When onboarding an independent contractor in Canada, organizations must classify aspects of the contingent worker relationship to ensure compliance with the correct tax and employment laws. Misclassification of workers happens in Canada when Canada Revenue Agency (CRA) and/or regulatory bodies deem one or more of an organization’s contract workers as actual employees. Independent Contractor classification will also affect the cost of employing specific contractor types.
The digital transformation is not only changing the way companies do business, it’s also changing the way they use talent to get it done.
Historically, the full-time employment model was the “go to” method for acquiring talent, now – however, more and more organizations are engaging temporary resources rather than hiring full-time employees in order to remain competitive and meet their business objectives.
Looking ahead, four in 10 Canadian businesses say their organization is committed to growing their non-employee workforce to create greater flexibility over the next five years.
Understanding contractor classification in Canada
And while these workers may be referred to by many different names – temporary resources, freelancers, gig or remote workers, contractors, consultants, etc. – there are generally four different types of employment statuses that they can present themselves as when entering a working relationship, and all of them come with varying classification requirements that employers must consider.
Misclassifying workers can have serious financial, legal and reputational implications on your business, and as such, it’s important to become familiar with the different types of contingent workers before onboarding them into your workforce.
Below is a breakdown of the four different employment statuses that contingent workers can present themselves as in Canada:
Incorporated Contractor (INC)
The incorporated contractor, commonly referred to as an INC in the staffing world, represents a worker who has chosen to be in business for themselves and has incorporated a business to provide his or her services through. Engaging a worker that is incorporated to perform services for your organization essentially represents a business to business relationship between your company and another company.
As a business, the INC will have registered for an HST number if their business has had revenues exceeding $30,000 in a consecutive four quarter period.
Sole Proprietor (SP)
According to the Canada Revenue Agency (CRA) a sole proprietorship “is an unincorporated business that is owned by one individual. It is the simplest kind of business structure”.
Workers classified as a sole proprietorship are similar to incorporated contractors in that they have chosen to start a business for themselves, however the primary differences are that a sole proprietor is personally liable for the obligations of the contract and they may be doing business under their personal name rather than under a registered business name.
Temporary Worker (T4)
Temporary workers is the typical relationship for contractors and the most common engagement type in use. These individuals have an employment relationship that is usually defined through a written contract. As a temporary worker engaged on a term assignment, the employer is responsible for all employment standards obligations and tax remittance requirements such as EI, CPP and income tax collection at source. Specific provincial tax obligations, such as the employer heath tax also apply.
At the end of every year, a temporary worker must receive a T4 from his or her employer which details their earnings and withholdings/remittances for the year, and the employer is responsible to publish a Record of Employment at the end of the assignment.
Partnerships
Contract workers sometimes structure themselves as partnerships, although this is not one of the more common structures. A partnership is defined as a business relationship between two or more people or companies and it can even include two or more partnerships.
Revenues earned by the partnership are split according to the terms of the partnership agreement and it is the responsibility of the partners themselves to be compliant with CRA tax reporting and payment guidelines.
Partnerships act as employer of record for the individuals they place on contract, and clients should take reasonable steps to ensure that a supplier organized as a partnership is in good standing with all relevant tax and government authorities.
What are the risks involved in engaging contingent workers?
The shift towards a more agile workforce offers greater opportunity for flexibility and improved access to highly skilled people. For individuals, it also offers more flexibility, and the opportunity to organize their career by their skill set and develop valuable expertise. For both parties though, it also brings risks associated with unintended co-employment and relationship misclassification.
At the root of both contingent worker risks is the determination as to whether there is an employer-employee relationship between the company and the contingent worker.
Simply engaging workers who have organized themselves through a corporation or a sole proprietorship does not mean that you have avoided any of the risks that can be associated with contingent workers.
As contingent workers increasingly become a more integral part of the workforce, it’s important for organizations to be aware of compliance issues that can arise from engaging temporary resources and to have a process internally that ensures that they get it right.
To learn more about how competitive organizations are managing contingent worker risk, download our free white paper: A Checklist for Contingent Worker Risk:
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*Disclaimer: the information provided in this article is intended to be helpful information on the subjects discussed therein. It is not intended to be and should not be used as legal, business, or financial advice.
