Know the difference to avoid a run-in with the Canada Revenue Agency (CRA)!
When a realtor is looking to hire a candidate, one of the most frequently asked questions I get is whether this person will be a contractor or will she be an employee. Sometimes both candidate and realtor prefer to go the contract route: it’s less effort and expense for the realtor and has a greater tax advantage for the candidate. But the only arbiter who matters at the end of the tax year is the Canada Revenue Agency. If you think you’ve hired on contract but the CRA thinks you’ve hired an employee, you could be on the hook for quite a lot of expenses that you hadn’t planned on.
Let’s take a look at the good, bad and ugly of both options:
Hiring a contractor, instead of an employee, means among other things, a lot less paperwork. No payroll management to deal with deductions of income tax at source, CPP/QPP/EI; in fact, no employer portion EI at all.
Hiring an employee means all of that paperwork and more, when you factor in vacation days and benefits, neither of which are provided for contractors.
For the contractor, there are a variety of advantages, including deduction of business expenses, business-use-of-home expenses (for those that work from home) and so on. The downside is that there are no sick days, vacation days, benefits or any hope of a pension plan.
As you can see, there’s good and bad to both options. Where things go off the rails for some realtors and contractors is when the CRA determines that what the realtor in fact has is an employee. All of a sudden, there are unpaid taxes to be factored in, CPP/QPP/EI premiums, benefits to be instated, and so on.
How does CRA decide that a contractor is in fact an employee?
At a high level, there are four indicators that CRA looks for. Call it a contractor litmus test!
- Control—does the contractor have control over where, how and when they do the work? Or does the realtor require them to be in the office for a set number of hours each week, with direct control over the work being accomplished? If the former, they are a contractor. If the latter, they’re an employee.
- Ownership of Tools—who owns the equipment used in doing the work? For example, if an assistant needed a phone, laptop and internet access, who bought and paid for those items? A contractor would pay for, and own, their equipment. An employee would have those provided and owned by the realtor.
- Profit / Risk of Loss—If a candidate can make money, hire her own assistant, market her service to other people, incur a bad debt from an unpaid invoice, have to pay the cost of broken equipment or generally cover the costs of operating, including phone lines and internet, they are a contractor. Basically, the question is whether they are incurring financial risk or not.
- Integration—A contractor with only one client is a de facto employee, according to the CRA. Another way to distinguish a contractor from an employee is in the existence of a written contract that clearly stipulates the first three items from this ‘test’.
Looking at the specific example of a realtor’s assistant, the difference in whether the assistant is a contractor or an employee relates to whether they engage in this service for more than one real estate office, are able to work when and where they want as opposed to working in a designated office, and are paying for all their own tools to do the work. Any one of these indicators on their own is not enough to determine work status. It’s really an accumulation of all of them, to give an overall view as to how the assistant engages with the realtor.
In the end, if a realtor wants to have control over the what, where and when of the work being done, they need to hire an employee. It’s more work at the front end—setting up payroll, etc…—but it can save you a lot of time and money at the back end.
If you need help finding that rare pearl who will help you take your business to the next level, give us a call.
