As a Stern Cohen Chartered Professional Accountant with many years of experience advising business owners and corporations on tax liabilities, there is one issue that is often overlooked when, in fact, it can be a ticking time bomb. I’m talking about hiring staff as independent consultants when they are really employees.
Businesses expanding their talent pool through the use of independent consultants need to be very careful. A verbal or poorly written agreement between a business and an independent contractor is not enough to ensure independent status. Even the issuance of invoices and HST registration may be insufficient evidence of independence. The facts need to support the independent arrangement, and unfortunately, in many situations this is not the case. Too often, the business exercises control over its contractors or provides the equipment to perform the assigned duties. Often there is no risk to the independent contractor; they are simply paid an hourly rate for their services.
At the top of the list is the Canada Revenue Agency (CRA) which requires employers to deduct and remit Canada Pension Plan (CPP) and Employment Insurance (EI) premiums. If the CRA rules that a contractor is actually an employee, it can assess CPP and EI premiums in excess of $7,000.00 per year per employee at 2015 rates, and that is before interest and penalties. This action does happen and when it does, it is difficult to successfully reverse. In practical terms, if a business hires 5 independent contractors over a period of 3 years, a potential liability for CPP and EI premiums could exist in the amount of $105,000.00 plus interest and penalties.
Other reasons to be concerned about employee vs independent contractor status are Workers Safety legislation, Employment Standards Act, Health and Safety Acts, Employers Health Tax obligations and more.
Here are three simple steps Canadian employers can take to stay on the right side of the law:
The upfront effort and costs can be very worthwhile in subsequent defense of independent contractor status.
If you have any questions about this issue and the ramifications for your business, contact us. Stern Cohen Accountants are tax and advisory specialists for privately-held businesses in the Greater Toronto Area.