written on behalf of Feigenbaum Law
The “gig economy” is a term that has risen to prominence over the last decade or so as more and more people perform work outside of the normal employee-employer relationship, instead working as independent contractors. This impacts the job security and benefits available to workers, but it also allows them to have greater flexibility and access to tax deductions, which can come in handy when the person is performing gig work as a second job.
However, an employer who hires someone as an independent contractor can often profit because of the lack of benefits paid to contractors as opposed to employees, including not having to make CPP or EI contributions. But just because two parties in a working relationship agree the position is that of an independent contractor does not mean it’s necessarily true. A recent decision from the Tax Court of Canada looks at the government’s challenge of one such employment relationship.
Insurance Professional Teaches Classes at Night
The facts of the case are fairly straightforward. The employee (we will use the terms “employee” and “employer” even though the employee was hired as an independent contractor) is an insurance professional on a full-time basis. In the evenings, he teaches classes to prepare students for the exams needed to become a Certified Insurance Professional.
Over the last few years, the employee taught two classes for the employer. One was an in-person class that took place on weekends, while the other occurred over 11-12 weeks with a few hours of online classes each week.
The employee was free to teach the classes in any way he wanted, though he did have to follow an established grading scheme. While he was not ever guaranteed teaching work, over the years it became an unspoken agreement that the courses he usually taught would be offered to him again (with the class schedule reflecting his own availability).
The Intention to be an Independent Contractor: The Connor Homes Test
Both the employer and the employee stated that they wished for the employee’s work to be performed as an independent contractor. But that alone was not enough for the courts to make the same determination. A 2013 decision from the Federal Court of Appeal established what is known as the Connor Homes Test.
The Connor Homes Test established a two-step test to determine how an employment relationship should be characterized:
The first step looks at the subjective intent of each party in the relationship, stating “This can be determined either by the written contractual relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes and income tax filings as an independent contractor.”
The second step of the test “is to ascertain whether an objective reality sustains the subjective intent of the parties.” The purpose of this step, the court explained, is to help determine whether the facts are consistent with the parties’ expressed intention.
Applying the Connor Homes Test can be Difficult
The court noted that in some situations, the Connor Homes test is easy enough to apply. But when both of the parties in the working relationship agree on an interpretation but the government does not, it creates a problem by introducing the contract into account.
In the case at hand, the court looked beyond the intention of the parties. It considered the control of the relationship, noting the employee had the freedom to structure his classes as he wished so long as he followed the dates and marking scheme established by the employer. The employee’s performance was not reviewed, and although it could have chosen to, the employer did not audit his classes. But the court also looked at the employee handbook provided to the employee, which reads like an employment contract. The court found the issue of control to be neutral.
The court also considered how the employee was paid, finding that his payment upon conclusion of the courses is in line with an independent contractor.
The court then looked at the tools used by the employer, finding that he used his own home, computer, and internet connection, while the employer provided a classroom for in-person classes. Again, the court found this factor to be neutral.
When reviewing the chance of profit, the court found there was no way for the employee to increase his profit over and above the flat rate he was paid. However, he also did not face any real risk of financial loss.
The court, finding that much of the additional analysis resulted in a neutral position, looked again to the intention of the parties and found that the employee was an independent contractor and not an actual employee.
Contact the experienced team at Feigenbaum Law to provide knowledgeable advice around your business tax and legal issues. We will assist with personal tax planning to ensure compliance with all provincial and federal regulations. We work with clients in the US, Canada, and around the world on complex tax matters. We can be reached online or by phone at (877) 275-4792