How to distinguish between subcontractors and employees

Determining whether or not to withhold source deductions from a worker’s pay can be a daunting task and one that should not be taken lightly. There are a plethora of conditions that the courts use to determine whether a worker is a subcontractor or an employee. That being said, the courts seem to have developed four traditional tests to help distinguish between the two. They are: Control, Ownership of tools, Chance of profit or loss, and Integration.

Unfortunately there are no clean cut answers as every case is different; however here is a non-exhaustive list of points to consider when making your decision:

 -Who owns the equipment being used?

-Who pays for the overhead expenses?

-Does the worker deal with other businesses?

-Who bears the risk for profit or loss?

-Are there set hours of work for the worker?

-Who decides on time frames?

 

If trying to make an argument that the worker is a subcontractor and not an employee, make sure to have proper written contracts in place prior to starting the work and ensure that an invoice is prepared for the work performed.

 

If CRA performs a payroll audit and determines that one of your subcontractors should have been paid as an employee, they will likely charge a penalty and interest over and above collecting the source deductions for Tax, CPP, and EI for the past three years. If the worker owes additional tax over and above the tax withholdings that were required, CRA may go after the employer to collect these additional tax amounts.

 

 

 

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