Q:I am working for a big farmer. He pays me a flat amount, with no deductions for tax, Employment Insurance and Canada Pension Plan. I am having problems with the Canada Revenue Agency allowing my deductions. They say I am an employee. What is the test for determining this?
A:It depends who is asking and for what purpose the question is being asked.
Courts and tribunals have two choices in categorizing your services to this farmer. Either you are an employee or an independent contractor. There are certain features to each that will determine the true nature of the relationship.
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In civil court, there are factors that judges examine to see what the relationship is. Are your services exclusive to this farmer, or are you free to provide similar services to other farmers or businesses?
Who has control over your hours of work, the fees charged and the location and manner in which you supply your services? Does the farmer provide the tools or raw materials to do your job, or do you do that and charge them back to the farmer?
Do you have a hope of profit or risk of loss in providing these services, or are you sure to be paid no matter what? Are the services you provide an integral or central component to the farmer’s business enterprise, or a fringe part of it?
Do you give these services directly and personally, or through an incorporated company or a partnership?
If what you do is mainly controlled by the farmer or recipient of your services, it is more likely that you are an employee and not a contractor. A contractor has a significant degree of independence from the person receiving his services. The more that independence is eroded, the more it looks like a traditional employer-employee relationship.
This gives rise to liability for items such as source deductions and withholding income tax from your pay. It sounds like you receive a gross cheque and manage tax payments on your own. The determination of the true nature of your business relationship can change all that.
This is the general line of inquiry for civil purposes. For pure tax purposes, it can be different. The Tax Court of Canada sometimes employs another set of criteria. A recent Tax Court case focused on the intention of the parties when they formed their business relationship. Did they intend to be independent from each other, or did the intent appear to be to form an employer/employee relationship? A determination of whose business it is seems to be central to this particular case.
In the recent Tax Court decision, a major factor was whether the services were delivered directly and personally, or through a corporation.
This can have an effect not only on your obligation to pay taxes and other deductions monthly, but on your ability to make deductions on gross income. If you are an independent contractor for tax purposes, you can deduct legitimate business expenses incurred, such as tools, materials, and licences.
However, if the relationship has all the hallmarks of a employer-employee relationship, those deductions will be disallowed, those amounts added back into your income and you will be taxed accordingly.
If the provision of these services is providing you with decent cash, I’d take the trouble to incorporate a company to work independently of this farmer and others.
Keep a good set of books, get advice from a competent and qualified accountant, and only claim legitimate deductions.
Rick Danyliuk is a lawyer with McDougall Gauley LLP in Saskatoon.
