In Canada, there are no hard and fast rules in the Tax Act that help an individual determine whether they are an employee or an independent contractor. There are three tests, which have evolved through court decisions, that are used to assess the relationship between an individual and his/her employer. They are:

1. Economic reality or entre­preneur test
2. Specific result test
3. Organi­zation or integration test

Why is this important? Well, if you’re a contractor, or self-employed, you can deduct any reasonable expense incurred to earn income. There is a distinction in the Tax Act between the type of income earned depending on whether you’re self-employed or not. If you’re self-employed, you earn business income as a sole proprietor. If you’re employed, you (of course) earn employment income and are restricted in the types of expenses you can deduct for tax purposes.

An employer is also required to withhold income tax, Canada Pension Plan contri­bu­tions and Employment Insurance premiums from their employees’ pay. If you’re a contractor you’re likely required by the CRA to make tax install­ments since no one is withholding for you your contri­bution to the treasury on a regular basis. (The issue of install­ments will be covered in a future blog post.)

But back to the tests.

Economic reality or entre­preneur test

There are three aspects to this test: control, tool ownership, chance of profit/risk of loss. If someone is not only telling you what to do but how to do it, they have control over the work and a strong case is made that they are your employer. If you own the tools you need to do the job and they are not provided to you, this points to the likelihood that you are independent. Finally, if you are profiting from the work and bearing the risk of loss due to cost overruns, it is even more likely you are a contractor.

Specific result test

If there is a defined piece of work you’ve hired to do and you’ve been given the freedom to accom­plish it however you see fit, the employer-employee relationship likely does not exist. As an employee you’re typically hired to perform tasks with no specific result and on an ongoing basis. If there is a defined beginning and end to the work required, that’s a pretty good indicator you’re self-employed.

Organi­zation or integration test

This test concerns itself with the depen­dence of the individual on the organi­zation. If benefits ordinarily conferred on employees are available to the individual, then from the outside (i.e. the CRA) it appears the individual is an employee. In certain cases the proportion of an individual’s total income which comes from a single organi­zation has been taken into consid­er­ation as well, although personally I don’t think this is partic­u­larly convincing metric.

To sum up: There is no specific section of the Act that lays out all the rules to help a taxpayer determine if he/she can deduct expenses from their income. The law has evolved through court decisions and they have been based on the above three tests, which should all be taken into consid­er­ation along with the specific facts of the situation.

As with any general tax discussion, your personal situation is unique and could require the expertise of a Chartered Accountant. If you need a CA, please contact me and I will be happy to help you find one in your area!