Q: I farm but also do crop insurance work. I tried to deduct expenses on my tax return but the deductions were disallowed because I am considered an employee rather than an independent contractor. What is the difference?
A: The easy part to answer is the effect.
If you are an independent contractor and not employed by a firm, you will be able to deduct legitimate business expenses from income. If you are an employee, your ability to deduct such items is far more limited.
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Remember that even if you are an independent contractor, you must keep your deductions reasonable and within the legal limits set out in the Income Tax Act as administered by Canada Revenue Agency.
The harder part of your question is whether to class you as an independent contractor or an employee. A number of factors go into making that legal decision, and you have not supplied enough facts to provide an answer. However, I can describe the factors most commonly used by the courts to make this determination.
The mere fact that you have a written contract with your employer does not necessarily determine the issue because contracts also exist in true employment situations.
That said, there are several issues to consider, the first being one of control. Who is in control of the terms of the business relationship: the company you work for, you, or a combination? The more factors that you control or have significant influence over, the more likely it is that you are an independent contractor.
Who sets hours of work? Who controls overtime? Are you paid for working extra hours? Are you on a salary or commission? Do you charge a flat rate per job? Does you company give you training? Do you work only on its premises, or away from its building?
The way you are paid makes a big difference. Does the company give you a salary or set an hourly wage? Do you have a share in the company’s risk of loss or hope of profit? Do you have to supply your own tools, materials or samples? Do you participate in profit sharing? Who pays your expenses?
The more of these things that you control or supply, the less likely it is that you are a straight employee.
Tax is also an important factor. Are you registered with a GST and business number, separate from that of the company you work for? Do you charge that company GST? Check with your accountant; maybe you should be.
Also look at the type of authority you have or the working relationship you have with the company. Can you hire sub-contractors to do some of the work for you? Do you have other sources of income, or do you perform this type of work (or other types of work) for other companies? These factors may suggest you have a freedom that an employee does not usually enjoy, and you are more likely an independent contractor.
Remember that no single factor is the sole deciding issue. Rather, courts traditionally have looked at the entire package when determining if a person is an employee or contractor.
Rick Danyliuk is a lawyer with McDougall Gauley LLP in Saskatoon.
