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Independent Contractor vs. Employee

This is an age-old question that has been pondered by all employers, and previously by the British courts in the formulation of the precedents of Common Law. It continues to be a perplexing issue.

There are significant differences in the treatment of employees versus subcontractors for both tax and legal purposes.

From an employer’s point of view the benefits of using subcontractors rather than employees include the following:

• no E.I. cost

• no C.P.P. cost

• no payroll taxes to administer

• no WCB costs

• no T4’s to prepare

• no record of employment on cessation

• no vacation pay or statutory holidays to pay

• no overtime pay

• no benefit costs

• no termination costs

• no wrongful dismissal consequences

• no statutory termination notice period

• no union or collective bargaining

From the employees’ point of view, some of the benefits are:

• no E.I. premiums

• deductions for – vehicle expenses

• office expenses

• business expenses

• income “splitting” with spouses and/or children

• access to corporate  low tax rates

The benefits of an employment relationship from an employee’s point of view are:

• protection of rights under the Employment Standards Act

• protection against injury under the Worker Compensation Act

• protection against unemployment

• company paid benefits

• company contribution to C.P.P.

• overtime pay

• paid statutory holidays

• paid vacation

There doesn’t seem to be any benefits to an employer/employee relationship from an employer’s point of view.

CCRA will attempt to classify the relationship as employer/employee. This generally broadens the tax base and reduces tax leakage through aggressive expense claims and tax payment defaults.

Often a person in a subcontract relationship will incorporate to take advantage of low corporate tax rates. If CCRA later determines that the relationship is that of employer/employee the company will be deemed to be a Personal Services Business. It will have all of its expenses disallowed, except those normally afforded to employers (ie. Wages and benefits).  In addition, the company’s income will be taxed at the highest corporate tax rate  of 43% rather than the active business rate of 19.2%.

There are court cases which provide jurisprudence and some relief from Revenue Canada’s zealous actions.

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