By Martin Rumack
As a real estate professional, are you an “employee” or an “independent contractor”? The legal difference is important and has significant ramifications for your work-related benefits and liabilities, especially in relation to the taxes you may owe to Canada Revenue Agency (CRA).
What is an “employee”? The employer/employee relationship is the more traditional arrangement, by which the employer formally hires the worker, controls what and how his tasks will be, and is legally responsible for the employee’s negligence. The employer pays for the worker’s employment benefits (such as benefits under medical and dental plans), any required employer contributions to company pension plans, and remittances relating to the Canada Pension Plan and Employment Insurance. The employer is also required to deduct the employee’s income tax at source and remit it to the CRA on behalf of the employee.
In contrast, “independent contractors” essentially run their own businesses, dictate their own manner and method of work, and are themselves personally liable in the event they are negligent in performing their duties. They do not receive employment benefits, nor do they have any entitlement to company pensions. They are obliged to make their own Canada Pension Plan contributions. Because the employer does not withhold income tax at source for these workers, independent contractors must remit their own income tax instalments. There are some tax benefits to the independent contractor. He is entitled to deduct all reasonable business expenses from income for tax purposes.
The CRA uses an established test – based on long-established legal jurisprudence – to determine the true nature of the relationship and whether an individual is properly classified as an employee or an independent contractor. There is no single factor, but a set of several general considerations:
1) Control – This involves posing the question: “Who has the right to have the final say in the amount of remuneration to be paid, and the frequency and manner of payment?” Another factor is the consideration of who does the decision-making on matters such as the date of commencement of the work and the length of time, location and manner in which the work will be done. For an independent contractor these issues are all generally subject to negotiation between the parties, and the independent contractor has significant input. Conversely, in a true employer-employee scenario, the employer calls the shots.
2) Ownership of tools – Generally speaking, an independent contractor will supply his or her own tools that are needed to do the job. This test is particularly telling in connection with bigger-ticket tools that have to be purchased, leased or rented (computer equipment, construction equipment, motor vehicle, office equipment).
3) Chance of profit/risk of loss – The level of financial involvement and risk is another factor in the determination of whether a worker is an employee or an independent contractor. Does the worker cover the operating costs? Does he bear the risk in connection with either incurring a loss (for example due to bad debt, delays or damage due to equipment)?
4) Integration — This involves evaluating the extent to which each of the parties has integrated his activities into those of the other. Whose business is it? If the worker integrates the activities of the employer into his own activities, then he is likely an independent contractor. If the worker’s activities are integrated into the employer’s commercial activities, then it is likely that a traditional employee/employer relationship exists.
What are the risks of being wrong? The employee-vs.-independent contractor determination is assessed individually, after evaluating all the facts. The parties’ own expectations, or what they choose to call their business relationship, is generally not relevant either legally or from the perspective of CRA.
Real estate agents should always make sure their relationship is expressly defined in writing (with specific mention of the four tests outlined above, if at all possible). This will solidify each party’s intentions, and will be especially useful in the event of a future dispute.
If a brokerage hires an independent contractor who is later determined by CRA to be properly categorized as an employee, then both the brokerage and the individual salesperson will be liable for any unpaid taxes, penalties, CPP and EI premiums, plus any interest for late payment that arose from the initial improper categorization.
It is always best to discuss the matter with your lawyer and accountant at the beginning of your working relationship so the arrangement is properly structured and papered in order to avoid problems with CRA later on. For further information, see the Bulletin published by CRA, Employee or Self-Employed? (Bulletin RC4110).
Sometimes we have to spend a dollar to make a dollar. If in doubt, spend a few dollars to ensure your arrangement is structured properly from both a legal and accounting perspective in order to minimize the chance of the CRA stepping in later to classify you as an employee rather than an independent contractor.
Toronto lawyer Martin Rumack’s practice areas include real estate law, corporate and commercial law, wills, estates, powers of attorney, family law and civil litigation. He is co-author of Legal Responsibilities of Real Estate Agents, 3rd Edition, available at www.lexisnexis.ca/bookstore. Visit Martin Rumack’s website at www.martinrumack.com.