Employee vs. Contractor

From Prospera Chartered Accountants |

CPA Firm Calgary Alberta

Many entrepreneurs start their business as consultants or suppliers to one major customer. However, if you continue in business with only one customer or client you run the risk of being classified as an employee, not a contactor, by CCRA.

From CCRA’s point of view they do not want employees being treated as contactors. Contractors are allowed to deduct business expenses that may not be available to employees. They are not subject to EI premiums that employees have to pay and contractors can often split their income with family members.

Nor do contractors want to be treated as employees as they benefit from the deductions and income splitting. Unfortunately, there are a lot of grey areas in the space between contractor and employee. CCRA has issued a checklist to help determine the status, but many do not fit clearly into one side or the other. This is an area to consult a professional.

Here are some of the exceptions

  • An engineer gets a two year contract to design and build a gas plant. Although he will have only one client for two years, the nature of the contract means that he can still be determined to be a contractor, if the other areas are clearly determining him to be a contractor.
  • The company hiring the contractor insists that the relationship not be as an employee. This can be very difficult, as it is the employee who stands to lose more than the company. This does not make you a contractor, but often means your choice is limited to take the job as a contractor or walk away from the work.
  • There is a very common fallacy that incorporation protects you from all of this discussion. It is not true! A corporation can be deemed by CCRA to be an employee. Not only will the corporation lose all deductions and the owner treated as an employee, but there is a penalty tax adding 20% tax over the rate normally assessed.
  • I am often asked: If I work for one person for 95% of the time and find some other work for the other 5% will that keep me as an employee. NO! You would still be considered to be an employee, with a part time job on the side for the 5%.

My recommendation: Act, Speak and Be an entrepreneur. There has to be risk involved and you cannot have the best of both worlds. No risk and the advantages of being a contractor. The good news is that an entrepreneur can make substantially more money than an employee, most millionaires are entrepreneurs and it is a lot more fun.

For entrepreneurs, it is to your advantage to have several clients so you are never reliant on one client for your income. Then, if they are taken over or go bust, you still have others to keep you going.
The attached checklist gives you all the details. An interview with a professional gives you a perspective on your particular situation.