Tax & Trade Blog
Independent Contractor or Employee?
Direct sellers in the US have a “safe harbour” which does not exist in Canada. Specifically, section 3508 of the US Internal Revenue Code expressly excludes the salesforce from the definition of “employee” for federal tax purposes! By contrast, direct sellers operating in Canada need to be proactive about making sure that the salesforce stays on the right side of the employee – independent contractor divide, which is a “common law” test in Canada.
The recent Tax Court of Canada (“TCC”) case of Mazraani provides a good refresher – and some positive comments for Canadian direct sellers – on the difference between employees and independent contractors.
Mr. Mazraani was an insurance sales agent with Industrielle Alliance, Assurance et Services Financiers inc. (“IA”). After being terminated, Mr. Mazraani applied for employment insurance (“EI”) under the Employment Insurance Act (“EIA”) on the basis that he was an employee.
The TCC started its analysis by emphasizing that the EIA does not define “contract of service”, and relied on the Federal Court of Appeal’s two-stage analysis in Connor Homes.
The first step in the analysis is to look at the subjective intent of the parties in forming the relationship. The second step is look at the “actual working relationship” to see if it is objectively consistent with the subjective intent.
In this case, the TCC found that Mr. Mazraani would have understood that he was working as an independent contractor. In particular, the TCC relied on the contract he signed, evidence from IA (including testimony from fellow agents about expectations and from managers about how the contract was explained to new recruits) and the fact that Mr. Mazraani received T4As (akin to Form 1099s in the US), which are issued where there are amounts paid for services. The TCC’s view was that Mr. Mazraani would have understood that there was a difference between these T4As and T4s, which are issued for employment income.
Actual Working Relationship
In turning to the second stage of the analysis, the TCC found that the “verifiable objective reality” of the relationship was consistent with the common intention of the parties.
The TCC’s comments here are welcome news to Canadian direct sellers given that they often have monitoring and quality control provisions in place with their salesforce.
The TCC also found that the other traditional factors in the analysis supported an independent contractor relationship. In particular, the TCC observed that Mr. Mazraani was responsible for paying all of his licensing fees to the applicable regulatory authority – a good reminder that direct sellers should not pay the licensing fees required for independent contractors in certain provinces.
Given that there is no equivalent of the US federal “safe harbour”, Canadian direct sellers should take steps to ensure that all their documents, as well as their actions, maximize the classification of their salesforce as independent contractors!
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