Employee or Self-employed? Part 2

by in Small Business Information and Statistics
This is part 2 (of 4) of the blog series, Employee or Self-employed written by KD's Manager for Tax & Accounting, Kevin Penner, CGA.

There is a four step evaluation that the Tax Court of Canada, see TCC case (Wiebe Door Services Ltd. (Applicant) v. The Minister of National Revenue (Respondent), ruled must be applied to determine if a person is an employee.

a) The degree or absence of control, exercised by the alleged employer.

Simply put, if you have the ability to choose when you work, what you work on, how you do the work, how long you work, and you have the ability to substitute someone else to do the work for you, then you are likely not an employee.

(b) Ownership of tools.

If you supply your own tools, materials, etc., then you are likely not an employee.  If you own your own corporation, the company can still own the tools or you can bill the company for their use.

(c) Chance of profit and risk of loss.

If you are not paid an hourly wage, or have the risk of loss or reward of profit then you are likely not an employee.  Employees have very little risk, as usually they are paid regardless of how well the company is doing.  In addition to this, employees are usually paid for time put in, not the results achieved while working.

As an owner / director / worker, you are in the position where you cannot pay yourself a salary on a regular basis if there is no work coming in, unless you dip into a line of credit or financing.  In a situation like this, those payments should not be treated as salary anyway.  The point is, as an owner operator, you bear all the risk, and reap all the rewards.

(d) Integration of the alleged employees' work into the alleged employer's business.

This test is a little harder, in that if you are the only worker in your business, you are an integral part of the business.  If you have the ability to substitute someone else to carry out your duties, then you would not be considered integral.  That said all four tests must be considered not just one or two.

In part 3, we will look at what CRA has “said” based on the cases they have taken to court and won or lost.
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