Employed or Self Employed
Now that the April 30th tax deadline is quickly approaching, a lot of individuals are wondering what they could have done to reduce the exorbitant amount of taxes they are forced to pay. One of the most effective ways of reducing the amount of taxes one pays is to become self employed (or an independent contractor).
Individuals that are self employed are allowed to claim a broader range of expenses than if they were employees. These can include: meals and entertainment, transportation (including air fare), newspaper and magazine subscriptions, cell phones, computers and even a portion of rent or mortgage interest. Some of these expenses would have probably been incurred whether or not one was self employed or an employee but if the expense in question was deemed to have been incurred for “business purposes” some tax relief can probably be derived from it. Unfortunately, CRA (Canada Revenue Agency) is quite well aware of this fact as well and as a result polices this classification rather strictly.
It is important to note that merely considering oneself self employed is not sufficient to qualify for the resulting benefits. Each situation is unique, and the nature of the relationship between the worker and payer are what is used to determine which employment classification applies. There are no hard and fast rules, however, there are generally 4 areas that are scrutinized: control, ownership of tools, chance of profit/risk of loss and integration.
Control refers to who dictates the time, place and manner in which work will be performed. An employer can control the way work is done, the methods used as well as the time frame within which it is to be completed. Conversely, in a business relationship (self employment) control usually rests with the worker in determining how the work will be completed.
Ownership of the tools may or may not be determinative of the relationship because in some trades it is common for employees to own their own tools. Generally, in business relationships the worker supplies the equipment and is responsible for its maintenance, upkeep and replacement. If the equipment is expensive or costly to maintain then the worker is more likely to be viewed as self employed.
In the area of risk of loss, if an employee situation exists, then the employer covers the operating costs. In contrast, in a business relationship the worker pays for costs and risks losses. A self employed individual does not have a guaranteed steady income.
The final factor generally considered is the integration of work performed by the individual. Where the worker integrates activities to the payer’s activities, acting on the payer’s behalf, then an employment situation probably exists. On the other hand, where the worker integrates the payer’s activities to his or her own, then it is more likely that a self employed situation exists.
It doesn’t matter very much what the worker and the payer call the relationship; what is paramount are the facts that support whatever claim is made. If one is currently employed in a position where there is a fair amount of independence from their employer, it may be advantageous to investigate whether they can change their relationship to become self employed. This change may be accompanied with the loss of some employee advantages like: the right to employment insurance benefits, the employer’s contribution to Canada Pension Plan and possibly all benefits (i.e. pension benefits & drug, health and dental plans).
It should not surprise anyone that self employment is currently the fastest growing segment in the Canadian labour market. The details of any self employed relationship should be documented carefully in case CRA challenges this claim in the future. Both parties need to know the status of the arrangement. The worker needs to know with some level of certainty how they will be taxed. The payer needs to know whether source deductions, payroll taxes and group benefits are due, and whether compliance with provincial employment standards acts is required. Assuming a self employed status can be costly for both the worker and the payer if that assumption is invalid. As such, professional advice may need to be consulted in order to ensure that this is not the case.
Troy Peart BBA, CFP, CFA can be emailed at http://troypeart@shaw.ca. Your questions comments or suggestions for future articles are encouraged
