The previous page of this article discussed two elements that the Canada Revenue Agency uses to determine whether a person is an independent contractor or actually an employee; control and ownership of tools. There are two other elements of the independent contractor vs. employee situation that are part of the Canada Revenue Agency’s “four-point test”.
3. Independent contractor vs. employee: Chance of profit/risk of loss.
In this case, whether you’re involved in an employer-employee relationship or a business relationship depends on your financial involvement. Do you have a chance of making a profit? Do you run the risk of incurring losses due to bad debts, damage to equipment or materials, or delays? Do you cover the operating costs? If these three things are true, you’re a contractor, not an employee.
4. Independent contractor vs. employee: Integration.
This appears to be a further attempt to divine the intention of the parties involved. The Canada Revenue Agency states, “Where the worker integrates the payer's activities to his own commercial activities, a business relationship probably exists... Where the worker integrates his activities to the commercial activities of the payer, an employer-employee relationship probably exists.” Exactly how one would determine such integration is not laid out. “Employee or Self-Employed?” seems to treat this point as a summary category calling for a review of the other three.
It would seem to me that one obvious way of “proving” integration to your own commercial activities would be to have multiple clients. The contractor who only has one client makes it too easy for others to perceive his relationship with that client as an employer-employee one.
Also, as a contractor, to protect yourself, you should always enshrine your relationship with each employer in a contract, focusing on the first three points of this four-point test. “Having a carefully crafted written agreement setting out the intentions of the parties may offer some protection if one of the parties subsequently changes his or her mind and argues that the relationship is not what it was purported to be,” says Anthony Strawson, (CMA, LLB, BComm), in “Employee or Independent Contractor”. It will also help stave off being “recategorized” by the Canada Revenue Agency.
In summarizing the case law on the independent contractor vs. employee situation, Mr. Strawson points out that the issue is not clear cut, and that while there appears to be a trend towards a more flexible interpretation of the business relationship of a contractor and an employer, the final determination of whether a person is an independent contractor or an employee will always depend on the individual facts and circumstances of the case.
Some employers seem to view incorporation as “proof” of independent contractor status – to the point that they will only do business with incorporated contractors. While being incorporated could conceivably be one point of evidence showing an arm’s length relationship between a contractor and employer, it isn’t proof of a business relationship in itself. (See Should You Incorporate Your Small Business? for the advantages and disadvantages of incorporation and How to Incorporate Your Business if you decide to go this route.)
As a contractor, it behooves you to take what measures you can to ensure that your status as an independent contractor is clearly defined. If you have and are still uncertain about whether you’re actually an employee or an independent contractor, discuss the issue with your professional advisor and/or contact the Canada Revenue Agency.
