written on behalf of Feigenbaum Law
Being a business owner can be incredibly fulfilling, but also rife with challenges, particularly in relation to corporate tax planning and compliance. It may be easy for a business owner with minimal experience in tax or finance to take an informal approach to tax obligations, however, poor tax practices and corporate structuring can lead to significant problems down the road.
If a tax authority such as the Canadian Revenue Agency (CRA) or Internal Revenue Service (IRS) determines that a business has not complied with the applicable tax laws, substantial financial consequences may follow. For these reasons, every business owner must clearly understand their business structure, the classification of their workers, and their ongoing tax obligations.
Employer classifies a worker as contractor; Minister classifies worker as employee
The case of All Sports Marketing Inc. v. The Minister of National Revenue made its way to the Tax Court of Canada after the Minister of National Revenue (the “Minister”) determined that a business owner had not been contributing under the Canada Pension Plan or Employment Insurance Act on behalf of one of his workers. The employer appealed this determination.
The Minister’s position was that the worker was insurable and pensionable for a period of seven months during 2017. However, while the Minister deemed the worker an employee in arriving at this determination, the employer stated that the worker was a contractor and was therefore not subject to insurance or pension contributions.
Interestingly, at trial, the worker agreed with the Minister’s determination of his classification as an employee.
Employer says he hired worker as independent contractor
The employer’s company provides social media and email marketing services for organizations which host various sporting events, such as marathons. The employer also owns another company which hosts sporting events in Toronto.
The employer stated that he hired the worker as an independent contractor and told the Court that the employee could determine how and when he provided services to the employer. The employer also indicated that the employee had the freedom to work from anywhere and stated that it did not matter how the employee provided his services, only that he provided results. Based on these reasons, the worker was paid under a commission-based structure.
Employment contract refers to both “contractor” and “employee”
The Court turned to the employment agreement between the employer and the worker and found that, while it read like a standard employment contract, the worker was referred to as the “contractor” and the “employee.” The employer was referred to as “the employer” throughout.
The Court also noted that several sections of the contract were illustrative of its strange structure, for example, a clause which read:
“The employer desires to employ the Contractor and the Employee has agreed to accept and enter such employment upon the terms and conditions set out in the agreement.”
Another section stated that:
“The Employer agrees to employ the Contractor as a Sales rep, and the Contractor agrees to be employed on the terms and conditions set out in this Agreement. The Contractor agrees to be subject to the general supervision of and act pursuant to the orders, advice and direction of the Employer.”
Employment contract indicated existence of an employer-employee relationship
The employer failed to consistently refer to the worker as either an “employee” or “contractor” throughout the employment agreement. However, there appeared to be an indication of an intention to form an employer-employee relationship, for example, the contract stated that the worker was “employed.” Other sections of the agreement further supported an employer-employee relationship by including phrases such as:
“The Contractor agrees to devote full-time efforts to his or her duties as Contractor of the Employer.”
The Court noted that this type of clause would not be agreed to by someone offering services as an independent contractor. Other clauses referenced the need to avoid conflicts of opportunities, which are not a standard provision in an independent contractor agreement.
The Court determined that it was likely that the employer used a standard template for the employment contract and attempted to change the term of “employee” to “contractor.” However, it was clear that the employer did not successfully change all of the terms and failed to modify the substance of the agreement to remove the inference of an employer-employee relationship. The Court called this attempt at substitution mere “window dressing.”
Court highlights difficulty of distinction between “employees” and “contractors”
In coming to its decision, the Court acknowledged the difficulty of distinguishing between an employee and an independent contractor, in part because working relationships are subject to change. The most critical piece of such an analysis is determining whether the person “is performing (the services) as a person in business on his own account.”
When determining this issue, the Court must consider a variety of factors, including:
- whether the worker provides their own equipment;
- whether they hire their own helpers;
- the degree of financial risk taken by the worker;
- the degree of responsibility for investment and management;
- the opportunity to profit in the performance of their tasks; and
- intention of the parties.
Court finds worker is employee
The Court stated that there is a power imbalance between workers and employers which can sometimes lead to a would-be employee accepting a job as a contractor when the relationship is actually that of an employer-employee.
In this case, the evidence showed that the employer sought to take advantage of hiring the employee as a contractor. By doing so, he could secure the employee’s exclusive services while avoiding certain employer obligations, including mandatory payroll taxes, Canada Pension Plan and Employment Insurance contributions.
The Court held that the worker was in fact an employee and denied the employer’s appeal.
The Lawyers at Feigenbaum Consulting in Vaughan Assist Clients with Corporate Structuring and Tax Compliance
The experienced lawyers at Feigenbaum Consulting help clients work through various tax and legal issues. Whether you require assistance with corporate tax needs in either Canada or the United States, or are looking to expand your business across the border, the experienced tax team led by Mark Feigenbaum will help you plan for success. We regularly help our clients optimize their business structure to minimize tax liability and take advantage of any tax breaks or credits available to them. To learn more about how we can help you with your unique needs, contact us online or by phone at 1-877-695-1269.