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One of the most difficult issues for Freelancers or Contractors as well as the Client who hires them, is the distinction by CRA as well as the Provincial Ministry’s in your respective areas as to whether or not you qualify as a Contractor in business for yourself or are deemed an Employee.  The CRA

has become more diligent in their targeting of contractors and have been known in recent years to recalculate prior years Tax returns.  There are benefits for both parties of this Business relationship so if due diligence is administered when negotiating your contract, if and when the CRA come calling, you should sleep easy!

There are four determining factors that CRA and the Ministry looks at for this determination:  

1. Control CRA refers to control by the Client as the ability, authority or right to exercise control over how and when the Contractor performs the functions of his/her contract and what is to be done to obtain the desired result. A few questions to ask yourself are: Is the relationship of Client to contractor, one of subordination, does the time spent at the Contractor take priority over other clients, does the Contractor require in-depth training, can the Contractor refuse work from the Client.

2. Ownership of Tools and Equipment:  Mere ownership of a Laptop to be used on site doesn’t necessarily satisfy this requirement.  Machinists and Auto Mechanics are often required to supply their own tools so care must be taken to ensure this criterion is met.  Be sure to indicate in your contract that you (the Contractor) are responsible for repairs and maintenance, insurance and any costs related to those tools.  Another idea is to negotiate into your contract that you will perform some of the work from your business office away from the Clients location and stipulate that any costs associated with that office are at your expense.  The investment in the equipment must also be substantial-not merely a few tools of the trade and the contractor has full control over the use of the equipment.

3. Responsibility for Investment and Management:  You will need to have an established business presence ie: registered with CRA, a website, a business address, other Clients, etc. If you have paid staff, CRA looks at this favourably as qualifying you as a contractor.  A Capital investment made in your business is another area that CRA takes into account.

4. Opportunity for Profit: The Contractor has an opportunity to do work more than one client.  The Contractor also negotiates his/her scale of payment.  A suggestion is to negotiate a flat rate (without re-imbursement for expenses) for the contract regardless of time spent-this is an indicator to CRA that a business relationship exists not an Employee/Employer.

A written ruling can be obtained from CRA prior to beginning the business relationship by submitting form CPTI at http://www.cra-arc.gc.ca/forms. 

If these issues are ignored, it can be as costly oversight both for the Contractor and Client.  The Contractor will not be entitled to business deductions and will have to pay tax on the Gross amount of the contract, Employee portions of CPP and EI etc.  Clients are sometimes hesitant to get into an Employee/Employer relationship with the costs and liability involved and will be forced to sever the relationship.  They will also have the increased cost of EI, CPP and Health tax depending on the respective Province where the contract has taken place.

For information on this issue, visit http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-06e.pdf for Canada Revenue Agency, http://www.fin.gov.on.ca/english/tax/bulletins/eht/0196.html for Ministry of Finance, Ontario.  For other provinces, please visit their respective websites.  General rule of thumb is that a CRA ruling holds precedence so if your contract satisfied the CRA, you should be safe but a little research would go a long way!