26 February 2002 External T.I. 2002-0122735 - EMPLOYEE VS SELF-EMPLOYEED CONTRACTOR

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether an individual is an employee or self-employed contractor in certain non-arm's length situations.

Position:

General information provided on four criteria used in such a determination; referred taxpayer to RC4110; and suggested they contact the Trust Accounts Division of the local TSO for a formal ruling.

Reasons:

Consistent with most recent opinions on this issue.

XXXXXXXXXX 	2002-012273
		Randy Hewlett, B.Comm.
February 26, 2002

Dear XXXXXXXXXX:

Re: Employee or Self-Employed Contractor

We are writing in response to your letter dated February 11, 2002, wherein you requested information on the criteria used by the Canada Customs and Revenue Agency (CCRA) to determine whether an individual is an employee or self-employed contractor in certain non-arm's length situations, as follows:

(a) Mr. A is working for Mr. A's corporation,

(b) Mr. A's spouse is working for Mr. A's corporation, and

(c) Mr. A's spouse is working for Mr. A.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Whether a person is an employee or a self-employed contractor is a question of fact, which can only be determined with an appreciation for all the circumstances of a particular situation. Many factors must be taken into consideration in establishing whether or not there is an employee-employer relationship. One key factor is the determination of whether the contract between the parties is a contract of service (employer-employee relationship) or is a contract for services (self-employed contractor). Generally, a contract of service exists if the person for whom the services are performed has the right to control the amount, the nature and the management of the work to be done, as well as the manner of completing the work. A contract for services exists when a person is engaged to achieve a defined objective and is given all the freedom required to attain the desired result.

The courts have established a series of tests to determine whether a particular contract is a contract of service or a contract for services (see, for example, the decision by the Federal Court of Appeal in Wiebe Door Services Limited v. The Minister of National Revenue -1987 DTC 5025).

These four tests are as follows:

(a) Control Test - The objective of this test is to assess if the individual is limited or restricted under a "master-servant relationship". It recognizes that in most cases, the degree of control an employer has over the employee is greater than it is in an independent contractor relationship. For instance, in an employee-employer relationship, the employer can order or require not only what is to be done, but also how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

(b) Integration Test - This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business. Under a contract for services, although the work is done for the business it is not integrated, but only accessory to the business.

(c) Economic Reality Test - This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business independently or working for someone else. The objective of the test is to verify the existence of various factors of an economic nature and, using these factors, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

(d) Specified Results Test - This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases and it does not usually require that a particular individual carry out the undertaking. In contrast, in an employer-employee relationship, the employee makes himself or herself available to the employer, to be used by the employer without reference to a specified result.

The contract between the parties, which sets out the rights and obligations of each of the parties, provides important information in determining the type of relationship that exists. However, even more important than the contract is the actual circumstances surrounding the performance of services and whether such findings of facts agree with what is stated in the contract. It is also important to note that not all of the foregoing tests will be relevant or have the same degree of importance in varying situations. Moreover, no single test will in all circumstances be viewed as conclusive.

The CCRA has published a pamphlet, entitled Employee or Self-Employed? (RC4110), which contains information that will provide assistance in determining whether or not an individual is an employee or a self-employed. It does not replace a formal ruling, which should be obtained from the Trust Accounts Division of your local Tax Services Office. This publication can also be found on the CCRA website at http://www.ccra-adrc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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