Q: This week, I received a notice of re-assessment from the Canada Revenue Agency (CRA) for my 2004 and 2005 personal income tax filing. CRA claims an audit was performed on the large pharmaceutical company I worked at and must report the earnings as employment income, not as self-employment income. Due to bureaucracy, I was initially hired as an independent for the latter half of 2004 and the first half of 2005. Eventually, the company began to withhold payroll deductions. Why am I being penalized for this?
A: As an employee or self-employed, we all share a common partner, CRA. Whether we like or not, taxes are what we pay for the privilege of a democratic society. CRA frequently audits corporate payrolls and often discovers payments to consultants that may or may not be independent contractors for tax purposes.
Basically, an individual that works for one company, at hours specified every day for a fixed amount, would be considered an employee. Comparatively, an individual that provides services to several companies using his/her own expertise, independently prioritizes the work and degree of service, would be considered self-employed. However, it’s not always that simple. Here are some basic guidelines:
The control test: Who determines when, where and how the services are to be performed. An employer would generally dictate the times, place and how services are provided.
The specific result test: This test makes a distinction between “contract of service” and “for service.” The former is considered an employee and the latter self-employed.
The integration test: This determines if an individual is an integral part of the company and is therefore an employee. If you participate in all company events and are treated like any other employee, then you would be considered an employee, regardless that payroll deductions were not withheld at source.
The economic reality test: Self-employed individuals bear economic risks such as financing equipment and tools, hiring help to operate the business and obtaining sufficient clients to succeed in the business. An employee does not bear that kind of risk.
Every situation is different: check with your accountant or lawyer.
Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304.