Employee versus Independent Contractor-Defining an Employee for Tax Purposes

For tax purposes the distinction between an employee and an independent contractor is important for the following reasons:

  • The deductibility of expenses is considerably more restricted for employees. Self-employed individuals may take more deductions.
  • Employers must remit income tax, EI payments, and CPP payments to the CRA for employees only.


Non-tax implications for independent contractors include:

  • Ineligibility for EI benefits, holidays, employer-paid or other non-cash benefits;
  • Potential liability issues that arise with independent contracts;
  • Inability to collect severance pay; and
  • Lack of job security, as well as increased economic risk.


The traditional tests of employee versus independent contractor are:

  • Control test;
  • Integration and organization test;
  • Economic reality test (this is a part of the entrepreneur test – ownership of tools and risk of profit/loss); and
  • Specific results test (this is part of the risk of profit/loss elements of the entrepreneur test).
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