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CPA

Contractor or Employee? Learn the Difference

Businesses must differentiate between contractors and employees to create accurate tax assessments. The Canada Revenue Agency (CRA) has specified criteria to determine an individual’s status as an employee and contractor as each of them has different tax implications. Companies prefer hiring contractors as it saves them from tedious paperwork and money as, unlike employees, they don’t receive benefits or pensions.

Let’s compare and contrast between contractor and employee using the four-point test used by CRA to help you make informed choices:

 

Contractor or Employee—The Four-Point Test

 

Contractors and employees differ in several ways, but they also share many similarities that can blur the lines. The four-point test is based on four factors: ownership of tools, control, integration, and economic reality. It allows Canadian businesses to differentiate between the two options to ensure accurate reporting and tax filing.

 

Control

 

The test evaluates the ability of the company to control the individual’s actions. An employer retains the right to hire and fire an employee, dictate salary, and decide work timings and work processes. When working with a contractor, the control is limited, and an individual is engaged in achieving a defined objective.

 

A builder carrying construction equipment on his shoulder.

 

Ownership of Tools

 

Employees are provided equipment and tools by the employers to carry out their job. Contractors, on the other hand, buy their tools. Bring-your-own-device (BYOD) policy doesn’t change employee status as a contractor. But, when workers buy expensive equipment to perform the job, they’re more likely to be classified as contractors.

 

Integration

 

Integration refers to an individual’s degree of involvement in the commercial activities of an organization. If the work carried out by an individual can be viewed as a separate business of the individual rendering the service, they’re probably contractors. Where the individual integrates their activities to an employer’s business, an employee relationship probably exists.

 

Economic reality test

 

There is an inference of employment when an individual doesn’t share the profit or loss. On the other hand, if the individual is ultimately responsible for the profit or loss, it would indicate a contractor situation. As a general rule of thumb, an individual not responsible for covering the operating costs will probably be classified as an employee.

If you’re looking for full-cycle accounting services in Edmonton, get in touch. At Duggal Professional Corporation, we offer various financial services and solutions, including accounting, business reporting, taxation, and consultancy, at affordable rates. Call 780-863-2224 today to get started.