Employee or Self-employed? Part 3

by in Small Business Information and Statistics
This is part 3 (of 4) of the blog series, Employee or Self-employed written by KD’s Manager for Tax & Accounting, Kevin Penner, CGA.

A common argument I have heard from CRA staff is that you cannot contract with yourself, so you have to be an employee.  If this is true then the opposite logic should follow.  If I can’t contract with myself to be self-employed, then how can I hire myself to be an employee of my corporation?  The legislation for Employment Insurance (EI) says you can’t be employed by your own corporation or be self-employed (proprietorship) and have EI coverage.  This is because CRA are afraid you would “lay off” yourself. You have that ability to control the work accepted or rejected, and collect benefits when you don’t want to work.  If you can’t have EI coverage, how can you be considered to be an employee?

The bottom line is that the CRA seems to be cherry picking when they want people to be employees of their own corporation.  I can reference three specific court cases where CRA took opposing arguments on this issue.  In the case Meredith V. Her Majesty the Queen the CRA argued that the shareholder, Mr. Meredith, could not be an employee of his own corporation.  I won’t get into all the arguments, it is an interesting read though. However my take on it is simply that the CRA did not want Mr. Meredith to be eligible for the Overseas Employment Tax Credit (OETC).  The CRA won this case and Mr. Meredith was ruled not to be an employee of his own corporation.

In the second case David Martin, Cyril Chisholm, Diethelm von Lieres, Appellants, and The Minster Of National Revenue, Respondent, the CRA again argued that the appellants could not be employees of their own corporation.  Some very interesting arguments were made and the Judge’s comments in this case were also extremely interesting.  The short answer is that CRA did not want the shareholders to be employees of the corporation.  The CRA lost this case and the shareholders were allowed to be employees.

The third case is Anmar Management v. Her Majesty the Queen -Appeal 2009-2782 (CPP).  This decision is oral from the TCC.  The appellant contracted with the shareholder to provide services to the corporation.  CRA said that the Shareholder had to be an employee of the corporation because he owned the company.  The shareholder successfully argued that he was not an employee and that he had chosen this structure for a reason.  The TCC Judge agreed and ruled in the appellant’s favour that he was in fact not an employee and that this was his intention and that he had this right.

In part 4, we will look at what the legislation says about structuring your affairs.
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