Entrepreneurship & Small Business

CRA penalty for being classified as an employee vs. contractor

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  • Feb 11th, 2019 11:18 am
[OP]
Newbie
Oct 9, 2018
2 posts

CRA penalty for being classified as an employee vs. contractor

I pondering an employment opportunity with a marketing agency in Japan. I'm a Canadian citizen, living in Canada. (Note: This is through a trusted friend with whom I worked previously while living in the country.) This isn't a part-time thing, I'd be doing it as my main job and depending on it as a main source of income. It's a one-year contract, and they are going to call me a consultant and wire money each month as payment. According to everything I've read, this sounds like a standard employee-employer relationship, with the obvious caveat that they can't hire me as an employee because they have no entity here in Canada. So I'll work from home every day, with relatively set hours due to the nature of the work.

I've spoken to an accountant (highly recommended by trusted friends), who says I can file taxes as a sole proprietor and declare the money as self-employed income. There's no funny business on my end -- I'll be paying the full personal income tax rate, plus my own and the employer portion of CPP contributions. He also said we could do some modest writeoffs, including a portion of my mortgage and internet bill. Thing is, I've read a lot online about the CRA going after contractors and/or employees in similar situations. The difference is that the employer is a Canadian company. Usually they go after the "employee" because he/she has incorporated (but in all other senses is an employee), and is only paying the much lower small business tax rate. Or they target the employer for skipping on required payroll deductions.

What I'm curious about is what exactly would happen if I were to get reviewed or audited. I assume the CRA would have difficulty pressing a Japanese company for unpaid taxes. In fact I doubt they would bother. So I'm curious what I'd be on the hook for. Could I be dinged with penalties that would otherwise be slapped on my employer?

Thanks in advance for any insight on this.
15 replies
Deal Addict
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Feb 14, 2009
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Catullus wrote:
Feb 7th, 2019 1:16 pm
There is no short answer to your question, but without details, I suggest
stay on self-employed path.
In comparison with incorporation path, you will have about
the same deduction power in your context ( computers/monitor, internet, home office, etc)
but WAY less legal, accounting and general PITA associated with INC.
And especially if this is for only one year.

Cheers!
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Feb 14, 2009
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Catullus wrote:
Feb 7th, 2019 1:16 pm
Talking specifically on contractor vs employee -- there are about 10 positions:
* are you going to "somebody's" office most of times?
* you go regular standard times, like 9-to-5 or you set your own schedule?
* do you own tools or "they" provide you with tools?
* Do you plan you work youself? make a strategy? decisions? or just do what "they" tell you?
* DO you have responsibilities, insurance?
* Is it long term single-customer arrangement? or you have 10 other customers?
* something else....

If you feel not conformable with calling you-self "contractor" you can
pay all apropriate taxes and stay on "employee" path.

Cheers!
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Mar 23, 2008
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Catullus wrote:
Feb 7th, 2019 1:16 pm
I pondering an employment opportunity with a marketing agency in Japan. I'm a Canadian citizen, living in Canada. (Note: This is through a trusted friend with whom I worked previously while living in the country.) This isn't a part-time thing, I'd be doing it as my main job and depending on it as a main source of income. It's a one-year contract, and they are going to call me a consultant and wire money each month as payment. According to everything I've read, this sounds like a standard employee-employer relationship, with the obvious caveat that they can't hire me as an employee because they have no entity here in Canada. So I'll work from home every day, with relatively set hours due to the nature of the work.

I've spoken to an accountant (highly recommended by trusted friends), who says I can file taxes as a sole proprietor and declare the money as self-employed income. There's no funny business on my end -- I'll be paying the full personal income tax rate, plus my own and the employer portion of CPP contributions. He also said we could do some modest writeoffs, including a portion of my mortgage and internet bill. Thing is, I've read a lot online about the CRA going after contractors and/or employees in similar situations. The difference is that the employer is a Canadian company. Usually they go after the "employee" because he/she has incorporated (but in all other senses is an employee), and is only paying the much lower small business tax rate. Or they target the employer for skipping on required payroll deductions.

What I'm curious about is what exactly would happen if I were to get reviewed or audited. I assume the CRA would have difficulty pressing a Japanese company for unpaid taxes. In fact I doubt they would bother. So I'm curious what I'd be on the hook for. Could I be dinged with penalties that would otherwise be slapped on my employer?

Thanks in advance for any insight on this.
You're already talking to an accountant. Why would you be willing to take advice from an anonymous internet forum and "online" advice over someone you can whose credentials you can verify?

You seem to be talking about two different things... Sole Prop means all your income comes in as personal income, and you have deductions that you take off. If you keep those reasonable, the CRA isn't going to bust your hump (most likely).

The small business tax rate comes into play if you incorporate.

It's not up to the Japanese company to pay your personal income tax and CPP, they're just paying an invoice to a Canadian company (your company, or you as a sole prop). What happens after that is between you and the CRA. Thousands of Canadians have single person corporations or are self-employed and it works out just fine. Your accountant can make sure you're not setting yourself up for a successful (from the part of the CRA) audit.

C
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Nov 10, 2018
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CNeufeld wrote:
Feb 7th, 2019 7:08 pm
You're already talking to an accountant. Why would you be willing to take advice from an anonymous internet forum and "online" advice over someone you can whose credentials you can verify?

You seem to be talking about two different things... Sole Prop means all your income comes in as personal income, and you have deductions that you take off. If you keep those reasonable, the CRA isn't going to bust your hump (most likely).

The small business tax rate comes into play if you incorporate.

It's not up to the Japanese company to pay your personal income tax and CPP, they're just paying an invoice to a Canadian company (your company, or you as a sole prop). What happens after that is between you and the CRA. Thousands of Canadians have single person corporations or are self-employed and it works out just fine. Your accountant can make sure you're not setting yourself up for a successful (from the part of the CRA) audit.

C
I wholly agree with this.
For legal topics and discussions, the opinion, guidance, and thoughts provided are my own and are not considered to be legal advice, in any manner.
Deal Addict
Feb 5, 2009
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Catullus wrote:
Feb 7th, 2019 1:16 pm
According to everything I've read, this sounds like a standard employee-employer relationship, with the obvious caveat that they can't hire me as an employee because they have no entity here in Canada.
Actually they can and should hire you as an employee, the company doesn't have to have any establishment in Canada in order to have Canadian employees, and as an employer they would be responsible for collecting payroll taxes. Personally I am dealing with few such examples.


The questions is if they would want to do that, or they will just hire someone else and not bother with the paper work.

If you are paid as consultant it would be no different than many Canadian employers not following the rules, although CRA is mostly interested in PBC and less so with self employed individuals.

https://www.taxtips.ca/personaltax/empl ... canada.htm
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Mar 23, 2008
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Homerhomer wrote:
Feb 7th, 2019 9:25 pm
Actually they can and should hire you as an employee, the company doesn't have to have any establishment in Canada in order to have Canadian employees, and as an employer they would be responsible for collecting payroll taxes. Personally I am dealing with few such examples.


The questions is if they would want to do that, or they will just hire someone else and not bother with the paper work.

If you are paid as consultant it would be no different than many Canadian employers not following the rules, although CRA is mostly interested in PBC and less so with self employed individuals.

https://www.taxtips.ca/personaltax/empl ... canada.htm
Why “should they” hire the OP as an employee? Plenty of businesses use contractors in a perfectly legal way. The only thing the government cares about is “properly” classifying the relationship for tax purposes. It’s not illegal to have a PSB; you just lose many of the tax advantages of incorporating.

C
Penalty Box
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Jun 24, 2015
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Woodbridge, ON
i did a job like this for a year. i was hired as a sole proprietor. so i was paid by their A/P department and i had to do my own taxes and balance my own books, but in the eyes of the company a contractor is no different than a hired employee they both have employee numbers and network access, login access, email access, pass cards, etc. so you don't have to tell anyone your a contractor except your accountant and the CRA.
Hi
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Feb 4, 2019
23 posts
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Depending on the level of income as well as, perhaps, the possibility of being able to extend your contract after the 1 year term, it may make sense to incorporate.

Since you will be working 100% remotely for this Japanese firm, I assume you have a relatively flexible schedule. Have you considered marketing/providing your consulting services to other businesses, perhaps Canadian ones?

Having more than one client can go a long way in proving to CRA that you are an independent contractor as opposed to an employee. It’ll also boost your income ;).
[OP]
Newbie
Oct 9, 2018
2 posts
CNeufeld wrote:
Feb 7th, 2019 7:08 pm
You're already talking to an accountant. Why would you be willing to take advice from an anonymous internet forum and "online" advice over someone you can whose credentials you can verify?

You seem to be talking about two different things... Sole Prop means all your income comes in as personal income, and you have deductions that you take off. If you keep those reasonable, the CRA isn't going to bust your hump (most likely).

The small business tax rate comes into play if you incorporate.

It's not up to the Japanese company to pay your personal income tax and CPP, they're just paying an invoice to a Canadian company (your company, or you as a sole prop). What happens after that is between you and the CRA. Thousands of Canadians have single person corporations or are self-employed and it works out just fine. Your accountant can make sure you're not setting yourself up for a successful (from the part of the CRA) audit.

C
Ha, my wife asked me the same question.

Rest assured, I plan to do exactly what my account advises. This opportunity did seem like a somewhat unusual arrangement, and having always been a salaried, T4-receiving employee I was simply curious about other people's experiences in this area.

Your response did put me more at ease though, so thanks for that.
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Mar 23, 2008
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Catullus wrote:
Feb 8th, 2019 11:45 am
Ha, my wife asked me the same question.

Rest assured, I plan to do exactly what my account advises. This opportunity did seem like a somewhat unusual arrangement, and having always been a salaried, T4-receiving employee I was simply curious about other people's experiences in this area.

Your response did put me more at ease though, so thanks for that.
I've been a contractor for the last 8 years or so, and before embarking down that road, I sat down with an accountant and got some answers to my questions. One thing that became apparent is that there's lots of bad information out there, lots of grey areas, and lots of difference in individual situations. For example, incorporating can be a good thing for some people in some situations, but in others, it's just a lot of extra expense for no benefit. For the first 6 years, I was a self-employed sole-prop, and only incorporated recently because my vendor (I often work through a third party company who has a contract with the end client) was concerned with a shift in the PSC situation. And I had been with them long enough they felt there was a risk I would be considered an employee, which would put THEM at risk, not me.

C
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CNeufeld wrote:
Feb 7th, 2019 11:15 pm
Why “should they” hire the OP as an employee? Plenty of businesses use contractors in a perfectly legal way. The only thing the government cares about is “properly” classifying the relationship for tax purposes. It’s not illegal to have a PSB; you just lose many of the tax advantages of incorporating.

C
They should because OP stated that he is in the employee-employer relationship, and the rules are simple. To have it done properly the employer should hire the employee and take care of the payroll taxes and witholdings.
If there is a employee-employer relationship as defined by CRA and you get paid as subcontractor it is not legal, it is however quite convenient and happens quite often, CRA to date rarely cared about it if the individual is hired as sole proprietor if the employer-employee relationship is in place, the odds or being caught are very slim, and if it did happen CRA would likely decline the expenses and not much more.
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Homerhomer wrote:
Feb 11th, 2019 8:28 am
They should because OP stated that he is in the employee-employer relationship, and the rules are simple. To have it done properly the employer should hire the employee and take care of the payroll taxes and witholdings.
If there is a employee-employer relationship as defined by CRA and you get paid as subcontractor it is not legal, it is however quite convenient and happens quite often, CRA to date rarely cared about it if the individual is hired as sole proprietor if the employer-employee relationship is in place, the odds or being caught are very slim, and if it did happen CRA would likely decline the expenses and not much more.
A PSB is perfectly legal; I'm not sure why you're insisting it isn't. The CRA doesn't care about the employer/employee relationship as long as they get their tax revenue, which is why they remove the small business tax deduction in particular and most other deductions for PSB contractors. The CRA still gets both the employer/employee portions of CPP and payroll taxes the case of a PSB.

C
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CNeufeld wrote:
Feb 11th, 2019 10:36 am
A PSB is perfectly legal; I'm not sure why you're insisting it isn't. The CRA doesn't care about the employer/employee relationship as long as they get their tax revenue, which is why they remove the small business tax deduction in particular and most other deductions for PSB contractors. The CRA still gets both the employer/employee portions of CPP and payroll taxes the case of a PSB.

C
The OP stated he or she meets employer-employee conditions, it is very straight forward.
The rules are very simple, from cra:

https://www.canada.ca/en/revenue-agency ... _mpld_wrkr

Employee or self-employed worker?
It is important to decide whether a worker is an employee or a self-employed individual. Employment status directly affects a person's entitlement to employment insurance (EI) benefits under the Employment Insurance Act. It can also have an impact on how a worker is treated under other legislation such as the Canada Pension Plan and the Income Tax Act.
The facts of the working relationship as a whole decide the employment status.
In an employer-employee relationship, the payer is considered an employer and the worker an employee. Employers are responsible for deducting Canada Pension Plan (CPP) contributions, EI premiums, and income tax from remuneration or other amounts they pay to their employees. Employers must remit these deductions along with their share of CPP contributions and EI premiums, to the Canada Revenue Agency (CRA).
An employer who fails to deduct the required CPP contributions or EI premiums has to pay both the employer's share and the employee's share of any contributions and premiums owing, plus penalties and interest. For more information, go to Payroll.

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