The reason you want to become an independent contractor (i.e. self employed) and not an employee is because independent contractors have more tax write-offs and pay much lower taxes than employees.
How to Become an Independent Contractor in Canada
It all comes down to the contract between you and your employer or “customer”. The agreement must contain specific clauses so that the Canada Revenue Agency (“CRA”) views the agreement as an independent-contractor arrangement, and not an employee-employer arrangement.
Five Factors – How to Become an Independent Contractor and not an Employee
To be treated as an independent contractor (i.e. self employed), your agreement with your customer must contain five specific factors, which are discussed below:
If it appears that your employer is exercising a great deal of control over your work, then you are going to be deemed to be an employee for tax purposes. Therefore, the agreement should clearly state that that you, the independent contractor, will work independently with minimal or no supervision.
2) Tools and Equipment
In many cases, employers provide their employees with tools and equipment necessary for their employees to conduct their work. If this is the case, the CRA will view the relationship as that of an employer and employee.
To become an independent contractor, the agreement should state that you, the independent contractor, are responsible for supplying your own tools and equipment (e.g. printer, laptop, flash drive, etc.)
3) Financial Risk – How to Become an Independent Contractor and Not an Employee
Generally speaking, employees do not take any financial risk, unlike independent contractors.
To become an independent contractor, consider changing the agreement between you and your employer such that you, the independent contractor, are responsible for paying for specific costs, including rent and a share of overhead expenses.
4) Opportunity for Profit – How to Become Self Employed and Not an Employee
Employees have fewer opportunities for profit compared to independent contractors (i.e. self employed individuals).
To become an independent contractor, consider placing a clause in the agreement, which allows for milestone payments or a success payments paid to you.
5) Intention – Self Employed vs. Employee
The most important factor that you should consider placing in your contract is that, “The intention of both parties is for you to be treated as an independent contractor who is self employed and for the payer to be treated as a customer.”
A large number of court cases involving the determination of employee vs. self employed have been decided on the basis of the intention of the agreement.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.