24 July 2012 External T.I. 2011-0431601E5 - Employer/Employee Relationship

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 employer is required to withhold from payments made to an individual who is an employee?

Position: Yes

Reasons: Wording of the Act.

XXXXXXXXXX 2011-043160
Gillian Godson

July 24, 2012

Dear XXXXXXXXXX :

Re: Employer/Employee Relationship

We are writing in reply to your email of December 12, 2011, regarding the definition of an employer/employee relationship under the Income Tax Act (the “Act”). You also inquired about the requirements for an employer to withhold tax from payments to an employee and the associated reporting rules.

Our Comments

The term “employee” is not defined in the Act, other than to expand or clarify that for the purpose of the Act, an officer is an employee. Nonetheless, this does not mean that an employer can choose how to report payments made to its employees, or whether or not to withhold source deductions.

The determination of whether an individual is performing services as an employee or as an independent contractor is determined under common law (i.e. using criteria established by the courts) or, in the case of a worker in Quebec, using the rules in the Civil Code of Quebec. The pamphlet RC4110, Employee or Self-Employed, which is available on the CRA's website at http://www.cra-arc.gc.ca/E/pub/tg/rc4110 /rc4110-e.html, describes the factors used to determine whether a person is an employee or is self-employed.

In situations where an individual has been determined to be an independent contractor, there is, generally, no withholding requirement unless the person is a non-resident. However, any payments made to an independent contractor are required to be reported on a T4A. Please refer to the guide RC4157 Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary which is available at http://www.cra-arc.gc.ca/E/pub/tg/rc4157/rc4157-e.html.

In situations where the individual is an employee, there is a requirement to withhold income tax at source pursuant to paragraph 153(1)(a) of the Act. Part I of the Income Tax Regulations (the “Regulations”) sets out the rules for withholding. For more information on the withholding of income tax and other source deductions, refer to the document T4001 Employers’ Guide – Payroll Deductions and Remittances, which is available at http://www.cra-arc.gc.ca/E/pub/tg/t4001/t4001-e.html. In addition, the employment income is required to be reported on a T4, not on a T4A. Sections 200 and 201 of Part II of the Regulations set out the requirements for filing a T4 and T4A. For more information on the T4 reporting requirements, please refer to RC4120 – Employers’ Guide – Filing the T4 Slip and Summary, also available on CRA’s website at http://www.cra-arc.gc.ca/E/pub/tg/rc4120/rc4120-e.html.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch