Taxation: Employee vs Contractor 

Here’s a rewritten version of the main points: 

• Nature of Contract: The core difference between employees and self-employed individuals (contractors) lies in the nature of their contracts. Employees work under a contract of service, while contractors operate under a contract for services. This distinction, though clear in many cases, can sometimes be complex. 

• Taxation Differences: Employees are taxed on their gross income, with limited opportunities for deductions (as per section 8 of the Income Tax Act). In contrast, contractors are taxed on their net profits, which is their revenue minus expenses. For example, while an employee cannot deduct the cost of a business lunch from their income, a contractor can deduct 50% of such expenses. 

• Payroll Taxes and Withholdings: Employees’ incomes are subject to payroll taxes and withholdings, whereas contractors’ revenues are not. 
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• Control and Independence: The degree of control over work is a significant factor in determining employment status. Employees work under the direct control and supervision of their employer, adhering to given orders. Independent contractors, however, operate independently and are focused on delivering a specified result using their methods. 

• Assessment Criteria by CRA: The Canada Revenue Agency (CRA) assesses employment status considering several factors, including the power of selection, payment of wages, control over work methods, and the right of suspension or dismissal. 

• Modern Challenges: Advances in technology and changes in labor laws have made applying traditional tests for employment status more challenging. Courts and the CRA now consider the overall operation and relationship between the parties. 

• Other Tests by CRA: These include the entrepreneur test (focusing on control, ownership of tools, and financial risks), the organizational test (assessing whether the work is integral or accessory to the business), and the specific results test (looking at whether the engagement is for a specific outcome or for general business profits). 

• Substance Over Form: The actual substance of the relationship, rather than the formalities of the contract, determines the nature of the employment relationship. Factors like control, provision of equipment, financial risks, and opportunities for profit are considered. 

• Contractual Tips for Contractors: To be more likely classified as an independent contractor, it’s advisable to avoid employee benefits, relate work to specific projects, bill in stages, provide your own supplies, work independently, not issue a T4, and have the ability to hire others.