We solve serious CRA tax problems

How To Differentiate Between A Contractor And An Employee?

One of the most audited and most litigated problems in Canadian tax law involves the differentiation between a contractor and an employee. Any Chartered Professional Accountant will tell you that there are significant differences between the classifications for both the payor and the payee.

From the payor’s perspective, if the person you are paying is an employee, then you have obligations including withholding and remitting payroll tax source deductions (tax, EI, CPP, EHT), liability to others for errors and omissions, and the obligation to abide by employment standards laws (notice requirements, vacation pay, etc). The employee is limited in deducting expenses, has to report as income the value of benefits, and must take directions from the employerabout how, when, and where to do the work. A Chartered Professional Accountant can tell you the rest of the differences.

If the person is a contractor, however, then the payor doesn’t have to withhold and remit payroll source deduction, is not liable for their actions, and doesn’t have to worry about employment standards laws. The contactor has added benefits including of having greater ability to deduct expenses that a Chartered Professional Accountant can use to reduce the amount of tax payable, the ability to choose how the work is done, and may have to registered for HST/GST.

The courts have set out a number of tests and factors when differentiating between an employee and a contractor. The most common test looks at the intention of the parties, who controls the relationship or has the right to, who owns the tools, who has a chance of profit or a risk of loss, and who controls investment and management decisions. All of these factors aim at seeing if one or both parties are in business on their own. This is very difficult and fact driven. What makes it more difficult is that a written agreement that clearly shows the intention to have a contractor relationship is not final. The courts will look at how the parties in fact treated the relationship, not what they wanted it to be. Talk to your Chartered Professional Accountant to review your business relationships.

People often try to arrange their relationship to either be one of a contractor (called a contract for services) or one of an employee (called a contract of service). However, they are not often successful if they don’t get professional advice. This usually affects those who want to hire contractors but end up getting employees. These people, thinking they don’t have employees, don’t withhold and remit payroll source deductions. Then they are reassessed by the CRA, they end up owing all of the payroll deductions plus penalties and interest. Even worse, because payroll source deductions are trust debts, the directors of the payor, if the payor is a corporation, have personal liability for these debts.

If you have been reassessed on a contractor vs employee issue, or think that you may be at risk, contact a Chartered Professional Accountant to get clarity. The issues can be complex and the cost of being wrong can be severe. A Chartered Professional Accountant can help you get clarity.

About the Author

pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

I was referred to Mr. Faris by another professional who recommended him to deal with my multiple years of outstanding corporate and tax returns. I interviewed Sam and was impressed in his confidence and transparency. He did not promise the moon just to get my business. Sam was able to file all returns under the voluntary disclosure program. After completing filling all tax returns, I realized the amount of money he saved me. I enjoyed very much working with him. He ensured that the work progress flow smoothly without any complications. He took to consideration the emotional stress factor and he was available to speak with me even beyond business hours just to make me more calm and to make me feel that he is on top of the matter and it will be resolved to my satisfaction. Indeed, this is what happened. The matter was resolved to my satisfaction and CRA concluded that the returns which Sam filed are reasonable and there is no need to further audit me nor my company. In summary, Sam is a life saver. He saved me and saved my family and now I am in the right track where all my tax filing obligations are met and I don’t owe any taxes. So grateful to Sam and his dedication while working on my file.
Sam is an excellent CPA and the best tax consultant in the country. He helped me to deal with a very complicated tax audit with the CRA where the CRA sent me a proposal assessment of 1.5 million dollars based on their net worth audit calculation and analysis. Sam was able to provide a counter analysis which highlighted significant mistakes that the auditor made with his assumptions and calculations. It’s ridicules that CRA wanted to taxed me on a loan that I obtained from my bank. Sam dealt with this audit perfectly. He demonstrated a very high level of expertise and CRA had to accept his counter analysis with no question asked. Many thanks to Sam’s efforts and high business standards in dealing with this issue and resolve it to my favor. I will have Sam as my primary CPA going forward so I can focus on doing business and will have a peace of mind in terms of the high quality of work done by him. Well deserved this review with the 5 stars rating.
Sam Faris helped me with a complex cross border tax matter. This issue involved 12 years of tax returns and it was as a result from mistakes that my previous accountant did. He was able to perfectly address the issue with the CRA and to fix the returns under the voluntary disclosure program. End results; CRA accepted Sam’s work with not a single question and the returns were reassessed to my satisfaction without penalties and interest. Many thanks to Sam brilliant work.
Response from the owner:Dear Sir It was a pleasure working on your file and get you the results that you aimed to have and to your satisfaction. We have been dealing with similar cases for many years and we were confident that the results are favorable. Please feel free to contact us in the future if you do require further help.
I found Sam’s firm online and I read the excellent Google reviews about him and his team. I decided to hire him to help me navigate an issue with the CRA. Sam delivered as expected and as promised. Results were to my satisfaction and I am very happy with how the process was handled. Highly professional and extremely knowledgeable.
Response from the owner:Dear Tanya Thank you for the 5 stars Google review and your kind words. We strive to provide the best customer service and make our clients relax and calm during the process. The cases we are taking are very sensitive so providing quality work to the CRA is extremely important so just to avoid any escalation and to make sure that our package is accepted from the first round. We will remain at your disposal anytime you require our services. Sam Faris
You will notice Sam is very quick with his responses. He knows his stuff and gives solid advice. Highly efficient, would recommend.
Response from the owner:Dear Jay Thank you for the 5 stars positive review. Working with you was pleasant too. Many thanks for your business and please do feel free to contact me if you have any questions. Sam Faris
after the initial assessment I had with Sam, he proposed a strategy to dispute CRA decision. He knew up front how to approach my case as he seemed that he dealt with similar cases many times. I hired him the end results were as promised and no surprises. Sam is very trust worthy and has a high business standards. May thanks Sam.
Response from the owner:Many thanks for the positive review.
I recently turned to Faris CPA for help with my tax filing, and I must say, I'm over the moon with the results! The whole process was a breeze, saving me time and stress. What really stood out was the friendly professionalism, impressive expertise, and crystal-clear communication from Sam and his team. They made what could've been a daunting task feel like a walk in the park! If you're looking for a warm, approachable tax expert who genuinely cares about his clients, I wholeheartedly recommend Sam and the folks at Faris CPA - they're great tax consultants!
Response from the owner:Many thanks.
Working with Sam and his team was an extremely valuable experience. One of the best Tax consultants in Toronto I've ever come across.

He has a ton of experience resolving problems with the CRA and was truly a big asset to me when I had issues I needed help with.

Would highly recommend Sam and Faris CPA, thanks again for all the great work!
Response from the owner:Thank you Paul for your positive feedback and we are glad we met your expectations.
I had an amazing experience working with Faris CPA for my CRA needs. They really know the CRA processes and made everything so easy. They were super professional, always ready to answer my questions, and made sure everything was done right. I couldn't have asked for better help. Highly recommend their services for anyone dealing with the CRA! -Sara
Response from the owner:Thank you Sara for the 5 stars review.