Employee or Independent Contractor
Income from an office or employment is determined by different rules than those applicable to determining income from a business or property. Differences arise as to the availability of deductions, the time of recognition of income, and the “taxation year”. Therefore, it is of importance to a taxpayer to determine whether his or her income or some portion thereof is from an office or employment or from a business or property.
There may be difficult cases where it will be necessary to determine the answer as a matter of fact, having reference to the definitions referred to above and the common law as to whether the income in question is from an office or employment or from business carried on by the taxpayer as an independent contractor. For example, in some circumstances it may be difficult to determine whether a commission agent receives income from an office or employment or from a business carried on by himself or herself. A similar problem frequently arises with entertainers and musicians. [Interp. Bul. IT-525R - see below]
Under the common law dealing with master and servant relationships, the general test to be applied is the nature and degree of control over the person alleged to be the employee. In addition to the control test, there are three other tests which courts have developed to ascertain whether a taxpayer is an employee or an independent contractor. These are:
(a) the integration test;
(b) the economic reality test; and
(c) the specific result test.
Under the integration test, distinction is made between a contract of service and a contract for service. In the former situation one is employed as part of the business and work is done as an integral part of the business. In the latter situation, the taxpayer's work, although done for the business, is not integrated into it but is only accessory to it, and therefore the taxpayer is an independent contractor. Using this test, part-time lecturers and teachers who do not appear to be under the direct control and supervision of the educational institution have been found to be employees. [Rosen, 76 DTC 6274, Hecht, 80 DTC 1438.]
Under the economic reality test, the courts have determined that a person who is in business as an independent contractor runs the risk of financing equipment, supplying the help necessary to operate and administer the business, and having to ensure that there are sufficient clients to render the business economically viable. [Hauser, 78 DTC 1532, Alexander, 70 DTC 6006.]
With respect to the specific result test, the courts again make a distinction between a contract of service and a contract for service, the former indicating an employer–employee relationship.
The courts have recently stressed the importance of examining the facts of the alleged employment relationship in detail rather than trying to establish a mechanistic test or series of tests. [Wiebe Door Services Ltd., 87 DTC 5025. - refer to ¶ 8., below]
The Canada Revenue Agency (CRA) in November 2015 issued booklet RC4110 "Employee or Self-Employed", which outlines the criteria that Employers, Employees and Sub-Contractors should use in order to determine their appropriate status. We highly recommend the use of this booklet, and provide a downloadable copy for your use.
Personal Services Business
Excerpt from Interpretation Bulletin 525R
Employee or Self-Employed Artist
¶ 1. Artists who are employees have the benefit of coverage by their employers under both the Employment Insurance Act and the Canada Pension Plan. Self-employed artists are not covered under the Employment Insurance Act, but are covered by, and must pay all the contributions required under, the Canada Pension Plan based on their net self-employed earnings. Artists who perform services as employees in the Province of Quebec contribute to the Quebec Pension Plan on remuneration received from any such source. Self-employed artists who reside in that province on the last day of any year also contribute to the Quebec Pension Plan. Taxpayers who perform services as artists in the Province of Quebec should consult Revenu Québec concerning their status under Quebec law (see the current version of “Interprétation Revenu Québec” IMP. 80-3).
¶ 2. In a series of successive arrangements or contracts, an artist may be an employee for a certain period and, upon termination of the contract as an employee, subsequently become self-employed. In other circumstances, an individual can be an employee under one arrangement or contract and, over the same period of time, be self-employed under a second arrangement. An individual, however, cannot be both an employee and self-employed under the same arrangement or contract.
¶ 3. Many factors must be taken into consideration in establishing whether an individual is an employee or is self-employed. The question to be decided is whether the contract between the parties is a contract of service that exists between an employer and an employee, or is a contract for services, that is, the engagement of a self-employed individual. A contract of service generally 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 and the manner of doing it. 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.
¶ 4. When dealing with persons of particular skills and expertise, such as artists, supervision and control of the manner in which the work is done may not be a critical and decisive factor. However, the determination of whether or not an artist is under a contract of service or a contract for services is a question of fact, and will depend on the nature and the terms of the contract or arrangement (written or oral), its duration, and all the elements that constitute the relationship between the parties.
¶ 5. In some cases it will be clear whether an artist is carrying on a business or is an employee. For example, a member of the full-time staff of a radio or television station or network would typically be an employee, whereas an artist who operates on a completely free-lance basis, seeking and obtaining a variety of engagements, would be self-employed. However, in other situations the circumstances may fall somewhere between these extremes and the determination of the question is more difficult. Thus, it is not possible to give one criterion or even a group of criteria that can absolutely determine, in all cases, whether or not an artist is an employee. The following two paragraphs give guidelines or factors which will help in the determination of the artist's status.
¶ 6. There is an indication of status as an employee and therefore of a contract of service between an artist and, for example, a party such as a symphony or other type of orchestra, a ballet company, an orchestra leader, a film or theatre producer, or a television company, where that party has, according to the terms of the engagement:
¶ 7. On the other hand, there is an indication that the artist could be a self-employed individual carrying on a business if the artist:
¶ 8. A decision on June 18, 1986, by the Federal Court of Appeal, in Wiebe Door Services Ltd. v. M.N.R., 87 DTC 5025,  2 CTC 200, is considered to be the most significant precedent which the CRA follows in resolving issues concerning the status of an individual as an employee or self-employed person.
In determining whether an individual is an employee or self-employed person, the CRA will apply the use of a four-in-one test, which involves the consideration of the following criteria:
In applying the four-in-one test, it is the complete interaction between the worker and the payor that must be considered. No one criterion determines whether a person is an employee or independent contractor, all the criteria are considered relevant. The CRA publication RC4110, entitled Employee or Self-Employed?, further elaborates on these criteria.
¶ 9. In any case of doubt as to the status of an artist, advice should be obtained from a CRA tax services office.