Independent Contractors and Tax Liability: New Case suggests Dangers and Risk-Management Strategies

Using independent contractors instead of employees can be a high stakes game. A recent case was doubtless a nail-biter for one employer, which narrowly avoided an expensive tax bill. MWW Enterprises Inc. v. M.N.R. provides a nice example of how courts approach the distinction between independent contractors and employees in tough cases.

This article summarizes the key findings and provides some tips for employers in Calgary and across Alberta to limit their risk when using independent contractors.

The Situation

A television production company, MWW Enterprises Inc., hired 44 workers as independent contractors to film a TV show. Production lasted four months. The company carefully designed its operation so that the workers would be contractors and not employees.

Unfortunately, the Canada Revenue Agency (CRA) investigated and determined that the 44 workers were employees, not contractors, with associated liability for deductions and withholdings. However, in an appeal focusing on 11 representative workers, the Court held that all but two were independent contractors.

Analysis on Appeal

(a) The Easier Cases

To distinguish between independent contractors and employees, an adjudicator must (1) determine the subjective intention of the parties; and then (2) determine whether the objective reality conforms to those intentions (paras. 257 and 258).

Finding that most of the workers were contractors, the Court cited the presence of multiple classic indicia of a contractor relationship, including that:

  • There was little control over the hours worked.
  • Most workers were permitted to send a replacement when they were unable to attend for filming themselves.
  • All workers, with apparently one exception, considered themselves on hiring to be independent contractors.

(b) The Harder Cases

Three workers in particular presented more of a challenge. All three (who I’ll call Workers A, B and C) had the same job title: Production Assistant. Unlike most of the other workers, the written contracts for these three did not explicitly designate them as independent contractors.

Worker A was a student, with this being his first job in the field. He worked on the production for 49 days. He came with little background knowledge or experience and played a subordinate role, taking direction from others. He believed he was an independent contractor because of what he was told and because he issued invoices, but he did not actually know the difference between the legal categories. The Court found he was an employee, despite the parties’ subjective understanding to the contrary.

Worker B was also a student. She worked for a period of only seven days. She considered herself to be an employee and reported her income has employment income for tax purposes. The Court found she too was an employee.

Worker C held the same position as Workers A and B, but the Court deemed he was an independent contractor. Though Worker C was also new to the field, he had worked on contract for other production companies before and he believed he was a contractor for MWW Enterprises Inc. He worked for only two days as a replacement for someone else. The Court referred to his as a “hybrid case” but ruled that Worker B’s experience and subjective understanding tipped the scales.

The Takeaways

  • Document carefully: The Court ruled in the company’s favour in all instances where the parties’ intentions to create a contractor relationship were recorded in writing. Clear documentation of intentions is crucial.
  • Explain properly, especially to inexperienced workers: Of the three Production Assistants, a key factor distinguishing the independent contractor (Worker C) from the employees (Workers A and B) was the subjective intention. Most notably, even though Worker A believed he was a contractor, he did not understand the difference and lacked experience to inform his choice. Had the company been careful to explain to its workers the distinction between contractors and employees, and had it documented their mutual choice, the scales might have tipped the other way for Workers A and B.
  • Be able to check the boxes: The analysis is fact-driven and weighing factors is always a judgment-laden and human process. Among other things, that means you can never perfectly predict the result in cases that are close to the line. But CRA and the courts apply well-established criteria for distinguishing employees from independent contractors and companies can mitigate the risk by ensuring they structure the relationship so that the classic criteria point in the right direction. (See CRA’s publication RC4110(E) Rev.19 for more on that criteria.)

Avoid Disaster by Requesting a Ruling

The filming project in this case apparently lasted only four months. However, many Calgary and Alberta-based companies use contractors for indefinite periods, even many years. When that happens, there is risk of more extensive liability if CRA eventually concludes the workers were in fact employees. To limit the potential damage, employers can ask CRA for a ruling before too much time passes. Once the decision is made, companies can move forward with a bit more certainty.

Disclaimer: This blog does not provide legal advice and should not be relied on as such advice. The articles here provide general information only. They cannot take the place of good counsel tailored to your situation. Articles are not updated after publication and may become outdated with changes in jurisprudence or legislation.

Matthew Tomm Law provides legal services in Calgary, Alberta, focusing on employment law and civil litigation.

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