When I say "taxable", I am talking about goods and services tax (GST) and harmonized sales tax (HST). I am not talking about income tax in this blog post when I say "taxable".
The recent Tax Court of Canada decision in Craigmyle v. M.N.R. reminds us that planning is required for a business to claim that a person who is paid by the business is an independent service provider and not an employee (or vice versa). Generally speaking, in the context of GST/HST, it is better that an individual is an employee because labour of employees is not subject to GST/HST. An employer does not pay GST/HST to the employee and the employee does not need to register for GST/HST purposes. During an audit, the assessment exposure/risk does not include the salary accounts in the general ledger.
That being said, a business may decide to look at other legal requirements when deciding how to structure the business (the GST/HST does not operate in a vacuum). Since an employer has Canada pension plan and employment insurance payment obligations and income tax withholding obligations in regards to employees, the business may choose to retain the services of independent service providers and pay GST/HST on invoices submitted by the independent service providers for their services (if they are registered for GST/HST purposes). The business must make a business decision.
If the business hires independent service providers, it should to ensure that independent service providers who make taxable sales in excess of $30,000 (the small supplier threshold) register for GST/HST purposes and charge GST/HST. The business will have to be mindful of its own GST/HST assessment exposure/risk as a purchaser for non-payment of GST/HST.
The Craigmyle case deals with Canada pension plan and employment insurance. In this case, the Canada Revenue Agency determined that the individual was an employee and the Tax Court of Canada disagreed --- the individual was an independent contractor.
The Tax Court of Canada examined what the Courts have held to constitute a contract of service. Based on Wiebe Door Services Ltd. v M.N.R. (F.C.A.) [Wiebe Door], and accepted and expanded by subsequent cases, the following test is applied focusing on the total relationship of the parties with the analysis centered around four elements:
(a) degree of control and supervision;
(b) ownership of tools;
(c) chance of profit; and
(d) risk of loss.
Each situation has unique facts because the issue is the characterization of a relationship. Each case must be decided on a case-by-case basis.
Business that are engaged in exempt activities for GST/HST purposes are less likely to structure the business around independent service providers because the GST/HST cost is generally unrecoverable (in Ontario that would be 13% on the service provider's fees). Businesses that are engaged in zero-rated or taxable activities can recover the GST/HST paid to independent service providers. The focus would be on the assessment risk in the event that mistakes are made or the Canada Revenue Agency has a different opinion concerning the characterization of the expense.