Employment – Page 4 – Doug Carroll

Employee or independent contractor

At issue

The distinction between being treated as an employee or independent contractor is a frequently contended issue between taxpayers and the Canada Revenue Agency (CRA), and in turn a matter that often proceeds to court. It has implications on both sides of the contracted relationship, including:

Tax rates and reporting obligations of the respective parties,
Generation of RRSP contribution room,
Premium obligations for employment insurance and Canada Pension Plan, and entitlement to associated EI and CPP benefits,
Requirement to collect, report and remit GST/HST, and
Entitlement to and constraints upon tax deductions.

Though independent contractor characterization may more often be viewed from the working party perspective, it may also affect tax cost and administrative burden to the otherwise employer party. Furthermore, that working party may be able to receive payments through a corporation, enabling a greater degree of flexibility in ultimately distributing net receipts into personal hands.

But being treated as employment or an independent contract is not merely a matter of the parties saying so. The CRA or the courts may concur, but often will see it otherwise.

Gomez Consulting v. R., 2013 TCC 3

Gomez Consulting provided information technology (IT) consulting services to two federal agency clients: the Canada Revenue Agency and the Canada Mortgage and Housing Corporation (“the Clients”). In reporting its taxes for the relevant years, it claimed entitlement to the small business deduction, as well as certain deductions in calculating its tax liability.

On reassessment, the Minister of Revenue treated the corporation as a personal services corporation, but for which Mr. Luis Gomez Almeida (shareholder and employee of Gomez Consulting) was simply an employee of the Clients in his personal capacity.

In appealing the reassessment, Gomez Consulting relied heavily on the intentions of the parties, suggested to be inferred in part from the business contracts. As well, another IT consultant was called as a witness, testifying that he had been recognized as an independent contractor by the CRA appeals division.

The judge reviewed and adopted the position of a number of cases expressing the view that intent is not a relevant consideration in the personal services business analysis. On the facts, given the hourly pay rate, provision of tools and work space, and requirement to complete the work personally, the judge concluded that it was a personal services business. Small business rate and all deduction claims denied.

Wiebe Door Services Ltd v. M.N.R., 87 DTC 5025

This is the oft-cited and followed case from the Federal Court of Appeal that lays out a test for determining whether a person is an employee or an independent contractor.

The case was cited with approval by the Supreme Court of Canada in 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. The summary in this latter case affirms that each situation must be evaluated on its own facts, within a framework that considers:

Control the employer has over the worker’s activities,
Whether the worker provides his or her own equipment,
Whether the worker hires his or her own helpers,
Degree of financial risk taken by the worker,
Degree of responsibility for investment and management held by the worker, and
Worker’s opportunity for profit in the performance of his or her tasks.

Though detailed, this is not necessarily an exhaustive list, and the weight to be accorded to each factor depends on the facts in issue.

Practice points

Facts matter, and substance trumps form. Where an employment arrangement is dressed up to appear as something else – whether intentionally or inadvertently – the tax system will inquire and attempt to treat it in accordance with its true nature.
Whether or not rendered into a written contract, the intentions of parties may very well bind them vis-à-vis one another. The parties should not however assume that this will thereby bind the taxing authority.
The interposition of a corporation as the working party contractor in no way assures availability of the small business rate and deductions. The personal services business rules may apply as a look-through to effectively treat the individual as an employee.

Deductibility ‘up in the air’ – A commuting pilot’s predicament

As I was just this morning discussing with a colleague, commuting can be logistically cumbersome, not to mention time-consuming. In my case, it’s 3 to 4 vehicle transfers depending on direction and departure time. As importantly, commuting costs can be, well … costly.

So if those costs can be characterized in such a way as to be deductible, that could alleviate some of that burden. For Ian Brown, a pilot with 2,500 kilometres from home in Calgary to his home base tarmac in Los Angeles, that would be welcome relief indeed to the tune of over $16,000 for the two years in issue.

The long commute

Mr. Brown was a captain with Cathay Pacific Airways, most often flying the route between Los Angeles and Hong Kong. In order for him to have lived in Los Angeles, he would have required employer sponsorship to qualify for a United States Green Card or alternatively a visa under the Diversity Visa Program. At the time, Cathy Pacific did not provide such sponsorship.

The airline did have home bases in Vancouver and Toronto, but Mr. Brown did not have sufficient seniority to qualify to work out of either of those locations. Presumably he would have been willing and able to move domestically to the designated location if he had qualified.

As it was, Mr. Brown traveled to Los Angeles, conceding to the judge in the course of this informal procedure at the Tax Court that these were commuting costs in order for him to get to his place of employment.

Deductibility of travel expenses

Section 8(1)(h) of the Income Tax Act allows for the deductibility of travel expenses where an employee:

was ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in different places, and
was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment.

The cost of getting to and from work is not deductible.

In search of an exception

The judge considered whether the immigration restrictions might provide Mr. Brown with an exception to the commuting rule. His contention was that he had no choice but to live in Canada. While acknowledging the predicament, the judge nonetheless found that it remained a personal choice, and further that as he performed no employment duties during the course of the commute, this avenue was not available to him.

Mr. Brown’s last chance was to ask the court to follow an earlier judgment of the Tax Court that allowed a pilot in a similar situation to deduct travel costs to reach a home base destination outside of Canada.

Unlike informal procedure hearings (such as the one being presently heard), the referenced case was conducted under the general procedure, and therefore had potential precedent value. Unfortunately the reported case was simply a consent judgment endorsing an agreement reached between the taxpayer and the prosecuting Crown counsel. Without the opportunity to review any judicial analysis nor even to have the benefit of an explanation of the Crown’s rationale for the consent, the judge was unwilling to allow Mr. Brown’s appeal.

Saving when downsized – Choosing between RRSP and TFSA

An old friend was let go from her employment just before the summer. It came as a shock, even though the company warned staff about headcount concerns in the continuing sideways economy.

While her ego was bruised, her skill set remained intact and she had access to immediate outsourcing support. But with the summer ahead, she wondered how soon she would get back to work, assuming that the job market would be sluggish for the season.

Savings options for terminal pay

Meanwhile, she hadn’t even received her final paycheque. The company offered to have a portion of the terminal pay directed to her group RRSP, but needed her instructions soon. This only added to her stress.

She had three choices:

To allocate a dollar to RRSP, meaning a full payroll dollar was invested immediately.
She could invest in her individual RRSP using after-tax funds (though the contributed amount would be deducted from income when filing her taxes).
She could invest those after-tax funds in a tax-free savings account (TFSA). Then there would be no further implications at tax-filing time.

Funding an extended absence

What if my friend was right about the summer job market? What if she couldn’t find a suitable position as the fall months rolled on? Without an emergency fund, terminal payments earmarked for savings could be needed for current expenses.

Suppose she chose the RRSP route. As she would be subject to withholding tax (see table, “Withholding tax rates”) on a withdrawal from an RRSP, she would have to withdraw an amount greater than her specific need to net down to the necessary spendable cash. In the extreme, she would have to withdraw more than the original contribution to return to her initial cash position.

Even worse, she would still pay tax on that RRSP draw if the withholding tax fell short of the actual tax due when she files her tax return. And what if she continued to be on the job hunt into the new year? On top of that, the exhausted RRSP room is non-recoverable.

This situation is ideal for using a TFSA for at least a portion of the savings allocation. If unemployment continues, then a withdrawal is less complicated and less costly. There is no withheld or outstanding tax, and the withdrawal amount is a credit to future TFSA contribution room.

And if she is back on the job sooner than expected — as she is, by the way — she can transfer TFSA savings to her individual RRSP, once she’s comfortably settled into her new position.

Table: Withholding tax rates for RRSP/RRIF withdrawals

Amount General Quebec

Up to $5,000 10% 21%

> $5,000 to $15,000 20% 26%

> $15,000 30% 31%