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Not Sure How to Hire an Independent Contractor from Canada?

Posted by Corinne Camara

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Aug 31, 2016 9:00:00 AM

Not_Sure_How_to_Hire_an_Independent_Contractor_from_Canada.jpgWhen it comes to expanding into another country, there is no “have your cake and eat it too” option for businesses. If you want to operate officially within a new nation, you generally have to create new bank accounts and insurance policies, register with both federal and provincial departments, and more. This process drains your time and resources alike, and that’s before you start making decisions about hiring and other day-to-day concerns.

As a result, many organizations choose to avoid the process entirely by hiring independent contractors. These workers carry out a company’s business in another country and receive payment for it, saving the enterprise from the bureaucratic and financial hazards inherent to expansion. This practice also saves businesses money because their independent contractors don’t qualify for benefits such as pension plans or employment insurance. 

But while independent contractors can ease the growing pains of an expanding business, they present risks of their own, especially in Canada. Organizations such as the Canada Revenue Agency (CRA) employ very precise standards and rules governing the use of independent contractors, and failing to follow them can result in disastrous fines. These tips will tell you everything you need to know if you need to know how to hire an independent contractor from Canada.

Make Sure the Worker is Officially an Independent Contractor

When you hire north of the border, you need to understand what sets an independent contractor apart from a full-time employee. The CRA’s website features some basic definitions, but it’s a trickier issue in practice than in theory.

Generally, self-employed contractors don’t require oversight from a company representative. The employer offers them work and they can choose which tasks they would like to complete. Furthermore, independent contractors don’t owe their employers any exclusivity. They can work with any other company during or after their term with an organization. This independence also means that they usually possess the tools and work environment necessary to carry out their assigned work, so employers don’t usually have to furnish them with anything. Independent contractors can also sub-contract their work to other organizations (so long as they foot the bill for it) and hire their own workers. That said, they are also responsible for paying any expenses they incur and holding up their end of the agreement with the employer.

Businesses must keep track of these regulations, as well as many others, and know their contradictions and exceptions almost intuitively. While this is a difficult task, it’s also a necessary one. The CRA unsparingly penalizes companies that misclassify their employees, so if you fail to take due care of your workers, you may find yourself on the receiving end of a heavy fine. So how can you follow the rules properly without having to spend the time and resources it would take to actually set up a presence in Canada?

Work with an Employer of Record

Employers of record (EORs) are as close to a best-case scenario as you can get. They take on hiring responsibilities in Canada with your approval, saving you from expanding northward. If you work with an EOR, you needn’t worry about providing benefits, filing taxes, or taking on human resources duties, as they tend to handle these tasks for you. Employees are less likely to be misclassified, as these enterprises often include workers who are well versed in Canadian employment and tax regulations. Best of all, EORs are affordable for many companies, so if you’re not sure how to hire an independent contractor from Canada, they will be able to address your concerns without costing you a bundle.

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

Topics: Independent Contractor

How to Hire an Independent Contractor from Canada

Posted by Corinne Camara

|

Aug 12, 2016 9:00:00 AM

How_to_Hire_an_Independent_Contractor_from_Canada.jpgHiring independent contractors can simplify your business operations if you are expanding your US-based business into Canada. There are, however, many things to consider when you are looking to hire an independent contractor from Canada. In order to successfully engage an independent contractor, your company must be aware of Canadian laws and employment regulations to avoid any potential mistakes that could result in costly fines. To help you with your hiring needs, here are some tips for how to hire an independent contractor from Canada while being in compliance with both American and Canadian labour laws and subsequently grow your business!

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

So, What Is an Independent Contractor?

The first rule of thumb is to know exactly what constitutes an independent contractor. This is a crucial step, as misclassifying your staff can have serious legal ramifications potentially leading to heavy fines. The CRA (Canada Revenue Agency), which governs tax laws for Canada, has outlined a four-point test to determine whether or not a worker is an independent contractor. It is well worth the time it takes to ensure that you are correctly classifying your staff when you hire an independent contractor from Canada.

The test, developed by the CRA, takes into account who is in control of the work that is being done for your company, who owns the tools that are being used to complete the work, whether the independent contractor is in control of the amount of profits or risk associated with the work, and whether the independent contractor has been integrated into the company. These four points are worth looking at in depth to be sure that your company is not violating any CRA regulation when you hire an independent contractor from Canada.

Play by the Rules

After ensuring that you are classifying your employees correctly and that your independent contractors meet the regulations of the CRA, it is important to ensure that you are in compliance with Canadian—and individual provincial—labour laws. These laws address topics like national holidays, minimum wages (these are provincially mandated), workplace health and safety requirements, hiring and termination procedures, and vacation and sick time. 

When it comes to the legalities of expanding your business, it is important to become educated on the intricacies of labour laws and regulations so that your business doesn’t find itself on the wrong side of the laws. To avoid missing any important factors when you go to hire an independent contractor from Canada, it can be beneficial to engage a PEO (professional employer organization) to avoid the headache and possible confusion of paying Canadian independent contractors.

Consult a PEO

Hiring a PEO can be hugely beneficial when it comes to balancing American and Canadian payroll policies and laws when you hire an independent contractor from Canada. A PEO will be knowledgeable about the differences between American and Canadian labour laws and will reduce the margin for error in hiring and paying independent contractors.

A PEO will be able to completely manage and maintain your payroll process in an accurate and efficient manner as they are familiar with the over 190 regulatory requirements when it comes to processing Canadian payroll. Additionally, a PEO can assist you with organizing your data, allowing your company to focus all of your time and resources on operating and developing your business. Hiring a PEO allows you to expand your business and hire Canadian independent contractors with the confidence that your business is running efficiently while being in compliance with all regulatory legislative bodies.

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

Topics: Independent Contractor

Penalties for Misclassification of Independent Contractors

Posted by Karen McMullen

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Dec 23, 2015 9:00:00 AM

Penalties_for_Misclassification_of_Independent_Contractors.jpgAccurate employee classification is a necessity in business and affects a great deal of taxes, registration and other administrative peripherals that you're responsible for. With recent changes to laws and the growing need for independent contractors, all companies have begun falling under the scrutinizing eye of the Canadian Revenue Agency (CRA), but none more than companies who deal with independent contractors on a regular basis.

Why Do They Need to Be Classified at All?

Classifying workers falls mainly into two groups – employees and contingent (or independent) workers. Given that they are both types of workers who will work for you in exchange for pay, many companies don't fully understand why they even need to be classified. That comes down to law.

Employees, which you can generally assume are non-temporary workers who work at set times and follow direct orders, need to be protected under labour laws and the Employment Standards Act in their province. This affects everything from their rate of pay, overtime, notice of termination, leaves, employment insurance and their minimum wage – not to mention mandatory taxes that need to be deducted from each paycheque. Your business is also responsible for certain taxes and remittances that are related.

On the other hand, independent contractors, who you will find generally work for shorter periods and often make their own hours, have less protection – one of the risks of their job. Their contracts need to follow some laws, but many labour laws don't apply to them. They can charge a fee that is agreed upon on an individual level and are allowed to work more than the maximum hours in a week without having to be paid overtime.

The dangers of misclassification come down how you're expected to treat your employee, your responsibilities in the eyes of the law, and all the taxes that are associated with them. 

Why Would Companies Misclassify Their Workers?

In most cases, it's a simple mistake that causes this problem. Even though there are set standards for deciding who is an employee and who is an independent contractor, those lines can be blurred and more complex. Some contractors work in offices and their contracts can last several years. Some employees are expected to work from home. In that case, it can become confusing for a business to tell the difference and accidents happen on paper, which can lead to major trouble down the road.

Other companies may be tempted, due to complexities, to misclassify their workers on purpose. A contractor is not owed the same benefits or protection so they are associated with less administrative costs like remittances, vacation and statutory holiday pay. They often don't qualify for EI, so any deductions necessary from their paycheques becomes a great deal simpler than it would with a regular employee.

The Penalties

When a worker is misclassified, it creates a great deal of trouble for everyone involved and results in lost tax revenue for the government (which is something they never take too kindly to). Even unintentional misclassification causes problems, resulting in a long series of fines related to everything from incorrect filing to withholding income taxes to failing to register their social insurance number.

When it comes to intentional classification issues with independent contractors, you're in a whole new world of fines and penalties. On top of paying back taxes and other owed payments (for employees, for example, overtime and vacation pay would be due), you might see up to a year in prison for these missteps. You could also find yourself in a situation where they find you guilty of deliberately evading taxes, which can lead to five years in prison on top of hefty fines.

Don't find yourself in hot water because of paperwork – find out how an EOR can help keep you and your company protected.

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

Topics: Independent Contractor

What's the Difference between Employees and Independent Contractors?

Posted by Shannon Dowdall

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Dec 18, 2015 9:00:00 AM

Whats_the_Difference_between_Employees_and_Independent_Contractors.jpgAs independent contractors become a more common option for businesses of all types, it's important to address questions and concerns that are associated with this relatively new industry. Using contractors offers a great deal of benefit, including cost-savings, better and more efficient time management and smarter allocation of resources, so it's hard to imagine any drawback could apply. For most, however, it's the legalities that are intimidating and all laws (old and new) associated with their hiring, management and termination. Luckily, we can spell out a few of the major differences between traditional employees and independent contractors in a way that should help cut through any concerns.

1. Tool Ownership

In a typical work environment, your employee is generally provided with the tools they need to do their job. In an office, this might mean a computer, a desk, pens and paper, staplers and more. In a warehouse, this means forklifts, safety equipment and other things necessary. This is fairly straightforward. This also means an employee is generally not given the opportunity or ability to hire an assistant, or delegate their work to another without approval. In this way, you ensure that your employee is well equipped and they can, in turn, get their work done.

An independent contractor on the other hand, is usually responsible for all of his or her own tools. They are expected to provide their own laptops, office supplies, tools or anything else that is required of them. A graphic designer on contract might provide their own graphics software, a construction contractor provides their own steel-toed boots. When it comes to delegation, a contractor is usually allowed to subcontract to someone else – this means if they are given a large project and they need the expertise of another person on hand, they can hire them without express approval as long as the job gets done in the end.

While there are occasionally exceptions to these rules, as spelled out in various contracts and policies, it's an excellent marker for telling the difference.

2. Control Over Time and Work

A regular employee is expected to consistently answer to a manager or supervisor throughout the work or project period, and is generally directed by them as well in order to do their work effectively. They're also generally taught how to do their particular job in a standardized way that is preapproved by their company. That company also sets their rate of pay and how often they're paid, as well as the method and has full control over when they schedule the worker.

On the other hand, independent contractors are generally more flexible. Many of them don't stick to a 9 to 5 schedule, instead working on things at times they deem optimal for themselves. When they're hired, they often set out their own rate of pay and generally don't have to ask for permission when working on other contracts during their time with the company. Freelancers also come equipped with certain preferred methods, and tend to use their own to get the work done in the way they see fit to the standards of the business.

3. Classification

The biggest difference between independent contractors and employees is the legal difference. Based on the criteria above (and others), the Canadian Revenue Agency expects each worker to be classified correctly when you're filing taxes and any other administrative papers relating to them. When you classify an employee correctly, you're properly contributing to Employment Insurance, the Canadian Pension Plan and income tax as expected. That said, if you are misclassifying your employees and/or contractors, you should expect to see serious fines, penalties and arguably worst of all, poor reputation with the CRA. Ensure your classification is correct and to the right standards before you file – it's better to avoid trouble than to try to deal with it when it comes.

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

Topics: Independent Contractor

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

The Danger of Hiring Nothing But Independent Contractors

Posted by Stacey Duggan

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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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