In This Issue
- How to make sure you’re really self-employed
- Yes, federal employees do have layoff options!
- Lord Stanley’s Cup
How to make sure you’re really self-employed
You have a small business with a couple of big clients. And you take advantage of all those lucrative tax deductions. But are you really self-employed? You might think so, but the taxman could disagree and argue that you’re really an employee. And that could leave you with a nasty bill come tax assessment time. So it’s critical to determine whether you are in fact an “independent contractor” – and thus entitled to all those juicy expense deductions – or whether you’re really an “employee” and thus entitled to, well, pay more tax. Here’s how the Canada Revenue Agency decides.
Once, long ago, a tax court case set the standard for establishing “independent contractor” status – for legal beagles, the case is Wiebe Door Services Ltd. v. M.N.R. (87 DTC 5025, F.C.A.). In that case, the court decided that the following four tests must together be considered to determine eligibility for “independent contractor” status. The CRA has used these tests ever since. Do you meet the criteria?
1. Control test. The basic issue is who determines what is done where, when, and how. An employer tells an employee not only what to do but how to do it, when, and where. An independent contractor is simply hired to do something or to achieve a specific result.
2. Ownership of equipment. A self-employed individual normally supplies his or her own equipment.
3. Risk of profit or loss. A self-employed individual bears the risk of realizing a loss on the job, whereas an employer assumes all of the risk of the profit or loss, and the employee normally earns salaries irrespective of this result.
4. Integral part of business. If an individual is an integral part of the business, he or she may well be an employee. It is this test that finally transforms the self-employed “independent contractor” into an employee.
No single factor is conclusive. Rather, the whole relationship must be weighed in light of these factors to determine status. The Canada Revenue Agency has in fact attacked the status of many sole proprietors and privately-held corporations in recent years, because they have not met the four tests. The classic case is the employee who “retires” and returns to their former employer as a “consultant,” but has no other clients, works in an office, with equipment, and on a schedule provided by the former employer.
Even if you think you meet the four tests, you still might not be off the “employee” hook. The CRA has been known to also look at a number of other criteria, including the following:
- Are you open for business? The ability of the individual to provide his or her services to someone other than the employer is a key factor.
- Is it the “same old, same old”? As an independent contractor, were you a former employee and are you carrying out the same or similar duties?
- Is it all about you? Are you required to provide the services personally, or can you use others to provide the required services.
- Til death do you part? An independent contractor is normally engaged for a single task or project while an employee is engaged exclusively on an indefinite basis.
It’s not hard to see why this area causes so much confusion. In an attempt to bring some order (or possibly more chaos) to the situation, both the CRA and Revenue Quebec have their own published guidelines. CRA Publication RC4110 sets out its criteria, which I’ve sketched out above. In Quebec, the provisions of the Civil Code must be adhered to, so the criteria (set out in Publication IN-301) differ slightly from the rest of Canada.
Regardless of where you live, though, you’ll want to be sure you stay onside the rules if you’re claiming “independent contractor” status and all the tax breaks that entails. That’s where we can help. Give us a call, and we can help you stay on track, and maximize the many tax advantages of being self-employed.
Yes, federal employees do have layoff options!
By Ayana Forward, CFP, and Marc Lamontagne, CFP, R.F.P., FMA
Downsizing is here! In its 2012 budget, the federal government said it intended to downsize the civil service workforce. And sure enough, as of September 13, 2012, over 18,000 federal employees in 44 departments received notices saying they could be laid off. Not all “affected” employees will lose their jobs, of course, because the government expects voluntary retirements to account for some of the job cuts. But for those who do face layoff, three main options have been presented to help smooth their transition into new employment or educational opportunities. But which would work best for you? Here’s a quick rundown of what’s available.
Option A: Employee continues work in a surplus situation for 12 months. If a new position has not been found within this time, the employee is laid off. They will then collect a severance based on years of service if they have not already cashed that out.
Option B: Employee resigns from the public service and is entitled to a cash payment known as a Transition Support Measure (TSM), which is like an additional severance package based on years of service, plus their regular severance as above.
Option C: Employee is entitled to an educational allowance of $10,000 or $11,000 depending on the workforce adjustment agreement the employee falls under plus the TSM and severance as in Option B. There are two further sub-options that also fall under option C:
i) Resignation from the public service, or
ii) Take leave without pay for maximum period of two years. If alternative employment is not found within this time, the employee is laid off but given priority consideration for future employment in the public service. Under this sub-option, an affected employee can split the TSM over two calendar years in order to reduce the taxes paid.
As an example, let’s say Jane Doe has 25 years of service and eligible for the maximum TSM of 52 weeks of pay. She also has a severance equivalent to her years of service. The combined package is about $165,000. She can roll a portion directly into an RRSP based on years of service prior to 1996 under the old Retiring Allowance rule, but most of it will be taxed at her highest marginal tax rate.
In this case it makes sense for Jane to choose Option C (ii) – leave without pay – in order to split the income. Of course, this option assumes she wants to “register for classes” somewhere.
We have provided a general overview of layoff options for affected federal employees. As always, though, there can be twists and complications and “gray areas” subject to interpretation. Give us a call. We can help you decide the best course of action for your individual financial situation.
Marc Lamontagne, CFP, R.F.P., FMA, is a founding partner of Ryan Lamontagne Inc. Ayana Forward, CFP , is an Associate Financial Planner with Ryan Lamontagne Inc.
Lord Stanley's Cup
By Thomas Ryan, CFP, B.Com
With the NHL lockout now stretching into the weeks there is no shortage of banter about the league, the players, and the owners. One interesting issue that is not often discussed is the ownership of the Stanley Cup.
The Stanley Cup, it seems, is not owned by the NHL, but is rather held on a charitable trust.
In 1893, Canada's governor-general, Lord Stanley of Preston, purchased a silver bowl for $50 and named it the Dominion Hockey Challenge Cup. Hockey folks went with a less formal designation, the Stanley Cup.
In its early years, the Stanley Cup was not exclusive to one hockey league, nor was it meant to be. It was a "challenge cup," changing hands in much the same way as a boxing title. Contenders issued challenges, and the champions held the Cup for as long as they could fend off all comers. Independent trustees ensured that legitimate challenges were met on a regular basis.
The Stanley Cup officially turned pro in 1910, when the National Hockey Association took possession of it. By 1926 the National Hockey League had emerged indisputably as the top league in North America, and the NHL assumed control of the Cup. That control was formalized in an agreement signed with the Cup trustees in 1947.
When he donated the Stanley Cup, Lord Stanley of Preston provided the trustees of the cup with five instructions. They were:
- The winners shall return the Cup in good order when required by the trustees so that it may be handed over to any other team which may win it;
- Each winning team, at its own expense, may have the club name and year engraved on a silver ring fitted on the Cup;
- The Cup shall remain a challenge cup, and should not become the property of one team, even if won more than once;
- The trustees shall maintain absolute authority in all situations or disputes over the winner of the Cup; and
- If one of the existing trustees resigns or drops out, the remaining trustee shall nominate a substitute.
This type of trust is defined as a charitable trust, which is a well-defined area of the law. Unlike a trust in most circumstances, a charitable trust does not require you to be able to ascertain the beneficiaries of the trust, and is not subject to the rules against alienability or indefinite duration. Property subject to a charitable trust can be expressed as the “exclusive dedication of property to a charitable purpose in a way that provides a public benefit.” In the case of the Stanley Cup, it seems, the public benefit is the promotion of hockey.
All of which brings us to an interesting question. Who should be awarded the Stanley Cup if the lockout should cancel the entire season? If the Stanley Cup is truly held on a charitable trust, which by definition requires there to be a public benefit, should the NHL have exclusive jurisdiction over the ability to be awarded the Cup? If the NHL is not going to hold a competition this year, why can’t the trustees award the cup to another team in their place? Would that not be for the “public benefit”?
Thomas Ryan, CFP, B.Com is a founding partner of Ryan Lamontagne Inc. and sports enthusiast.
