vacation

45. Common contractual terms for contractors
 Fees and accounts
 Services
 Representation to public
 Termination
 Expenses and additional costs
 Insurance
 Authority
 Indemnity
 Set-off

46. 5 common reasons why contractors are
found to be employees
 Have business cards (integration)
 Are part of corporate chart (integration and
control)
 No financial investment in their own business
(investment)
 Accept employee benefits, including vacation
(integration)
 Have authority to bind the company
(integration)

47. 5 take away points
 A contractor is in business for itself, an
employee works for you.
 Sort out the form of relationship at the
beginning of the relationship.
 Have a good written contract for both
employees and contractors.
 Try to stay away from close to the line.
 Get legal and accounting advice beforehand.

48. Questions or Comments