Employee vs. Self-Employed

Be careful of Canada Revenue Agency rules

It is not unusual for a US-based entity (business or organization) to ask (or suggest) to pay a Canada-based remote worker as a self-employed contractor. This is done for a very straightforward reason. It is often a new and difficult process for a US entity to pay a Canadian tax resident as an employee. The business must familiarize themselves with Canadian payroll taxes, labour laws, workers’ compensation, withholding tax requirements, etc. Also, they must apply for a Canada Revenue Agency (CRA) business number and file Canadian tax forms.

Comparatively, it is fairly simple for a US entity to pay a Canadian tax resident as a self-employed contractor. But the US entity and the Canadian remote worker may not be aware of a significant risk. The CRA may investigate and determine that this person is actually an employee. This determination is irrespective of the belief of the US entity. Why is this important? This would mean that the working relationship is in violation of Canadian rules and subject to retroactive penalties and interest. Payroll taxes such as Canada Pension Plan and Employment Insurance could be retroactively assessed, also with interest.

The facts of the overall working relationship determine whether CRA deems a person to be an employee or not. The determination is not based on one single criteria but a reasonable assessment of all criteria as a whole.

Indicators that the worker may actually be an employee and not self-employed:

• Payer sets hours of work.
• Worker requires permission to work for other payers.
• The payer provides training and/or tools to worker.
• The worker uses email address and/or business cards provided by payer.
• The worker cannot hire helpers or assistants but has to do work themselves.
• It is a continuous working relationship.
• The payer controls the method and amount of pay.
• Worker is not in a position to realize an investment gain or loss.
• Worker is not financially responsible for not fulfilling the obligations of a contract.

If a Canadian remote worker believes that they may be violating CRA rules in this regard, then they can protect themselves by legitimizing the work relationship through a third party Professional Employer Organization (PEO) such as JobArc Enterprises Inc.