Introduction: Driver Inc. and How Some Trucking Companies Operate in Canada
A recent CBC news article criticized the Canadian trucking industry for its employment practices. Specifically, the article states that some trucking companies purposefully misclassify workers as independent contractors to save money on payroll taxes. The Canadian Trucking Alliance has called this practice, or scam, "Driver Inc.".
The CBC news article touches on the difference between an independent contractor and an employee. In particular, the article references different rights a worker will have under the relevant labour and employment laws and how truckers forfeit these rights by virtue of being misclassified.
For instance, one of the interviewee truck drivers had to prove to the Canadian Labour Board that he had been misclassified as an independent contractor to receive an order to be paid what he was owed.
One may ask: What is the difference between these two classifications of workers, and what is the legal basis for distinguishing between the two? The issue is common across industries. This article examines the distinction between independent contractors and employees, and how the classification of individuals affects how they are taxed under the Income Tax Act (the 'Tax Act').
What is the Difference Between an Independent Contractor and an Employee?
The distinction between an independent contractor and an employee is not always clear. The Tax Act does not provide a meaningful definition of an "employee". However, "employment" is defined in the Tax Act as the position of an individual in the service of some other person, and an employee is someone who holds the position of service.
An "independent contractor" is not defined in the Tax Act, but it is a person who is engaged by another to perform services. The key to distinguishing between the two is through the level of control that the person receiving the service has over the person providing the service.
Under the Tax Act, employees receive employment income. By contrast, independent contractors earn business income. These sources of income are both included in a taxpayer's taxable income under section 3 of the Tax Act, but independent contractors have more deductions available to them, such as the ability to deduct business expenses.
It is sometimes more beneficial for a worker to be an independent contractor for this reason. Similarly, the person hiring an independent contractor is not obligated to remit any income taxes or CPP and EI contributions on amounts paid. It is the responsibility of the independent contractor to calculate the taxes owed and to pay them accordingly. Conversely, an employer must remit income taxes to the government under paragraph 153(1)(a) of the Tax Act.
One of the issues in the trucking industry is that some truckers are not paying payroll taxes, or any taxes at all. While the CBC news article does not elaborate on exactly which payroll taxes are avoided, a self-employed person has obligations to make contributions to the Canada Pension Plan (CPP).
It can be inferred that this obligation is avoided to save money. In a usual employer-employee relationship, an employer is obligated to deduct CPP contributions from an employee's income. Thus, this misclassification allows employers to avoid their legal obligations under tax law and employment law. In return, truck drivers are incentivized to accept independent contractor status in exchange for higher income because of the taxes that are avoided.
How Are Independent Contractors and Employees Distinguished? – The Legal Test
A conclusive test for determining whether a worker is an independent contractor or an employee does not exist. Rather, the case law on this issue provides guiding factors to make this determination. These factors are rooted in the Federal Court of Appeal's decision in Wiebe Door Services Ltd. v Minister of National Revenue, [1986] 2 CTC 200 (FCA). Specifically, four factors were identified:
- The degree, or absence, of control exercised by the alleged employer,
- The ownership of tools,
- Chance of profit and risk of loss, and
- Integration of the alleged employee's work into the alleged employer's business.
At the core, these factors deal with the level of control that an alleged employer may have over a worker. The higher the degree of control, the more likely that an employee-employer relationship exists.
The test from Wiebe Door was modified in 1392644 Ontario Inc. v Canada (National Revenue), 2013 FCA 85 (Connor Homes). In addition to the objective factors in Wiebe Door, consideration of the subjective intentions of the parties is required. As such, a two-step test was developed. The first step requires an examination of the parties' subjective intentions.
The second step uses the factors from Wiebe Door to see whether the objective factors are consistent with the subjective intent of the parties. While subjective intention may characterize the worker as an independent contractor, these intentions are not determinative of the relationship. In other words, a contract that states that a party is an independent contractor does not necessarily mean that the worker will be considered an independent contractor if the Wiebe Door factors are not met.
Application to Truck Drivers – Relevant Factors That Have Been Considered in the Jurisprudence
Applying the legal test discussed in Wiebe Door and Connor Homes, it is arguable that many truck drivers would likely be considered employees rather than independent contractors under the law.
The Tax Court of Canada has previously made decisions regarding the characterization of truck drivers as either employees or independent contractors. Specifically, in Zazai Enterprises Inc v Canada (Minister of National Revenue – MNR), [2008] TCJ No 535, the Court found that a truck driver was an employee because the truck driver did not pay for gas, insurance, or maintenance, wore a company-mandated uniform, and simply showed up to drive on the company's schedule and instructions.
Moreover, the truck driver did not use his own truck and used his employer's truck. The Court emphasized that a truck driver operating a truck driving business without a truck is not likely to be an independent contractor. While the facts and circumstances will ultimately alter how a case such as this is decided, this case shows the way in which the Tax Court has applied the factors in Wiebe Door to truck drivers and highlights some of the relevant factors that the Court will consider.
Tax Pro Tip – Employee, Employer and Independent Contractor Obligations
The line between an employee and an independent contractor is often blurred. It is important to understand how a worker will be classified. This is because the classification of a worker will ultimately decide the tax implications on that person and the person who has hired that person for work.
Knowing the tax implications is important to ensure that you are compliant with your obligations as an employer, employee, or independent contractor under the relevant tax law provisions. Engage with a top Canadian tax lawyer if you are unsure as to how your employment relationship should be classified.
FAQ
What are the risks to an employer if an employee is misclassified as an independent contractor?
In the event that an employer misclassifies an employee as an independent contractor, there are a number of tools that may be used to enforce compliance. For example, administrative penalties may be applied to the business, or the employer may be forced to make corrective measures to comply with the Canada Labour Code or the relevant provincial legislation.
These corrective measures can include paying wages owed to the employee and other employees. In addition, there will be consequences for unremitted taxes, CPP, and employment insurance premiums, such as having to pay the unremitted amounts. Thus, the risk associated with misclassifying a worker is the potential for having to pay penalties for non-compliance and ultimately having to pay amounts that would have otherwise been payable.
I was found to be an employee under the Canadian Labour Code or other provincial legislation, will I be treated as an employee under the Tax Act?
A finding that a worker is an employee under the Canadian Labour Code or other provincial legislation that deals with employment standards does not necessarily mean that the worker will be an employee for the purposes of the Tax Act.
For example, under Ontario's Employment Standards Act, someone who provides services through a corporation may be found to be an employee of the person who received those services, despite the existence of a corporation. The provisions under the Employment Standards Act would apply to that relationship.
In contrast, under the Tax Act, this worker would be considered to be operating a personal services business and be taxed differently than an employee or a business. Therefore, employment legislation and the Tax Act operate separately, but the same conclusions can be reached under each respective legislation.
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.
