Staffing agencies (as well as Employment Agencies, Temporary Labour, Placement Agencies and other similar entities – "Agencies") play a growing role in connecting businesses with Canadian workers, but these models can come with unexpected tax "strings attached".
For example, did you know that in some cases, Agencies hiring workers classified as independent contractors can still be required to make Canada Pension Plan ("CPP") and Employment Insurance ("EI") contributions (as if the workers were their employees)? This tax quirk can be difficult to understand, especially when the Canada Revenue Agency ("CRA") views one's workers to be non-employees!
As the CRA appears to have intensified its audits of Agencies in recent years (which we have blogged about here and here), understanding where CPP and EI premium collection obligations lie is critical. Equally important is knowing when Agencies can challenge these obligations!
CPP & EI Rules for Independent Contractors
In the employment agency model, workers are hired by Agencies as either employees or independent contractors and perform services for third-party clients in or outside of Canada. Typically, Agencies pay the workers after invoicing the third parties for same.
What often surprises Agencies is that workers classified as independent contractors can, in some cases, still be deemed to be under "pensionable" and / or "insurable" employment (so as to shift contribution obligations onto the Agencies).
These rules come from the complicated regulations, which your tax advisor needs to be aware of. And whether or not an Agency is responsible for CPP and EI premiums will also depend on the arrangements between the Agency, its workers and clients.
Furthermore, the contribution obligations above only fall on Agencies which pay workers their remuneration.
Why Do I Care?
Ultimately, whether or not an Agency is subject to CPP and EI obligations depends on the facts. Canadian Courts have ruled in favour of Agencies (i.e., not being responsible for CPP & EI contributions) based on factors including the following:
- "Placement Agency" Definition – Businesses not being caught by the definition of "placement agency" for CPP & EI purposes;
- Conditions for Pensionable Employment – Services not being performed under conditions "analogous to a contract of services"; and
- Conditions for Insurable Employment – Workers not being under the "direction and control" of Agency clients.
Agencies who receive a Ruling Letter or Notice of Assessment from the CRA requiring CPP & EI contributions can appeal. However, it is important to act fast as appeal deadlines are typically 90 days from the date of being notified of the ruling or assessment.
Takeaways
Whether or not an Agency is responsible for CPP and EI premiums depends on the arrangements between the Agency, its workers and its clients. Agencies wishing to challenge Rulings and Assessments from the CRA in this regard must act fast to avoid missing appeal deadlines and facing potentially unwarranted penalties and interest.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
