As an employer bringing in sub-contractors can allow you greater flexibility and control over costs but many employers are erroneously categorizing employees as sub-contractors exposing themselves to liability under the Income Tax Act and other statutes and regulations.

There are times that the relationship is clearly one of a business relationship rather than one of employee-employer. Quite often it's not so clear cut, to help you arrive at the correct answer Canada Revenue Agency has set out a number of factors that make that determination (see their web site for a copy of the publication RC 4110).

Control

Generally the payer exercises control if he or she has the right to hire or fire, determines the wage or salary to be paid, and decides on the time, place and manner in which the work is to be done.

If it is obvious that the payer controls the worker's activities, it is highly indicative of an employee-employer relationship.

Ownership of Tools/Equipment

Generally an employer provides and maintains the tools and/or equipment that an employee needs to perform his or her assigned tasks. There are some notable exceptions such as mechanics, carpenters, painters and similar trades where it is customary for the employee  to supply her or her own tools.

In a business relationship it is customary for the self-employed person to supply his or her own tools and equipment and to assume risks associated with ownership.

If the payer supplies all of the tools and equipment needed and assumes the risks associated with ownership it is indicative of an employee-employer relationship

Chance of Profit / Risk of Loss

Generally, in an employee-employer relationship the employer alone assumes the risk of loss, the employee does not assume any financial risk and is entitled to his or her full salary or wages regardless of the financial health of the company.

In a business relationship, the self-employed individual may make a profit or incur a loss and covers his or her own operating costs. There is no guarantee of steady income as he or she is responsible for securing clients and work.

Unless the relationship is obviously a business one (your accountant, lawyer and management consultant etc) it would be prudent to apply to Canada Revenue Agency for a ruling. Complete form CPT1 (available as a PDF file on CRA's web site).

General

If you are treating an individual as a self-employed person you should require them to submit invoices detailing work completed, computation of amount (hourly rate, piece work etc) and containing either their SIN or GST number if a registrant. It is also prudent, but not required yet unless you're in construction, to issue a T4A slip reporting income to CRA.

Please note that, in Ontario, you are also responsible for WSIB premiums on payments made to sub-contractors unless they carry their own coverage (request a clearance certificate) or their earning would not normally be insurable. For more information please visit http://www.wsib.on.ca

For more information please call (613) 727-3845 or e-mail: info@robertson-sharpe.com