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Many small businesses who are uncertain about their revenue and operational workload will avoid the fixed cost of adding employees by using contractors. When you pay someone as a contractor, you don’t have to set up a CRA payroll account, deduct EI and CPP from their pay or make employer contributions of EI and CPP. The contractor simply invoices you, and you pay the bill. It’s an excellent and simple way to add capacity to your team in a low-risk manner.
However, as your business grows, you may get to a point where a contractor is working almost entirely for you on a regular basis, and if you try to control how they do their work, you may find that the CRA will decide that an employment relationship exists. If they decide this, then it triggers the requirement for payroll, payroll deductions and employer contributions and the CRA can require you to cover both the employee and employer deductions for prior years.
Unfortunately, the line between employee and employer is not super clear cut, but the CRA looks at the following factors to make a judgement:
You should read their guidelines carefully and get expert advice to be sure. Making a mistake here could mean you are liable for all the employee and employer contributions for the periods in question – which could be a huge bill! You can request a ruling from the CRA on whether your contractor is actually an employee.
|Pay as Contractors||Pay as Employees|
|You are small or starting out and don’t know how much work you will have.||You know you have enough work to make a commitment to them.|
|Your staff do similar work for other companies, and that’s fine with you.||You want your staff to only work for you.|
|Your team all work very independently and might even hire assistants or sub-contract the work.||You want to build a team and assign managers (The government would see a manager as an employee).|
|You are fine to have a very hands-off approach to how exactly they do their work.||You want to have a high degree of control of how and where they do their work.|
|The tools of the trade are inexpensive or common, so it’s easy to find contractors with the appropriate tools, and it’s reasonable to expect them to provide their own tools and know-how.||The tools required are too expensive for contractors to purchase, or you will expect the employee to follow work processes specific to your operations.|
|The team member takes some degree of risk (makes an investment of time or resources) and has some opportunity to profit.||The team member takes less risk and has limited opportunity for profit.|
|You pay by the job (so the team member could earn a profit if they work very efficiently and they are also taking on some risk).||You pay hourly or a salary so the risk of underpayment or opportunity for profit is minimized.|
Contractors generally want to be contractors so they can write off expenses and lower their personal income tax. However, if a contractor works for you full time, you control how they work, you provide their tools and equipment, you take all the risk, they have no opportunity to profit, and if you ask them to manage other staff, then the government is likely to say that an employer-employee relationship exists.
We recommend that you consult with a lawyer to help with your contract for contractors or your employment agreement for employees, as the CRA will look at the written contracts as a factor in their ruling. We recommend Caravel Law, a virtual law firm based in Canada with a great track record of high-quality and cost-effective advice and service.
Just a reminder that we here at Back Office Stars are not lawyers, and you should not use this article as your only basis for your decision. The factors involved are very complex, so hire a lawyer and get expert advice to save yourself significant grief in the future.
Major advantages of having employees on payroll rather than contractors emerged during Covid. Government Covid subsidies were only available to businesses with salaried employees on payroll.
Due to the fact that more people on payroll means more EI and CPP funding for these programs, in all likelihood, any future subsidies provided by the government will be tied to salaried employees on payroll.
Since Covid, work from home has become the norm, and it raises a number of new questions on how the government will view employees vs self-employed individuals. Is a person working full time from their home for an hourly wage, using their own computer, but following operating procedures supplied by the company a contractor or employee?
If both parties want to maintain a contractor relationship, they will probably need to consider how to shift risk and opportunity for profit to the contractor, like paying per job, not per hour.