1 March 2004 Internal T.I. 2003-0053821I7 - Employee vs. Contractor - Shareholder

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.

Principal Issues:	Whether an individual, who is a shareholder of a
		corporation, is a self-employed contractor or employee
		in a situation whereby the individual enters into an
		arrangement to provide services to the corporation.

Position:	The determination is a question of fact.  General
		information provided on criteria used to make such a
		determination, as well as comments on "personal
		services business".

Reasons: Consistent with other opinions on this issue.

	Edmonton Tax Services Office	HEADQUARTERS
Mr. John Kanis	Bob Naufal, CMA
	Client Services Division	(613) 957-2744

		2003-005382

Individuals subcontracting to their own corporations

We are writing in response to your email of December 18, 2003 wherein you asked for our views on whether an individual shareholder of a corporation, who enters into an agreement with, and provides services to the corporation, would be considered to be providing such services as a self-employed contractor or as an employee.

Employee or self-employed contractor

Whether a person is an employee or a self-employed contractor is a question of fact, which can only be determined following a complete analysis of the circumstances of a particular situation. Many factors must be taken into consideration in establishing whether or not there is an employee-employer relationship. Moreover, no one factor in and of itself, will result in the determination of the 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, [1986] 2 C.T.C. 200, 1987 D.T.C. 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.

Further information on this matter can be obtained from the pamphlet entitled Employee or Self-Employed? (RC4110). If you have questions on a specific matter with respect to the determination of an employment status, please contact the CPP / EI Eligibility Division of the Assessment and Collections Branch.

Personal services business

In general terms, subsection 125(7) of the Income Tax Act (the "Act") defines a "personal services business" carried on by a corporation, to be a business of providing services in circumstances where the shareholder (the "incorporated employee") of that corporation would, if it were not for the existence of the corporation, reasonably be regarded as an officer or employee of the entity to whom the services were provided. However, if, in the absence of the corporation, there would be no common law master-servant relationship and the individual who undertakes to perform the services would be viewed as a self-employed individual carrying on a business, the individual would not be considered to be an incorporated employee.

A corporation, which carries on a personal services business, is not entitled to the "small business deduction" in respect of the personal services business. Moreover, paragraph 18(1)(p) of the Act generally limits the deductions allowed by the corporation, in computing income for a taxation year from a personal services business, to wages and benefits paid to the incorporated employee, certain expenses of the corporation associated with selling property or negotiating contracts that are ordinarily deductible from employment income, and amounts paid for legal expenses incurred by the corporation in collecting amounts owing for services rendered.

Should you have any questions regarding GST matters relating to your issue, please contact the Excise and GST/HST Rulings Directorate of the Policy and Planning Branch.

We trust our comments will be of assistance.

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate