Hmmmm, common-law for income tax purposes?  This question has been posed to me countless times over the years.  It has been an area that has been a point of contention for many.  The long and short of it is that it is NOT an option, if you are, then you MUST file that way. In an April 11, 2011 Technical Interpretation, Canada Revenue Agency (CRA) notes that a “common-law partner” means a person who cohabits in a conjugal relationship with the taxpayer and, either has cohabited with the taxpayer for a continuous period of at least one year, or is considered to be a “parent” of a child of whom the taxpayer is also a parent.  This is relevant for income tax and other purposes.  Among other things, the main reason the CRA gets so worked up about this is generally because when a child is involved, there are claims for tax credits that are made which benefit the taxpayer which should not be claimed if in a common-law relationship.  What people fail to realize is that there are benefits to filing together as well, such as the establishment of your relationship for tax-free rollover of assets upon death and other aspects not always commonly known.  If you are at all unsure as to the nature of your relationship for tax purposes, get advice.  Staying on the right side of the CRA is in your best interest!

I get this question asked of me alot, “Am I an employee or a subcontractor?”.  Like many things in life, this is not a simple answer.  There are many factors to consider when determining this status for yourself or for someone working for your company. The Canada Revenue Agency expects each individual to understand the differences before making a decision.  Following are some cases that recently went through the Tax Courts of Canada.

Case 1 – Independent Contractor

In an October 22, 2010 Tax Court of Canada case, given the clear shared common intention to be a subcontractor between the payer and the workers, the Court found that the workers wereindependent contractors, not employees.

Case 2 – Independent Contractor

In an August 31, 2010 Tax Court of Canada case, the issue was whether the salesman was anindependent contractor or engaged in employment income.  The Court concluded that the salesperson was an independent contractor and noted that:

1.    The worker had signed Written Agreements with the Appellant when he began his working relationship on the basis that he was an independent contractor.

2.    The facts that apply in respect to establishing control, ownership of tools, possibility of profit, risk of loss, and integration show that the worker was an independent contractor.

3.    No controls were exercised on his services and the worker had the opportunity to make a profitand took on a risk of a loss.  He provided his own work tools and his own equipment.  He had no job security and was free to accept other employment or contracts while engaged.

4.    The test of intent also indicates that the worker was an independent contractor.

Case 3 – Independent Contractor

In a November 16, 2010 Tax Court of Canada case, the Court found that the workers wereindependent contractors, not employees, and noted that:

1.    A mutual intention to create an independent contractor relationship indicates that the individuals were independent contractors, not employees.

2.    The workers were able to set their own hours of work, although within certain limits.

3.    The workers were able to work for other clients without consent of the payer.

4.    The workers used their own vehicles to pick up supplies and charged an hourly rate for the use of their vehicles.

5.    The workers carried on their business under a business name, for example, “Cleaning with Care”, and had their own liability insurance coverage.

Case 4 – Employee

In a November 22, 2010 Tax Court of Canada case, the Court found that the workers wereemployees and noted that:

1.    The parties did not share a common understanding that the worker was to be self-employed and not an employee.  Where the intention of the parties cannot be ascertained, it is necessary to look at all the facts to see the legal relationship.

2.    The payer provided all the tools and equipment, except for a keyboard.

3.    The worker had no responsibility for investment in management.

4.    The worker had no expenses and no liability exposing her to a risk of loss and there was no opportunity for her to increase her income.

5.    The worker received instructions and directions from the payer on a daily basis.

If you would like assistance with understanding the differences between employee and subcontract work, contact our office at 1-877-826-1219 or visit us on the web at http://www.leskunaccounting.com

O Canada, we need help with the rules!