Tax Survival for Canadians. Dale Barrett
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Essentially, if the payer is authorized to, and has the right or ability to control the worker, or the manner in which the work is done, or what work is to be done, then the payer will likely be considered to have control over the worker’s daily tasks. Such indication of the payer exercising a high level of control may lead to a conclusion that an employment type relationship is evident.
Common indicators leading the CRA to a conclusion of an employment-type relationship include when the payer determines and controls specifics within the working relationship. Such control would be evidenced by control over what techniques and procedures the work would entail, what type of work and at what pay, whether there was any direction or training on how to complete the task, as well as control over the final work product. Essentially the working relationship is one of a subordinate type relationship, where the worker lacks the power to necessarily effect decisions or methodologies within the relationship. Other evidence may include the worker having to ask permission of the payer to work contemporaneously with the relationship.
Self-employed contractors differ from the employer-employee relationship in that the worker maintains his or her independence and is not under the direct control and power of the payer. In fact, practically the only type of control the payer has in this situation is outlining the framework for the work, while the contractor is completely independent to work as he or she chooses. Factors which may evidence a self-employed contractor include the worker being free to complete a task in the manner he or she sees fit without any oversight by a payer. This also means that a typical contractor has no true loyalty or continuity with his or her payer, and as a result, need not ask permission to accept or reject work. It is true that a contractor is usually not obligated to refrain from working for various payers contemporaneously with his or her current payer.
2.1b Source of tools and equipment required to perform the work
If the worker also has control and ownership over his or her own equipment, he or she is more likely to be considered a self-employed contractor rather than an employee. In the example of the independent corporate auditor, it is unlikely that such a contractor would be provided with a calculator and a laptop to do his or her job. These tools would generally be provided by the contractor. Similarly, one could not imagine that a person who works on a garbage truck for an hourly wage would be required to provide his or her own garbage truck.
2.1c Ability of worker to hire assistance or subcontract the work to third parties
In the vein of a self-employed contractor having a high degree of control over his or her work, a good indication that the worker is a contractor versus an employee is his or her ability to delegate services to an assistant or a replacement. If he or she cannot hire his or her own assistance or subcontract the work to third-parties, outside a provision in the service contract which prevents such subcontracting, he or she is most likely an employee.
2.1d Degree of financial risk taken by the worker
A contractor may have to prove to the CRA in the course of an audit, that he or she operates as a business independent of the company for which it performs work. In order to do so, there may be an analysis performed of whether, like any other business, the worker was in the position where there was a financial risk, and where he or she could potentially lose money. What differentiates a contractor from an employee is that generally an employee cannot lose money. If he or she shows up to work and does his or her job, the employee gets paid. This is not so for a contractor. Many contractors have invested significant resources in tools, equipment, staff, insurance, and other business costs. This puts them in the position where there is the potential for financial risk.
3
FILING TAX RETURNS
Most people file a personal income tax return each year either because they owe taxes or because they wish to receive a refund for overpaid taxes. Those who operate corporations will also likely file a corporate tax return as well as one or more GST or HST returns per year.
The tax filing system in Canada relies on taxpayers to self-asses their income, and when filing their returns, the majority of taxpayers provide complete and accurate information. Despite the possibility of serious penalties and potential imprisonment, a great many are not so forthcoming with correct information. Some people intentionally try to avoid taxes by failing to declare all their income, or by inflating their expenses or charitable contributions, and a great many others make unintentional errors on their returns. Although the odds are against a taxpayer being audited for any given year, despite the possible upside of paying less tax by being dishonest on one’s return, the penalties can be so severe that most people don’t attempt it.
While allowing the taxpayers to self-assess their income, and without having massive audit departments, the CRA is successful at collecting hundreds of billions of dollars per year without having more than a couple hundred convictions in court each year for failure to file returns and tax evasion.
1. The Filing Mechanics
Once the taxpayer has filed his or her return, the CRA processes it and makes a determination as to whether it should be accepted as filed. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial institutions, correcting it for obvious errors. Other times, the CRA has questions regarding certain amounts and may ask the taxpayer for clarification. Within a few weeks of filing, the CRA typically has finished processing the return and has determined a taxpayer’s tax liability. At that time it issues a Notice of Assessment, which left unchallenged, dictates the amount of tax owed by a taxpayer.
A taxpayer who disagrees with CRA’s assessment of a particular return may appeal the assessment. The appeals process starts when a taxpayer formally objects to the Notice of Assessment with a Notice of Objection (see Sample 1), which must be filed within 90 days of the assessment, and must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of the CRA, which over the last few years has been taking in excess of nine months in order to assign an Appeals Officer — creating a very lengthy process while interest will continue to accumulate on the taxes owed.
Sample 1: NOTICE OF OBJECTION
Once the Appeals Officer has made his or her decision, the CRA may vary, confirm, or vacate the appealed assessment. If the CRA varies or confirms the assessment, the taxpayer is entitled to yet another appeal to the Tax Court of Canada, and if still unsatisfied he or she may further appeal the decision to the Federal Court of Appeal. (See Chapter 14 for more information about fighting CRA in court.)
2. Personal Income Tax Returns (T1 Return)
As noted previously in Chapter 2, a taxpayer is required to file a return if he or she owes any taxes to the CRA for the relevant reporting period, or if he or she has been requested to file by the CRA. There are also various other reasons why a taxpayer may be required to file a return:
• You owe taxes.
• CRA sends you a request to file a return.
• You and your partner (i.e., spouse or common law) are splitting pension income.
• You received Working Income Tax Benefit (WITB) advance payments.
• You disposed of capital property (e.g., you sold real estate or shares) or you had a capital gain (e.g., if a mutual fund or trust attributed amounts to you, or you are reporting a capital gains reserve you claimed on your previous year’s taxes).
• You have to repay Old Age Security or Employment Insurance benefits.