4.1 Why is it important to determine if someone is an employee or self-employed and how would CRA assess it?

It is important to determine if a person is an employee or self-employed because it directly impacts things like the kinds of deductions/expenses they can claim, contributions to Employment Insurance (EI), ability to claim EI benefits if unemployed, payments of amounts to the Canada Pension Plan etc.   If you are considered to be an employee, it is the employer who is responsible for deducting and remitting their employees EI premiums, Canada Pension Plan (CPP) premiums and Income Tax withholding.   One of the major benefits to self-employed individuals is that they have access to far more deductible expenses than employees.

How CRA assesses whether someone is an employee or self-employed

CRA has a two-step approach determining whether a person is an employee or self-employed:

Step 1: CRA tends to ask the intent of the worker and payer when they entered into the business contract, if it was an employee-employer relationship or business relationship. Sometimes it is very clear because both the parties have a written agreement documenting their working relationship. Both parties set up the terms and conditions through the written agreement. To decide the party’s intentions CRA keeps a copy of agreement or testimony and examines the actions taken by both parties.

Step 2: CRA ask the worker and payor questions about their working relationship.  Questions are related to the following elements (Factors to consider):

1. Level of Control the payer has over the worker
2. Tools and Equipment provided to, or by the worker
3. The ability of the worker to sub-contract to another worker.
4. The degree of financial risk the worker can take
5. The degree of responsibility the worker is allowed for investment and management
6. The worker’s opportunity for profit

CRA looks at the situational facts as a whole before assessing whether someone is an employee or self-employed. This determination can be very subjective and leads to lots of court cases.

References and Resources:

• Video — “Independent Contractor vs. Employee: What’s the Difference?” (Author: Canadian Employment Lawyer Lior Samfiru)
• Article — “Employee or Self-Employed?” (Author: Government of Canada)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.3.3