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US Companies Get in Trouble Hiring Canadian Independent Contractors

Posted by Ray Gonder

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Feb 5, 2014 9:00:00 AM

US Companies Get in Trouble Hiring Canadian Independent Contractors2Given the complexities of operating a US-based business in Canada, it’s no surprise that some employers look for loopholes and workarounds. One workaround that US businesses have tried is to hire Canadians as independent contractors instead of employees. The US Company may feel that this removes the need for them to have a business presence north of the border as they merely have to direct funds from their bank account to the independent contractors.  

Unfortunately, hiring Canadian independent contractors can cause numerous legal and business issues.

Download our free guide on what US companies need to know about paying  employees in Canada.

An Employee by any other Name

If you need an independent contractor in Canada, that’s perfectly acceptable and completely legal. If you need an employee in Canada, and use an independent contractor to avoid tax withholdings and other employment regulations, then you’ve broken the law. Just like the IRS, the Canadian Revenue Agency (CRA) has strict rules around qualifying someone as an independent contractor.  The CRA has expressed a direct interest in eliminating the underground economies that have been created by employers abusing the independent contractor system. They are actively looking for businesses that abuse the system, and the penalties are severe.

Loss of Control

Unsurprisingly, an independent contractor is expected to be independent. They set their own hours, provide their own tools, and can subcontract their work to other people. By law, you have very little say in how they conduct their business. As a manager or owner, this gives you very little control over someone who is working for you. If they’re being used legitimately as a contractor, that’s rarely a problem. However, if you’re using them as a de-facto employee, then you have issues. Training them on your business processes, giving them goals to achieve and the tools to accomplish them and having the expectation that they are only working for you, all cross the line between contractor and employee.

Why Bother?

The only reason to use independent contractors as a workaround is convenience. Setting up all of the accounts and infrastructure to pay workers legitimately is difficult and time consuming. Instead of dealing with all of the legal and administrative complexities, some employers choose to pay contractors directly, expecting them to handle all of the legal and tax requirements themselves. While this may be simpler, it’s illegal and can result in huge fines, back payments, criminal penalties, and the loss of your right to conduct business in Canada. To make matters worse, it’s all pointless, since there’s a way that’s just as easy, yet completely legal.

Employers of Record

If you want the convenience of paying a flat rate, without having to worry about tax withholdings, workplace regulations, or business infrastructure, then you want an Employer of Record (EOR). They operate in the same way as an American Professional Employer Organization (PEO). An EOR already has all of the infrastructure, accounts, and insurance necessary to directly hire Canadian employees. You pay the EOR directly, then they hire and pay employees, handle withholdings and remittances, and ensure workplace compliance. You get the convenience of a contractor, without the legal risk, and without ceding control.

12 Things an American Company Looking to Hire a Worker in Canada Needs to Know

Topics: Payroll Service Provider, Outsourced Payroll Service, Canadian Payroll, Canadian Payroll Deductions, EOR, Employer of Record, U.S. Companies operating in Canada, CRA, Canadian Employer of Record, Independent Contractor, CRA Compliant

Is Your Canadian Small Business Adhering to Government Payroll Standards?

Posted by Karen McMullen

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Nov 22, 2013 9:00:00 AM

Is Your Canadian Small Business Adhering to Government Payroll StandardsOne of the most important, and challenging, aspects of running a small business is maintaining compliance with payroll regulations. Federal and provincial payroll regulations are incredibly complex, and affect everything from reporting requirements to how pay statements are structured. Understanding and applying all of these payroll regulations correctly is time consuming, and there is no room for error. Simple mistakes can lead to financial and legal problems that can cost your business a fortune. Maintaining compliance isn’t easy, and requires an investment of time, effort, and money.

Reporting and Remittance

Payroll regulations governing employee withholdings and employer contributions can differ depending on the type of business you operate and the employees you hire. Dates for remittances also vary, depending on your previous average monthly withholding amounts (AMWA). As your business grows or shrinks, the reporting dates and requirements can change significantly. If you’re handling payroll yourself, keeping up with all of these changes is your responsibility. Late or incorrect remittances can lead to audits, fines, and back payments.

Piles of Paperwork

Accurate documentation is often your only defence in an audit. The CRA recommends that you keep payroll records for 36 months, though they are not limited to a 36-month period for audits. To be on the safe side, you need to make sure that all of your timekeeping and reporting records are up to the latest standards. All of your documentation that contains employee information must be stored in a secure location, for your protection and the employees’. Upon request, any and all documentation must be turned over to the CRA or other authorities for examination.

Employee Classifications

Payroll regulations can also vary widely, depending on the types of services you’re paying for. Like many businesses, you may employ non-citizens, visiting workers, interns, and independent contractors. Each class has different reporting requirements, making it necessary to set up different pay schemes for different employees. You also have to be aware of payroll regulations that can affect an employee’s classification. Failing to adhere to the regulations could turn an independent contractor into a full-time employee—leaving you on the hook for past remittances and payments. Each classification has its own rules and regulations, adding another layer of difficulty to handling payroll.

Always Learning

Perhaps the most difficult aspect of payroll regulations is their constant evolution. These rules change from year to year, if not more frequently. The application of these rules can change from one government agency to the next. Having an understanding of these regulations one day is no guarantee of the same understanding the next day. The only way to assure constant compliance is through constant training and practice. Whoever is handling your payroll must be able to attend training seminars and conferences, read legal texts, meet with government officials, and practice all the things they’ve learned. Even small gaps in their knowledge or experience can prove costly.

Hassle-Free Compliance

An outsourced payroll provider offers an easy way to avoid these problems. They make it their business to stay up to date on changing regulations, and to incorporate those changes into their regular routine. Employees at a payroll service receive constant training, as well as constant experience in applying that training. They frequently interact with auditors and agents, so they know how the laws are actually being applied, versus how they’re written on paper. All of this knowledge and experience helps them avoid compliance issues, and successfully defend businesses that are accused of compliance lapses. When you factor in the associated costs of training, software, legal representation, and possible fines, payroll service providers are an affordable, reliable alternative.

7 Signs It's Time to Outsource Payroll

Topics: Payroll Service Provider, Outsourced Payroll Service, Canadian Payroll, Canadian Payroll Regulations, Employee Payroll Deductions, CRA, CRA Compliant, Small Businesses Payroll, Small Business Operations

Manage Your Payroll the Right Way with an Outsourced Service Provider

Posted by Ray Gonder

|

Nov 20, 2013 9:00:00 AM

describe the imagePayroll processing is an important part of any business. Making sure everyone is paid accurately, and on time, is critical. Making sure all of your reporting and remittance obligations are met is equally critical. Mistakes in any part of your payroll processing can lead to labour issues, audits, and expensive legal entanglements. There are several ways to handle your payroll processing, some more difficult than others. Handling your payroll the right way will save you time, effort, and money. Handling it the wrong way can end up costing you way more than you bargained in the long run.

DIY Payroll Processing

You always have to option of just doing it all yourself. Most businesses start out this way, with the owner handling payroll until it becomes too large to manage. You can take the time to learn all of the regulations, attend conferences to learn about new legislation, and even buy yourself some expensive software. Of course, then you have to learn to use the software, and keep up with updates and changes to the software. Once you have the knowledge and the software, you can spend hours every week handling all of the paperwork for payroll processing, as well as addressing any employee issues with payroll. As your business grows, you’ll spend more and more time on payroll, and less time focused on your business.

Pass it Along

Often, when payroll processing gets too complex for the owner, it gets handed down to the growing HR department. They inherit the responsibility of keeping up with changing legislation, learning new software, and dealing with employee issues. They often have little or no previous experience with payroll processing. They get to start from scratch, and learn the ins and outs of payroll service as they go. Of course, they aren’t liable for any mistakes they might make along the way. That burden still falls directly on the company. Incorrect payments or improper remittances can trigger a visit from the CRA. If they find problems with compliance, the fines and penalties go to the company, not to the HR staff.

Amateurs vs Experts

Payroll processing is a lot like other business services. It’s best to leave it in the hands of agencies that specialize in making sure it’s done right. Most businesses use accountants for taxes, shipping companies to deliver goods, and service agencies to repair equipment. Why do they outsource all of those needs? Because smart owners know that no business can do everything. Letting trained, experienced experts handle your tangential business needs just makes sense. When you try to do everything, you end up putting too much stress on your personnel, and pulling their focus away from your core business pursuits. By outsourcing some of your needs, you allow your staff to maintain laser-focus on growing and improving your business.

An outsourced payroll service relieves pressure on your staff, and relieves you of the stress of worrying about potential audits and penalties. They have years of experience interpreting and applying new and existing legislations, allowing them to easily navigate the complex payroll requirements. They undergo frequent, rigorous training, and have access to the latest and best software. Using their services is just like engaging a tax professional or repair service. If you want the best service, you hire someone who specializes in the service you need, and who has a proven track record of success.

7 Signs It's Time to Outsource Payroll

Topics: Payroll Processing, Payroll Service Provider, Outsourced Payroll Service, Canadian Payroll, Canadian Payroll Deductions, Payroll Tax Calculations, Payroll Tax in Canada, Canadian Payroll Regulations, Canadian Payroll Service, Payroll Calculator, CRA, CRA Payroll Tax, CRA Compliant

How to Avoid Staying Educated on Always Changing CRA Payroll Tax Rules

Posted by Stacey Duggan

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Nov 11, 2013 9:00:00 AM

How to Avoid Staying Educated on Always Changing CRA Payroll Tax RulesMany businesses still choose to handle payroll using in-house personnel. This is usually done either out of habit, or out of the belief that it saves the business money. Whatever the reason, it’s becoming increasingly expensive and risky to handle CRA payroll tax compliance using your own staff. As the CRA payroll tax rules continue to evolve and change, it’s becoming more difficult to keep up with all of the complexities. Any money saved by using your own staff can be instantly wiped out by a single error.

A Better Use of Time

Keeping up with CRA payroll tax legislation requires in-depth training and retraining. Even with all of that training, it still takes constant practice to meet all of the legislative requirements quickly and efficiently. Unless you have a dedicated payroll staff, your personnel probably only deal with CRA payroll tax requirements on a weekly or semi-weekly basis. This leaves gaps in their experience that can allow mistakes to creep in. With all of the other daily tasks your HR personnel are responsible for, it can be difficult for them to find the time to keep up with all of the payroll requirements. When they’re focused on payroll, they aren’t as productive in their other tasks. When they’re focused on their other tasks, they’re not gaining experience in CRA payroll tax compliance.

Employee Issues

Part of handling payroll involves handling employee questions and concerns. Employees always have questions about insurance and tax withholdings, overtime pay, missing hours, and myriad other concerns. Addressing these issues will consume even more time that your staff could be spending on more productive pursuits. Any mistakes must be corrected, CRA documentation must be changed, and new checks must be issued. The hours lost fixing minor errors can quickly add up to far more than the company is saving by using in-house personnel to handle payroll.

Convoluted Compliance

Even if your personnel have the right training and adequate experience to handle most payroll needs, that’s no guarantee that they’ll understand all of the nuances of the CRA payroll tax requirements. Worker classifications, insurance requirements, reporting documents, and more, can all change without notice. Something as simple as a trip to another work site can change the reporting requirements for a worker. If your staff isn’t familiar with the triggers that can cause these changes, they can fail to comply with the most current legislation. When that happens, fines, penalties, and back pay can quickly add up to tens of thousands of dollars.

Expensive Errors

Over the past year, the CRA has drastically increased their compliance efforts. This means more audits, more time spent navigating bureaucracy, and more potential for fines and penalties. Once you’re involved in a CRA payroll tax audit, you’ll probably want to engage legal counsel. At current hourly rates, it won’t take long for a labour attorney to cost far more than a payroll service.

Payroll Peace of Mind

Engaging a payroll service can eliminate all of these problems and concerns. Their dedicated staff is focused on payroll, and payroll regulations, every single day. They have the education, training, and experience to maintain compliance with the most recent legislation. Many of them are involved in shaping upcoming legislation, so they can be prepared for changes before they even happen.

Using a payroll service allows your personnel to focus on tasks for which they are better suited, and which are more productive for your business. The payroll service can handle everything from employee queries to CRA audit preparation. With their professional CRA payroll tax services, you save time, aggravation, and avoid compliance issues.

7 Signs It's Time to Outsource Payroll

Topics: Payroll Service Provider, Outsourced Payroll Service, Payroll Tax Calculations, Payroll Tax in Canada, CRA Audit, Payroll Service, Payroll Calculator, CRA, CRA Payroll Tax, Payroll Deductions, CRA Compliant

Staying Up to Date on Changing Payroll Regulations Can Be a Full-time Job

Posted by Stacey Duggan

|

Nov 8, 2013 9:00:00 AM

describe the imageAround 2,500 years ago, Heraclitus taught that “the only thing that is constant, is change.” In hindsight, it seems that he was predicting the existence of Canadian payroll regulations. Every year, if not more often, these payroll regulations undergo wholesale changes. New payroll regulations are added, old ones are removed, and many that are left get modified. When the dust settles, it’s up to you to figure out how the new set of payroll regulations affects your business. Unfortunately, the CRA expects a steep learning curve. Mistakes can start costing a business fines and penalties from the first day the new payroll regulations are in effect. With a lot to learn and relearn, and no room for error, keeping up with changes to the regulations can be a full-time job.

No Easy Task

Even without all of the changes, keeping up with payroll regulations isn’t easy. Aside from the CRA, there are provincial agencies that require their own remittances and paperwork. There are worker-classification issues, insurance payments, overtime calculations, and holiday pay to consider. Different workers will all have different rates and requirements, forcing the payroll manager to track each employee separately. Time reporting must be verified weekly to avoid any under or over payments. In the event of any errors, corrections must be submitted to the relevant agencies, and new cheques must be issued. And all of this is standard, day-to-day payroll management. There are complexities that can make all of this look simple by comparison.

All Tangled Up

Payroll regulations are complex, and interwoven. Some regulations that appear to stand alone can have a significant impact on other regulations. Worse yet, any impact may entirely depend on the situation at hand. A worker’s classification may change from one jobsite to the next—or it may not, depending on their role at the other jobsite. Reporting requirements can change from one job position to the next. Even pay rates for holidays or overtime can change, depending entirely on which regulations apply to a particular situation. The same worker may have to be tracked using multiple systems if they work at different sites or in different roles. Knowing how and when these regulations affect each other takes a lot of expertise. Getting, and maintaining, that level of expertise requires constant training and practice.

Staying up to Speed

Keeping up to date with changing payroll regulations requires a serious commitment of time and money. Payroll managers have to be trained, take classes, and attend seminars and conferences. Giving them the best tools requires purchasing expensive software, which also requires training to use. Even when they’re fully trained and have the right software, there’s no guarantee that they’ll be getting the experience to handle complex issues. The vast majority of their duties will be day-to-day payroll management. On the rare occasions when difficult regulations come into play, they may not have the expertise to recognize them.

Compliance with Confidence

A payroll service provider deals with changing payroll regulations every day. They may even be involved in helping to craft those changes. They have a level of expertise that can only be gained by constant training and immersion in payroll issues. They use state of the art software to help them accurately and efficiently meet your payroll needs. The cost of all the software and training is distributed among dozens, or hundreds, of clients—so you have no large, up-front expenses. Payroll service providers are frequently in contact with inspectors and auditors, so they know what red flags are triggering issues. To keep up with changing regulations, you need a full time payroll service provider.

What Are You Leaving to Chance by Handling Payroll on Your Own

Topics: Payroll Service Provider, Outsourced Payroll Service, Canadian Payroll, Canadian Payroll Deductions, Canadian Payroll Regulations, Government Compliance, Canadian Payroll Service, Payroll Calculator, CRA, Payroll Deductions, Payroll Regulations, CRA Compliant

3 Ways Outsourced Payroll Processing Saves You Money

Posted by Stacey Duggan

|

Oct 18, 2013 9:00:00 AM

3 Ways Outsourced Payroll Processing Saves You MoneyCanadian businesses large and small can save money by using outsourced payroll processing. Payroll processing is a necessary part of every firm that employs people, but it doesn't have to consume much of your time, resources, and focus. By outsourcing this task, you can reduce your overhead costs, find freedom from fines, and enjoy greater accuracy in your payroll.

1. Reduced Overhead Costs.

Some firms choose to hire a payroll clerk to take care of payroll processing. They figure they'll have greater in-house control over the process, and they might feel that communication will be easier when payroll processing is just a few steps away. Proximity and control can often be elusive, however, especially when you realize that these "benefits" can be extremely costly. One of the biggest drawbacks of choosing to hire your own payroll clerk instead of working with outsourced payroll processing is that you then assume additional headcount HR overhead costs. By adding another full-time employee to your payroll, you assume the clerk's wages, benefits, and other employee burdens such as Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, not to mention paid vacation and sick days and health benefits premiums. You can reduce your overhead costs (and quite a bit of time and effort) by using outsourced payroll processing.

2. Freedom from Fines.

Regulatory changes plague Canadian businesses because they're difficult to keep up with, and the fines for ignoring the changes can be steep. Your own in-house payroll clerk will have a difficult time staying abreast of changes that can affect payroll processing, remittances, Employment Insurance, provincial and federal regulations, and more. When you entrust this work to an outsourced payroll processing firm, you are guaranteed to be compliant with all regulatory changes. Not only does this give you peace of mind and save you from administrative aggravation, but it also can save you from having to pay fines.

3. Greater Accuracy.

Along with the cost of hiring your own payroll clerk, if you take care of payroll processing in-house, you'll also incur the costs of payroll software and support systems. This software can be expensive, and there's no guarantee that it will always work perfectly and stay up-to-date with regulatory changes. Of course, there's a range of payroll processing software out there, from inexpensive and glitchy to break-the-bank expensive and robust. You'll have to make decisions about payroll processing software without having the benefit of experiencing them first-hand to judge them well. When you work with outsourced payroll processing, however, there are experts taking care of all of this for you. Since it's their business to guarantee that your payroll is processed correctly, on-time, and fully compliant with the law, outsourced payroll processing firms spend a great deal of resources on ensuring that their systems are robust, current, and fail-safe.

When you use an outsourced payroll processing firm to handle the details of your firm's payroll, you save money. You save money in overhead costs, fines, and accuracy. You can be confident that you're not overpaying any taxes or other government contributions. If saving money was the only benefit, it would be well worth it to go with a payroll processing firm, but that's not where the benefits end. In addition to saving money, you have the peace of mind of knowing that a major part of your firm is being handled by experts with years of experience in their field. Your payroll will always be on time and fully compliant with federal and provincial regulations. You can put payroll out of your mind and focus your efforts on more interesting and gratifying aspects of your business, which only you can handle.

7 Signs It's Time to Outsource Payroll

Topics: Payroll Service Provider, Outsourced Payroll Service, Employee Payroll Deductions, Government Compliance, Canadian Payroll Service, Payroll Calculator, Great Payroll Service Provider, CRA Compliant

The CRA is Watching – 5 Audit Red Flags

Posted by Stacey Duggan

|

Oct 9, 2013 11:06:00 AM

CRA is Watching 5 Audit Red FlagsHow does the CRA make sure that Canadian businesses comply with current tax law? They audit. A CRA audit can come in one of three flavors: Income Tax Audit, HST/GST Audit, and Employer Compliance Audit.

The Income Tax Audit is the most basic (and least painful) type of CRA audit. Essentially, the CRA will examine the amount of money you spent and earned. This isn't to say that an Income Tax Audit won't impact your business. It will cost you time and money.

The HST/GST Audit verifies that you have been faithfully collecting and remitting GST/HST (Goods and Services tax/ Harmonized sales tax). This CRA audit is more involved than the Income Tax Audit.

The Employer Compliance Audit is used to ensure proper withholding and remittance. It's important to note that the CRA also examines taxable benefits in this audit.

You may feel a little better knowing that the CRA will not perform both the Income Tax Audit andthe HST/GST Audit on the same firm. That's small comfort, however, when you realize that a CRA audit is time-consuming, tedious, expensive, and intrusive. It's best to avoid an audit from the start, and the best way to do that is to avoid the following red flags:

1. Neglecting to pay CPP or EI.

One of your responsibilities as a Canadian employer is to withhold CPP contributions and EI premiums from your employees' pay cheques and then to send these funds along to the CRA. In addition to your employees' contributions and premiums, you must add your own contributions to these funds. If you don't, the CRA will require that you cover both your own portion and that of your employees.

2. Reporting Consecutive Losses.

Nobody likes to admit that their businesses are suffering – until tax time, that is. The government allows for losses by offering extra tax credits. This helps fledgling businesses to make it past those difficult first years. If you report four or more consecutive losses, however, the CRA will likely audit to see what's going on.

3. Failing to Hire an Accountant or Outsourced Payroll Processing Firm.

The CRA knows that when people handle their accounting themselves, they're more prone to making errors. In addition, when you handle your own accounting, there's more temptation to include income or expenses that shouldn't be included in your reports. For these reasons, the CRA is more likely to audit small businesses who handle their accounting themselves.

4. Reporting Excessive Business Expenses.

If you report business expenses that are much higher than you usually report, or if your business expenses are higher than other similar businesses in your area, the CRA may want to find out why. Sometimes businesses report higher-than-usual business expenses when they face a big expansion or remodeling project. You can avoid this red flag by spreading your business expenses out over several years instead of tackling everything at once.

5. Receiving Most of Your Income in Cash.

The CRA looks for unreported income, and cash deposits will be scrutinized. You should be able to explain each of your cash deposits, especially if they're not being reported as income. The CRA especially targets small businesses when it comes to analyzing cash income.

An outsourced payroll processing service can help to minimize your risk of a CRA audit by guaranteeing proper withholding and remittance, helping you to become 100% compliant, and structuring your payroll processes to avoid audit red flags. If you feel that you're currently on shaky ground when it comes to a CRA audit, take steps today to improve your situation and your peace of mind.

7 Signs It's Time to Outsource Payroll

Topics: Outsourced Payroll Service, CRA Audit, Government Compliance, Best Payroll Calculator, CRA, CRA Compliant, CPP, EI, Tax Laws, Canadian Businesses, Audit Red Flags

Professional Employer Organizations Are Called "Employers of Record" in Canada

Posted by Stacey Duggan

|

Aug 22, 2013 9:00:00 AM

Employers of Record in CanadaUS-based businesses having to pay Canadian staff in Canada can benefit from using a PEO (Professional Employer Organization). In Canada, PEOs are called “Employers of Record” (EORs). Foreign companies can simply have their Canadian staff paid on their behalf by a Canadian-based EOR. Foreign companies gain the freedom to move ahead without the HR and payroll costs and headaches and potential liabilities that come with working within the Canadian regulatory environment.

Having a Canadian EOR immediately removes the following barriers from a foreign company's expansion and operations in Canada:

Insurance, Banking, and Financial Infrastructure

If you're currently operating in the United States, you already have these systems in place. The only problem is they are not relevant in Canada as most US-based systems won't work north of the border. Establishing insurance, banking, and financial infrastructure that is compatible both with your current infrastructure and with Canadian systems can be tricky and time-consuming.

A Canadian Administrative Presence

To pay Canadian staff in Canada, US-based businesses need to have a Canadian administrative presence. This means registering and maintaining a Canadian-based corporation and physical address to be compliant with Canadian law.

CRA Filings

The Canada Revenue Agency works differently than the IRS, and it can be troublesome to learn and be compliant with a whole new set of rules and regulations. When using an EOR, this is all handled for you. You don't have to deal with the paperwork, the remittances, and the legislative changes that affect Canadian HR and payroll processing regulations.

Compliance with Canadian Federal and Provincial Regulations

From employment laws to health and safety regulations, the rules are different in Canada, and even with a thorough knowledge of Canadian law, you could easily end up being fined for non-compliance. An EOR gives you a safety net. They're already compliant with Canadian law, so when you use an EOR, you're assured of being in good standing.

A Canadian Employer of Record can also help with:

  • Advice on using independent contractors.

    Recently, several well-known, US-based companies have had disputes with the CRA over what constitutes an independent contractor. When you have an Employer of Record who understands these nuances, you can avoid fines and legal hassles.
  • Ever-changing compliance laws.

    You don't have time to read up on every Canadian legislative change that affects business taxes and laws. An EOR ensures you are always up-to-date and compliant.
  • Assistance with human resources.

    Canada has a different culture when it comes to hiring, unions, contracts, vacation days, and other HR issues. An Employers of Record can give you much-needed advice on these issues.
  • Improved costs.

    Using an Employer of Record not only saves you worry and time, it also saves you money. It's a simple and efficient way to establish your Canadian presence and keep your operations running smoothly.
  • More time.

    If you'd rather focus your time on your core competencies than on the small print in CRA manuals, an Employer of Record manages all the HR and payroll details while you manage your Canadian operations.

For foreign firms that need to pay Canadian staff in Canada, seeking out a Canadian-based firm that offers Employer of Record services can eliminate a potentially huge administrative headache.

12 Things an American Company Looking to Hire a Worker in Canada Needs to Know 

Topics: EOR, Professional Employer Organization, Canadian Payroll Service, PEO, Employer of Record, U.S. Companies operating in Canada, American Business in Canada, CRA Compliant, Canadian-Based EOR

The Danger of Hiring Nothing But Independent Contractors

Posted by Stacey Duggan

|

Aug 20, 2013 11:45:00 AM

Independent ContractorBoth employers and employees can benefit from independent contractor arrangements. Employers like working with independent contractors because they don't have to pay CPP, EI, income tax, pensions, and benefits. The contractors themselves also appreciate the arrangement because they can write off reasonable business expenses and avoid the bureaucratic hassles that accompany working within a business.

Working in an independent contractor framework seems like a win-win situation for both employer and employee, so what's the catch?

The CRA is strict about the definition of an independent contractor because they know that some people use independent contractors to avoid paying taxes and benefits. To draw a clear line on the issue, the CRA has formulated a four-point test to determine whether or not someone is an employee or an independent contractor.

Abiding by this four-point test is critical to you as an employer. If the CRA finds that you're not following the regulations governing independent contractors, you could be subject to back taxes, CPP contributions, and EI deductions for the time spanning your employee's involvement with your company. This is not just an issue for large corporations. Any business, large or small, could find itself facing huge financial penalties if the CRA finds that it hasn't followed its guidelines regarding independent contractors.

The guidelines specifically examine control, ownership of tools, profit/risk, and integration.

1. Control

Essentially, the CRA wants to know who is in control of the work done.  If the employer specifies how the job will be done and directs the worker's daily activities, the worker is an employee, not an independent contractor.

This doesn't mean that the employer doesn't have any say in a project. Of course, the employer can impose reasonable limits. For example, the employer can say, "The brochure needs to be printed by March 22nd," but the independent contractor should be in charge of how the project is accomplished.

2. Ownership of Tools

In most cases, independent contractors must own and maintain their own tools and equipment. If a worker reports to work at a business and uses the business' equipment, that person is an employee. If, on the other hand, the work is done at the independent contractor's office or home on the worker's own equipment, it's much more likely that the CRA will consider this worker an independent contractor.

3. Profit/Risk

Employees don't have many opportunities to take risks or incur profits outside of their agreed-upon wages. Yes, employees incur losses when they travel to work and pay parking fees, but these do not classify as risks in the eyes of the CRA. Also, employees may earn bonuses, but again, this is not what the CRA has in mind when discussing risks.

Profits and risks come into play when an independent contractor can turn down work or choose to take a loss for various reasons such as doing work for charity, trying to secure better contracts, or obtaining a client at a loss to secure future business or gain prestige. Also, independent contractors can set their own rates, even varying their rates for certain projects, which is not a privilege employees usually enjoy.

4. Integration

How integrated is the worker into the company? This can be difficult to determine and quantify, but the CRA uses it as one of their criteria for determining a worker's status. Contractors are less integrated than employees in the company's day-to-day affairs. They often come in only occasionally, or they work at the office when handling specific projects.

The Rules Are a Grey Area

It can be difficult to know if you're compliant, as each situation is gauged on a case-by-case basis, based on the personal interpretation of circumstances by the specific CRA Auditor you are dealing with. Rather than running the risk of having independent contractors be assessed as employees, it can be well worthwhile to seek professional advice before getting into any trouble.

What Are You Leaving to Chance by Handling Payroll on Your Own

Topics: Payroll Tax, Payroll Service Provider, Canadian Payroll, Canadian Payroll Deductions, CRA Audit, CRA, Remitting Taxes, Canada Revenue Agency, Independent Contractor, CRA Compliant, CPP, EI

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