Employee versus Independent Contractor and Taxation of Payments (HRIS vs FIS)

Overview

The University is required to apply the appropriate tax treatment, under the Income Tax Act, to payments made to persons providing services to the University.

All payments must be processed through HRIS, except for specific exceptions listed below in the section “What method (HRIS or FIS) should be used to pay an individual?“.

Individuals who receive payment for services from the University may, in some cases, be required to collect Harmonized Sales Tax (HST) in respect to those payments (see Payroll and the HST). Integral to determining the appropriate tax treatment is the determination of an individual’s relationship with the University in respect to a particular service, i.e. employee or contractor.

The document “Income Tax Guide – Employee or Independent Contractor “, maintained by the Payroll Department, Office of the Assistant Vice-President, should be referred to for detailed guidance surrounding this important decision. The document includes the following sections:

Questions you should ask when determining whether a service provider is an employee or an independent contractor
Requirement to keep clear and understandable notes about each particular situation
Parameters for assessing service provider relationships
Types of service provider relationships
Types of legal entities
Types of services that are provided to the University of Toronto, and a matrix which assists in determining the relationship, communication required and processing method
Adjudication processes and example court cases
Communication of final assessment to the service provider to let them know the basis for the decision
Sample agreement between University of Toronto and the independent contractor.
Contact the Manager, Payroll Department at 416-978-2814 for additional assistance

The following sub-sections highlight the issues and guidelines in this area, and should be read in conjunction with the Income Tax Guide – Employee or Independent Contractor:

Implications of Employment Relationship

Where an employment relationship exists with respect to a specific service rendered, there are both benefits and costs to the individual, and related obligations and costs for the University.

Benefits to the Individual:

Earnings are classified as insurable earnings for purposes of employment insurance should the individual be in position to require benefits.
Earnings are classified as pensionable earnings for purposes of future benefits from the Canada Pension Plan.
On behalf of the individual, the University deducts and remits to Canada Revenue Agency amounts in respect of income taxes, employment insurance contributions (EI) and Canada Pension Plan contributions (CPP).

Costs to the individual

Cost of contributions to the Employment Insurance and Canada Pension plans.
Potential greater income tax cost because of the limited deductions against employment income versus other types of income in arriving at taxable income.

Obligations of the University

Withholding and remittance of income taxes, EI and CPP.
Cost of University contributions to EI and CPP borne by the hiring department through the standard benefit rate.

Employee or Not?

The Income Tax Act does not define an employee. However, jurisprudence, i.e. court rulings, have applied four tests to help determine if an employment relationship exists:

control
specified results
risk of profit or loss
integration

Control
This test looks at the control the University has over the person performing the service. Generally, an employment relationship is indicated if the University determines how, what, where and when work will be done.

Specified Results
Does the individual have to supply the service personally for a fixed or indeterminate period?

If so, the individual is an employee in respect to the service.

If not, i.e., if the University accepts that the individual may subcontract the work, generally an independent contractor relationship exists.

Risk of Profit or Loss
Is there a chance for profit or loss to the individual providing the service? Is there a significant investment in facilities?

For example, does the individual incur expenses related to the service such that he or she will realize a profit or loss if the payment from the University exceeds or falls short of those expenses?

The absence of the potential for profit or loss may indicate an employment relationship.

Integration
Is the work an integral part of the normal activities (teaching or research) of the University?

Assistance
Each situation has to be considered carefully in order to determine the status.

It is not necessary for all criteria to apply in order for an employee relationship to exist.

In summary, an employee or an independent contractor would likely exist if most/all of the following factors were present:

Employee:

specific tasks, recurring
not responsible for costs
provided with office or work station
job description
reporting relationship
performance appraisals
remunerated regularly
employment agreement

Non-employee (independent contractor)

controls what, where and when
provides own supplies, services, offices
pays own expenses
remuneration at risk
services provided on behalf of company
contract for services

The document Income Tax Guide – Employee or Independent Contractor should be consulted, as this document categorizes common types of services provided to the University and the appropriate treatment to follow in each circumstance.

If the individual’s relationship with the University in respect to the service being provided is still unclear, contact the Manager, Payroll Department at 978-2814 for assistance.

What method (HRIS or FIS) should be used to pay an individual?

All payments for services provided by individuals must be paid through HRIS, except for the following:

Payments to an individual who is a sole proprietor (* see below) AND it has been determined that there is NOT an employee relationship after reference to Income Tax Guide – Employee or Independent Contractor and after consultation with the payroll department, if necessary. These individuals would need to issue an invoice to the University, including applicable HST. These payments would be made through FIS – see section on certified invoices,
T4A-NR payments, if the cheque is to be issued in a foreign currency,
Payments to non-residents working at a location outside Canada,
Expense Reimbursements (see Travel and Other Reimbursable Expenses)
Small, non-routine payments. See sections on Petty Cash or Imprest Expenditure Bank Account for specific guidelines.

(*) a sole proprietor is a self-employed individual where

The business is not incorporated;
The individual has sole responsibility for decision making;
The individual receives all profits and is responsible for all losses; and
The individual reports their business income on a T1 individual tax return

For assistance in determining the payment method for specific types of services provided to the University, refer to Chapter 6 of the Income Tax Guide – Employee or Independent Contractor, which is a matrix to determine the method of payment by type of service.

Last revision June 2010