Owner-Manager: Independent Contractor or Employee?
The factors to be applied in determining whether a worker is an employee or an independent contractor are now well established. While the factors have been enumerated in various ways by different authors and judges, the CRA has adopted a "total relationship" approach (for workers outside Quebec) based on the following criteria: (1) the intention of the parties, (2) the degree of control exerted by the payer over the worker, (3) ownership of the tools and equipment needed to do the work, (4) the worker's ability to subcontract or hire assistants, (5) the worker's financial risk and opportunity for profit, (6) investment in and management of the business by the worker, and (7) any other relevant circumstances (RC4110, "Employee or Self-Employed?"). The relative weight of each factor will depend on the circumstances of the case; however, the intention of the parties, the degree of control, and the risk of profit and loss are often heavily weighted by the courts.
Most owners who provide management services to their incorporated businesses intend to be contractors rather than employees, a characterization that is beneficial to both the owner and the business: the business does not have to make source deductions for CPP contributions in respect of a person who controls more than 40 percent of the voting shares of the company, and the owner can deduct business expenses in respect of his or her management services business. For an owner-manager, the only issue is typically whether the engagement constitutes pensionable employment.
At times, however, the courts have struggled to apply the analytical factors when a worker is also a directing mind of the company. For example, in Pro-Style Stucco (2004 TCC 32), the court noted that the traditional "control" analysis breaks down when the directing mind of the corporate payer is the worker (paragraph 21). In that case, the court resolved the difficulty by reference to the legislation and to the paid directorship of the worker: under section 2 of the CPP Act, "employment" includes the tenure of an office. "Office," in turn, is defined as "the position of an individual entitling him to a fixed or ascertainable stipend or remuneration . . . and also includes the position of a corporation director."
An owner-manager is often a director of his or her company, and as a result is at greater risk of finding that he or she is an employee. However, several recent cases provide guidance for owner-manager directors. In Donald L. Mancell Personal Law Corporation (2008 TCC 521, at paragraph 28), Paris J interpreted section 2 of the CPP Act as requiring that a director be entitled to a fixed or ascertainable stipend or remuneration in order to automatically be characterized as an employee. The issue was earlier examined at length by Rowe J in McMillan Properties (2005 TCC 654). In that case, Rowe J ultimately declined to decide whether a director who received no remuneration was an employee for the purposes of the CPP. The decision sets out most of the important case law on the embedded issues and should be reviewed for that reason. Further, the recent trend in the case law (for example, Mancell; Kewcorp Financial Inc. (2008 TCC 598); 765750 Alberta Ltd. (2007 TCC 149); and Quadra Planning Consultants Ltd. (2009 TCC 144)) is to emphasize the separate legal personality of the worker and the corporation in applying the traditional factors, with the result that the control factor will favour a contractor relationship when the worker is the directing mind of the company.
There are several steps that an owner-manager directors can take to minimize the risk of an employment determination. He or she should ensure that no remuneration is paid in respect of the directorship (or that only a small portion of the remuneration is treated as pensionable employment income) and should differentiate, and document as distinct, the management services provided to the company from the duties performed by the owner in his or her capacity as a director. The yearly resolutions appointing the owner as director might state that no remuneration is to be paid in respect of the position.
The owner-manager should be particularly careful to ensure that the separate identities of the company and the owner-manager's proprietorship are obvious in practice, so as to capitalize on the emphasis in the jurisprudence on separate legal identity in applying the traditional factors. To this end, the owner should have a written management services agreement with the company that explicitly states the parties' intention that the worker is to be engaged as a contractor. The agreement should also specify that remuneration for management services depends on the profitability of the company. If the owner desires some regular income, the agreement can provide for a minimal retainer to be paid to the owner to ensure that he or she is available to provide services wherever and whenever needed. The owner should consider registering for and charging GST on management services (whether or not the effect is ultimately a wash for the company) and should ensure that the proprietorship has the accoutrements of an independent business--at a minimum, business cards, letterhead, business insurance, and office equipment or other tools provided at the worker's expense. Finally, if the owner receives professional advice in structuring his or her relationship with the company, the owner should discuss with the adviser the distinction between an employee and a contractor and should keep any evidence demonstrating that the owner understood the distinction at the time that the agreement was drawn up. As always in dealing with the CRA, the owner-manager should bear in mind that while a court may accept credible oral testimony, the CRA prefers documentary evidence.