The CRA could find your consultants are actually your employees
The recent downturn in the economy has prompted many companies to impose hiring freezes, making independent consultants fashionable and economical again for Canadian employers who need highly skilled professionals to complete very specific tasks while maintaining the flexibility to trim their payroll costs.
According to a KPMG study, up to 41 per cent of a company’s gross annual payroll is associated with employee benefits, so using independent consultants can offer considerable savings. They make their own Employment Insurance and Canada Pension Plan contributions, and relieve an employer of responsibility for benefit plans that can include medical and dental benefits, long-term disability insurance, life insurance, savings and RRSPs.
However, it is the CRA that has final say over whether a person is an independent consultant or an employee.
Many people are willing to give up company benefits and job security for career flexibility and the favourable tax treatment they receive from the CRA for being self-employed.
As an employee, the equation of earning an income goes as follows: you earn, you’re taxed and then you spend what is left over. If you are self-employed, the government allows you to adopt a much more favourable equation: you earn, you spend, you income split, you defer bonuses and then you are taxed on what is left over. A good accountant can be invaluable in those calculations.
The biggest questions asked by both HR directors and independent consultants are “What are the best ways for independent consultants to structure their businesses for both legal and tax purposes so they will not be considered an employee by the CRA?“
Your company should seriously consider contracting and paying consultants through staffing agencies, which in turn will hire and pay the independent consultants. These agencies create a buffer between your company and consultants, and the CRA is more likely to consider the consultant an employee of the staffing company.
Require consultants to be incorporated and have a business licence, so that you are making a contract with a legal business entity, not a person.
If the independent consultants are incorporated make sure they are registered with CRA and have a business number and a GST number.
Make sure consultants have an office outside your place of business, with a phone line, fax and separate e-mail.
Ensure that your company signs clear contracts. A contract is a starting point for a relationship, and it is essential to ensure that its content is clear and fair to both parties. Make certain that the scope of the work is defined and measurable, and that it includes a time frame for when the contract ends. Contracts between legal entities should be signed using the business name of either the staffing company, or the incorporated business of the consultant, and your firm.
Ensure that consultants have adequate insurance and their own benefit plans. Requiring consultants who work with you to show proof that they own Errors and Omissions insurance policies before signing contracts protects both the consultant and your firm from financial catastrophe. If there is conflict over a job or a consultant has cost you financially by making a mistake, your firm has assurances that the consultant has enough insurance. This may be the difference between your company carrying on business or going out of business.
Finally, if your company is engaging independent consultants it’s wise to seek the advice of a labour and employment lawyer to minimize the possibility that the CRA will later rule that the consultants are actually employees, imposing all the responsibilities that go with being an employer on your company.