Tax Court Addresses Distinction between Employees and Independent Contractors

October 26, 2016 | Andrew Valentine

A recent decision of the Tax Court of Canada serves as a reminder that charities and non-profit organizations must ensure that they properly distinguish between employees and independent contractors.

In Sistema Toronto Academy Inc. v. MNR, the Tax Court of Canada addressed the treatment of certain individuals that were hired by a registered charity to provide musical instruction to disadvantaged youth in Toronto. The Canada Revenue Agency (“CRA”) had determined that these individuals were engaged in insurable and pensionable employment, such that the charity should have made source deductions under the Employment Insurance Act and Canada Pension Plan. The charity appealed CRA’s decision and, on appeal, the Tax Court considered whether these individuals were in fact hired under contracts for employment or as independent contractors.

The Court reviewed the factors established by the Supreme Court of Canada to determine whether an individual is performing services as a business or as an employee. The factors to be considered in making this determination include:

  • the level of control the employer has over the worker’s activities;
  • whether the worker provides his or her own equipment;
  • whether the worker hires his or her own helpers;
  • the degree of financial risk taken on by the worker;
  • the degree of responsibility for investment and management held by the worker; and
  • the worker’s opportunity for profit in the performance of his or her tasks.

The Court noted that the subjective intention of the parties must be ascertained as a first step in the analysis, but must then be tested to determine whether objective reality sustains the subjective intent of the parties.

In this case, the music instructors had originally been hired in 2011 as employees. The charity then prepared new engagement letters in January 2014 to characterize the instructors as independent contractors. The charity re-characterized each letter of employment as a letter of “engagement”, ceased paying vacation pay and for statutory holidays, and no longer agreed to pay severance and provide notice of termination. Instructors were thereafter required to bring their own instruments. The charity also ceased making source deductions and advised that the instructors must determine their own HST obligations. All instructors were requested to sign the new letter of engagement. Despite these changes, the work being performed by the instructors and the manner in which it was preformed remained unchanged.

In analysing the intention of the parties, the Court noted certain of the instructors did not sign the new letter and intended to remain as employees. For some instructors, the Court accepted there was a subjective intention to be independent contractors after January 2014.

In reviewing the objective reality of the relationship, the Court analysed the factors above. The Court noted that because the music instructors had specialized expertise, the control test is somewhat inadequate. However, instructors were required to attend safety procedure orientation sessions, provide criminal background checks, and abide by certain of the charity’s policies. The charity also retained the right to supervise and control the instructors’ work performance. This suggested a level of control consistent with an employment relationship.

The Court also noted that instructors were provided with equipment for much of the period in question, were paid a fixed rate per hour and had no risk of loss. There was also no evidence that the instructors hired their own helpers, or had any investment or management responsibilities.

The Court concluded that the instructors were employees notwithstanding a subjective intention in some cases that they be treated as independent contractors.

Charities and non-profit organizations must ensure that they are properly characterizing their workers as employees or independent contractors. A mere subjective intention to characterize workers as employees or independent contractors is not determinative. As in this case, CRA and the courts will analyse the substance of the relationship to determine how the organization’s workers will be treated.

Organizations are well-advised to review the relationships they have with their workers and service providers to ensure that they are being characterized properly both at the outset and throughout. Miller Thomson’s lawyers would be pleased to assist in this analysis, and to develop policies and contracts that will ensure that the division between employees and contractors is properly respected.


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