Employee vs. Independent Contractor

Employee vs Contractor

(Originally posted in the Fall 2014 edition of WB Condo Connection, Volume 6, Issue 3, with minor edits)

By: Jeff Lack, BAcc, CPA, CGA – VP, Communications & Administration

As most people are aware, residential condominium corporations in Canada do not pay income tax – they are registered as not-for-profit entities under the tax act thereby exempting them from paying federal and provincial income tax (assuming they maintain their not-for-profit status, which is a discussion beyond the scope of this article). However, that not-for-profit status does not exempt the corporation from having to follow the many other sections of the Canadian Income Tax Act. For example, the corporation must still file an annual tax return despite not being taxable.

Likewise, the corporation must continue to abide by the rules that pertain to employee vs. independent contractor status of the individuals that perform work on behalf of the condo. This is an important distinction to make for both the corporation and the individual performing the work as the difference influences many factors including (but certainly not limited to):

  • The corporation’s liability for employment benefit contributions;
  • Insurance; and,
  • How the worker is treated under the Canada Pension Plan and personal Income Tax rules.

From the Board of Directors perspective, improperly classifying and paying an individual as an independent contractor rather than an employee can have a significant impact if the corporation is audited. The Canada Revenue Agency (CRA) does perform audits for reasons other than income taxes and they may hold the condo responsible for un-remitted employment deductions, including the employer’s portion of CPP and EI. This may also then extend to related legislation such as WSIB and create significant liability for the corporation, not to mention the triggering of an audit on the individual’s personal tax return. From the individual’s perspective, there are advantages and disadvantages that exist in either case, whether the individual is considered an employee or an independent contractor.

So how should a condo corporation know whether an individual should be treated as an employee or an independent contractor? Unfortunately, it is not as simple as choosing whichever one the corporation (or the individual) wants. The factors that determine an individual’s status have been set by precedence in many previous court cases including 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983, 2001 SCC 59 in which it was stated:

“The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.”

The CRA has therefore developed four general tests to determine an individual’s employment status:

A. Control

  1. An employment relationship is indicated if the payer determines how, what, where and when work will be done.
  2. An employee often performs specific, recurring tasks (i.e. that could be outlined in a job description) and often has specific, but not necessarily regularly, scheduled hours.
  3. A self-employed individual is generally free to work when and for whom he / she wishes and usually works for more than one payer.
  4. The working relationship of a self-employed individual does not present a degree of continuity, loyalty, security or subordination.

B. Chance of Profit / Risk of Loss

  1. Self-employed individuals usually have a degree of financial risk and an opportunity for profit.
  2. Employees are not usually responsible for costs incurred, including insurance, where self-employed individuals are.

C. Integration

  1. Is the work an integral part of the normal activities of the corporation? If so, the individual is more likely to be considered an employee
  2. Employees report to a specific individual / group (i.e. the Board of Directors) within the corporation and have their performance reviewed.
  3. Employees are remunerated on a regular basis where remuneration for self-employed individuals is at risk based on performance.

D. Tools & Equipment

  1. Self-employed individuals usually provide their own tools and equipment and are responsible for their maintenance, as well as providing the materials and supplies used.
  2. Independent contractors are able to sub-contract and / or hire additional individuals to complete the work whereas employees usually can not.

As you may notice, the CRA has significantly slanted the rules to ensure that individuals are more likely to be considered employees than self-employed. The above are only some of the examples used and many more specific facts may be used by CRA to determine the actual relationship, however it should be noted that most commonplace attempts to create the appearance of an independent contractor relationship – such as issuing invoices, entering into a “service contract” etc. – when the above factors clearly indicate an employment relationship, have been tried in court and have failed.

Additional specific examples within condominiums that may indicate an employee relationship include submitting time sheets, providing building specific benefits such as reduced rent or common fees, providing regular pay increases or bonuses, and requiring vacation approval / tracking. Boards should also be careful when paying employees, for example Superintendents, for “extra” work such as weekend or after-hours coverage, additional landscaping or special cleaning / maintenance requests as CRA will very likely consider this to be overtime worked by an employee rather than payment to an independent contractor.

It is almost impossible under the existing rules to have an individual work as both an employee and an independent contractor during the same time period for the same payer. As such, regular payroll withholdings should be applied to these extras rather than being paid separately to ensure compliance with the Income Tax Act and employment laws.

You may wish to take a moment to consider the individuals working within your condo community and ask yourself “Based on the criteria set out by CRA, is this individual truly an employee or an independent contractor and are we as a Board of Directors following the proper procedures in paying this individual in order to comply with legislation and reduce any potential risks to the corporation?” And if you’re still not sure, it may be wise to speak to your auditor for additional guidance and advice.