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Taxes
The distinction between self employment and employment income is very important for tax purposes because if you are self employed, you are, subject to certain provisions dealing with specific types of expenditures, allowed to deduct all reasonable expenses incurred to earn that income, whereas employees are restricted to certain very specific deductions.
For the employer, hiring an independent contractor is also very attractive because all the employment expenses and related benefits disappear.
Given that self employment status is therefore very attractive for both parties, it is not surprising that many cases have ended up in the courts and hence a comprehensive set of guidelines have developed over the years.
Broadly speaking, there is not just one factor that determines status, rather the courts have looked at a set of them that must now be applied to the circumstances of the individual case. These are:
a) the economic reality or entrepreneur test
b) the integration or organization test
c) the specific result test
The economic reality test looks at
1) whether or not the individual is able to control what is to be done and how and when it is accomplished
2) who owns and provides the tools necessary to do the work
3) whether the person doing the work incurs business risks, and has the opportunity to make a profit or incur a loss related to the work.
The integration test looks at how dependent on the organization the person doing the work is. This has come to mean what proportion of the person’s income is derived from the organization, are they eligible for benefits, are there indications the person is part of the organization, i.e. do they have an official title, business cards, office space, facilities etc normally available to employee?
The specific results test looks at whether or not a person was engaged to achieve a specific objective and was given freedom to decide specifically how to obtain the desired result.
Note all the factors are looked at, and failing to meet one or two of the tests, or meeting one or two of the tests does not in itself indicate status one way or another. Also, rarely is one year indicative of a pattern. For example, in the early years of self employment, you may only have one client. As long as you are actively looking for more work, and you do not clearly meet other criteria, the fact that all your income is from one source does not automatically put you off side. Hence CRA, in auditing such situations, will look at more than one year to see what patterns are established. And all circumstances surrounding your work.
The best policy is to seek professional guidance to ensure you understand clearly what your tax status is.
© 2015 John B Voorpostel CPA, CA, CMB
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