The services of an employee (a real employee) are not subject to goods and services tax ("GST") or harmonized sales tax ("HST"). The services of an independent contractor are subject to GST/HST if that person is not a small supplier. A small supplier is a person who makes less than $30,000 per year - they do not need to register for GST/HST purposes and are not required to charge, collect and remit GST/HST.
Persons who are independent contractors and who make supplies that exceed $30,000 per year must register for GST/HST purposes and charge, collect and remit GST/HST. This would include service providers from outside Canada who come to Canada to perform services.
Persons who hire independent contractors must pay the GST/HST on the services. If the person is engaged in exempt activities, they may not be able to recover the GST/HST paid to the independent contractor. As a result, the GST/HST can represent an increase in the cost of the services. If the person is engaged in commercial activities, the person may be assessed for failure to pay GST/HST if the independent contractor does not charge GST/HST when required. As a result, the business must be a watchdog in this area.
With the implementation of HST, the distinction between employees and independent contractors has become more important. If a business wants a person to be an employee, they need to document the employment arrangement and make all necessary source deductions. If a business wants a person to be an independent contractor, they should review income tax case law to ensure that the person meets the factual requirements associated with an independent service provider. For example, an independent contractor uses his own tools to perform his/her trade.
This area is more complicated than it seems. Depending on the amounts at issue, it may be worth taking some time to structure the arrangements more carefully and clearly.