C. Higgins (613) 957-2103
MAY 13 1988
XXXX
This is in reply to your letter of February 3, 1988 requesting our interpretation of the tax implications relating to certain information submitted by you.
Specifically, you ask the following questions:
(1) Whether the terms of the contract submitted to us constitutes an employee/employer relationship, or that involving a selfish employed independent contractor; and
(2) Whether the proposed corporation would be considered to be carrying on a "personal services business" as defined in paragraph 125(7)(d) of the Income Tax Act (the "Act").
Since this contract and other documents submitted in your letter refer to a factual situation involving specific taxpayers, we feel that it would not normally be appropriate for us to express an opinion without having full knowledge of all the facts. As a result, your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. However, we are prepared to offer the following general comments.
OUR COMMENTS
1. Employer - Employee vs Independent Contractor Relationship
The determination of whether a taxpayer is an employee or an independent contractor is a question of fact. The court decisions relating to the subject have basically establishes four tests that must be applied in determining whether a particular contract is a contract of service or a contract for services.
Following is a brief discussion of these tests:
(a) TEST OF CONTROL
The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.
(b) INTEGRATION TEST
This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.
(c) ECONOMIC REALITY TEST
This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and, using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this teat include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.
(d) SPECIFIED RESULTS TEST
This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases. Also it usually does not require that the undertaking be carried out by a particular individual. In contrast, in an employer - employee relationship, the employee makes himself available to the employer to be used by the employer without reference to a specified result.
Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important distinguishing factor is the nature of control exercised by the employer over the employee. It is necessary to review and analyze carefully the facts of the particular situation to which the above tests are to be applied, and determine whether the relationship is either one of a contract of services or a contract for services.
As previously mentioned, the determination of whether a taxpayer is an employee or an independent contractor is a question of fact. Any questions regarding you particular situation, including the proposed corporation Should be directed to your District Taxation Office.
We trust these comments and information will be of assistance.
Yours truly, ORIGINAL SIGNED BY Wm. McColm for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch