In today’s world, many people are realizing it may be more advantageous to offer their services as an independent contractor running their own small business, rather than working as an employee. As an independent contractor, you’re your own boss, and you get the freedom to choose your clients, working hours and conditions and certain tax advantages.
Having said that, it’s important to understand that just because you say you’re an independent contractor, Revenue Canada may not see it the same way, as the definition of a self-employed independent contactor must meet the legal test.
This post discusses the advantages of being a contractor, and how to assess whether you actually “freelance” versus an “employee” by Revenue Canada.
What is an Independent Contractor?
A self-employed contractor is someone who works in a business relationship with their client, and meets certain conditions and factors, such as sending invoices to the client instead of receiving a salary.
What is an Employee?
Employees are dependent on an employer and have certain entitlements under employment standards legislation, such as minimum wage, overtime, vacation, statutory holiday, etc. An employee’s employment relationship is governed by the Employment Standards Act, or common law, if there is no contract.
How to Determine Your Status
If the Canada Revenue Agency audits your client, they may determine that your relationship with your client is actually not one of a contractor, but rather as an employee.
If this is the case, then the employer will be required to pay past amounts for benefits and deductions like Employment Insurance (EI) and Canadian Pension Plan (CPP), along with penalties and interest. In such an instance, the employer’s directors may even be personally liable.
Therefore, it is extremely important to make sure that the relationship is actually one of an independent contractor by looking at some of the factors below, such as:
- The level of control of the worker’s activities over the timing and manner of performance of the work
- Ownership of tools and equipment and whether the contractor hires other individuals such as sub-contractors or assistant
- The degree of financial risk, management and investment in the independent contractor’s business
- The ability of the worker to make a profit and other factors such as written contracts, etc.
Benefits of Independent Contracting
There are many advantages to an individual to characterize their relationship with the business as a contractor.
- An independent contractor has the ability to control their working hours and conditions
- They can take on more than one client
- They have the potential to make more profits and not just rely on a fixed salary
- An employer typically provides for employee benefits but an independent contractor can still include a clause in the contract regarding workplace safety, benefits and insurance
There are also significant advantages for businesses to hire independent contractors. An employer may prefer to characterize a relationship as an independent contractor, as it permits an employer not to have to make source deductions of EI, CPP, income taxes, health tax and workplace safety insurance premiums.
Tips To Help Ensure Your Services Are Recognized as an Independent Contractor
The following tips will help you ensure that you are considered self-employed by Revenue Canada:
- Prior to commencing services for an employer, make sure the terms of service are properly reflected as a freelancer.
- Ensure that the services being provided to not change over time such that they may be considered to be an employee, rather than as a contractor.
- Ensure that you have a termination provision in your agreement that provides for advance notice of termination. Courts may still determine that “reasonable” notice is required for an contractor, but it’s better to make it clear at the outset.
While there are many benefits to being an independent contractor, it’s essential that you’re actually considered one by the Canada Revenue Agency to avoid your client being charged financial penalties and legal ramifications under various legislation, including the Income Tax Act, Employment Insurance Act and Employment Standards Legislation.