Among the regulations enforced by the CRA is the difference between an independent contractor and an employee. Unfortunately, qualifying someone into one classification or another can be confusing, and if the Canada Revenue Agency determines that you have misclassified workers, there are repercussions for both your staffing firm and the worker. The key to staying on the right side of the CRA is to correctly identify when an independent contractor actually qualifies to be paid as such.
CRA Independent Contractor Re-classification
To figure out if you need to take care of CRA independent contractor re-classification, use the following four-point test to determine if you are paying independent contractors who would actually be considered employees.
1. Control. Who has control in the business relationship? In an employer-employee relationship, the employer determines the wage or salary, the time and place where the work will be done, and the manner in which the work will be done. In an independent contractor situation, the worker decides how, where, or when the work will be done and what the standards will be.
2. Tool and Equipment Ownership. Who pays for the tools and equipment? When employees work for employers, the employers provide tools and equipment, generally at the place of business. Independent contractors, however, supply their own tools, even if that means renting them. Independent contractors are also responsible for the maintenance and repair of their own tools.
3. Opportunity for Profit/Risk. Employees show up for work and get paid for the time they put in. They don't have to worry about the financials of the company they work for; they don't take risks, and they also don't reap the rewards of risk. Independent contractors run the risk of incurring losses due to delays, damage to tools, equipment and materials, and bad debt. Independent contractors also assume operating costs, which employees don't have to think about.
4. Integration. Another factor in CRA independent contractor re-classification is integration into the organization. The CRA states, "Where the worker integrates the payer's activities to his own commercial activities, a business relationship probably exists." Another way to put this is, "does the independent contractor have other clients besides the one in question?" If the worker has only one client for a long period of time, they may be re-classified as an employee.
After reviewing this four-point test, you may find that you need to take a closer look at your independent contractor classification process.
Why is it so important to get this distinction right? Because if the CRA re-classifies someone as an employee, you will not only have to pay back taxes for the length of their employment but could lose your good reputation in your client’s eyes in the process.
Financial Repercussions for the Employer:
- CPP and EI employer and employee contributions for both the current and previous year.
- 10% penalty on the total assessment as well as interest of approximately prime plus 1% from the date each of the contributions were due.
It's easy to see how these fines could severely impact all parties involved including your client. Qualifying independent contractors correctly from the get go is more important than ever as the CRA focuses its efforts on staffing firms who specialize in sending out those that are incorporated or are a sole proprietorship.
It's wise to establish and maintain a relationship with experts in the Canadian temp staffing industry like The Staffing Edge to keep you up-to-date on issues that may affect CRA independent contractor re-classification.