Independent Contractor or Employee - The Tests For #228

Nov 01, 1994

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By Gerry Neely
B.A., LL.B.

When the Homelife/Victoria case was decided in 1992, the conduct required to establish independent contractor status was not common knowledge among the licensees who claimed this status at the hearing. However, Revenue Canada reports that the returns of licensees claiming to be independent contractors continue to be rejected, either because of the terms of the contract, or because the parties to the contract failed to adhere to its terms.

Arrangements made outside the contract may differ sufficiently from the terms of the contract to change the independent contractor relationship. While it is not a requirement that the contract be in writing, a written as opposed to an oral contract is more prudent, in part, because Revenue Canada will rule whether a specimen contract meets the independent contractor status tests.

One of the reasons why it is important to get a Revenue Canada ruling is that the Income Tax Act does not set out the tests which determine whether one is self-employed or an employee. Instead they are found in numerous decisions, all of which depend upon their facts.

In one case these tests were listed: the control test, the integration test, the economic realty test, and the specific result test.1 The same case contained the following list of guides to which the courts have referred to in deciding whether a person is an employee or not:

Right to control; right to dismiss; the nature of the task; the freedom of action given; the magnitude of the contract amount; the manner in which it is to be paid; ownership of tools; changes of profit; risks of loss; and integration to payer's business.

The courts acknowledge that it is difficult in some cases to draw the line between independent contractor and employee status. An example of this difficulty is found in a case dealing with real estate licensees and a Quebec statute which required pension deductions to be made from payments to employees. No contributions would be required from self-employed salespersons. The agency had two types of contracts, a common element between them being that in both contracts the salespeople were able to choose their working hours, their days off, their holidays and had no quotas to meet.

Salespersons with the first type of contract were responsible for their offices, telephone, furniture, stationery, advertising and automobile costs. While the listings were the property of the agent, the only financial arrangement between the two parties was that from the commissions paid to the agent, 10% was retained and the balance was paid to the salesperson. The salespersons with this category of contract were held to be self-employed.

In the second type of contract advertising costs were shared between the two parties and the agent had the right to examine every advertisement; the agent kept control over files and secretarial services, the right to decide whether to sue or not, to withhold commissions if certain requirements were not met, the right to approve correspondence and the obligation to provide the salesperson with signs, stationery and office space.

The salesperson's responsibility was to follow the policies established by the agent, to attend meetings, and to have an office in the salesperson's home. Commission was shared between the agent, the cooperating agents and the salespersons, according to an agreed percentage. This type of contract was held to be one of employment.

This case was decided in 1987, and in turn its decision was based partly upon an 1968 case. While Revenue Canada would not necessarily follow either case as a precedent, some of the facts concerning the duties and responsibilities of the parties would be applied today to the assessment by Revenue Canada of a salesperson's status.2

  1. Braive v. M.N.R., 81 D.T.C., 748.
  2. La Societe Immobiliere Jem Ltee v. Sous-ministre du revenu du Quebec, CCII Canadian Employment Benefit and Pension Guide Reports (Transfer Binder), p. 6006, #8538 and Mann and Martel v. Minister of National Revenue, OP. CIT.1 p. 5958, #8502.

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