Legal Status for your Service Providers on your On Demand App
Are Your On-Demand Service Providers Employees or Contractors? The difference between the two can have a huge impact on Canadian income tax if service providers and the app owners think they are contractors and the Canada Revenue Agency (CRA) decides otherwise. Let’s take a look at how the CRA determines which is which.
When possible, structure your platform to hire service providers as independent contractors. It is the preferable arrangement for both parties for a number of reasons:
- When hiring an independent contractor, you don’t have to do payroll, withhold income tax or pay the employer’s share of Canada Pension Plan (CPP) or Employment Insurance (EI).
- When you hire a contractor, it is assumed that he/she is proficient at the required task.
- Employing contractors rather than employees gives you much more flexibility to terminate relationships without concern legal notice of termination requirements.
- Tax deductions are a big tax advantage for the independent contractor because employees are generally not allowed to deduct business expenses from their employment income.
So businesses hiring contractors can be a good deal for both sides. But if you hire a contractor who is later deemed to be an employee, you both lose:
- You will have to remit unpaid taxes and may be subject to penalties.
- CPP and EI premiums will all have to be paid by both parties.
- The contractors business expense deductions will have to be repaid.
Determining whether a relationship is one of employment rather than a business relationship is not always a clear. You must do what you can to protect independent contractor status by making sure it passes the Fourfold Test.
The Fourfold Test for Determining Contractor Status
The Fourfold Test is the standard that the Canada Revenue Agency uses to determine which type of relationship exists. It is based on four key points; control, ownership of tools, the chance of profit/risk of loss, and integration. Let’s examine them below.
The primary issue here is who’s directing and controlling the employee or contractor’s work. Does the employer have the right to hire or fire, determine pay salary and decide when, where and how the work is to be done? If so, an employment relationship likely exists.
Conversely, in a contractor relationship, the worker decides where, when and how the work will be performed. If you can show the contractor was responsible for planning the work to be done, choosing the hours of work and setting the standards to be met, you’ll have a much better chance of establishing independent contractor status.
- Ownership of tools
Contractor typically supply their own tools, but employee do as well. The CRA typically looks to the cost of supplying those tools and who bears that cost to determine this test.
- Chance of profit/risk of loss
This test examines the employee’s or contractors on your financial involvement.
- Do they have a chance of making a profit
- Do they bear a risk of incurring losses due to bad debts, damage, delays etc…?
- Do they bear operating expenses?
Is the worker performing the same work as the payer of the work or performing different work entirely? Where the worker integrates his activities to the commercial activities of the payer, an employer-employee relationship probably exists.
One strong way to establish a contractor relationship is through freelancing – i.e. the contractor who only has one client looks like an employee.
Having a carefully crafted written agreement addressing the fourfold test where possible and setting out the intentions of the parties may also offer additional protection.
Some cases view incorporation as a strong indication of independent contractor status, but it isn’t proof of a business relationship in itself – i.e. if you are incorporated, but working exclusively for a single employer and performing activities that an employee would normally perform, an employment relationship could be found.
Safeguard Contractor Status
Take what measures you can to ensure status as an independent contractor because of the serious effect having the CRA declare employment status could have on your service providers’ income taxes and your ensuing withholding responsibilities.