Employee or Contractor? How is the Paperwork Different After You Hire?

When you have a new hire, procedures differ, depending on whether they are an employee or contractor. Here’s a rundown of both.

Expanding your employee and contractor base can present new challenges. To remain compliant with the Canadian Revenue Agency (CRA), businesses need to have specific information filed for each employee or contractor hired.

For Employees

Social Insurance Number (SIN)

Employers in Canada are required to review an employee’s Social Insurance Number (SIN) within 3 days of starting employment. A SIN is required to work as well as access government benefits like Employment Insurance and the Canada Pension plan. New employees who do not have a SIN can apply for one at a Service Canada location. The number can be obtained in a single visit. Employers can verify a SIN by calling Service Canada at 1-800-206-7218.

Social Insurance Numbers beginning with the number 9 are issued to temporary workers.  They are not Canadian citizens or permanent residents, but they have been authorized to work until the expiration date on their immigration documents.  Employers are responsible for verifying that employees are eligible to continue working.  If the work authorization has expired, the employee can contact Immigration, Refugees, Citizenship Canada (IRCC) to obtain a valid document and have their SIN updated. They can continue employment through the renewal process.

Form TD1

In addition to the Social Insurance Number, your company should also collect a completed Form TD1 from new employees.  Form TD1 is the Personal Tax Credit Return which determines how much tax should be deducted from an employee’s income.  If more than the basic personal amount is claimed, both the Federal TD1 and the Provincial TD1 should be completed.

In Quebec, Provincial Form TP1015.3-V, Source Deductions Return, should also be completed.

For Contractors

While no specific forms are required for hiring a contractor, it is important to understand your relationship with hired contractors. Mistaking an employee for a contractor can be costly for both the business owner and the employee.  The Canada Revenue Agency (CRA) has specific tests to determine contractor or employee status.  This four point test is outlined in the CRA document Employee or Self-Employed? (RC4110).  The points are as follows:

  1. The Control Test

Is there a written contract for service?  Who decides when, where, and how work will be completed as well as who will complete it? A contractor provides a contract for service and is in charge of when and how work would be completed. An employee takes this instruction from the company he or she works for.

  1. The Integration Test

Is the contractor operating as a business with multiple clients? Generally, contractors have multiple clients. A person providing a service to a single company may be working as an employee .

  1. The Economic Reality Test

Who provides large investments in tools and maintenance for the job or service contracted?  A person providing a service as a contractor or business would be responsible for investments in tools and any maintenance required.

  1. The Specific Results Test

Is there an opportunity to profit?  Is there is also a risk of incurring debt if issues arise? Does the contractor assume operating costs for completing the hired job or service? An answer of ‘yes’ to each of these questions indicates a contractor relationship.

When navigating your path of growth and expanding your business with new employees or hired contractors, it’s important to ensure you’re following regulations set forth by the CRA.  For more information on the Canada hiring process for employees or contractors, please contact us.


E&E Professional Accountants has years of experience in assisting businesses with their accounting needs. We are founded and managed by a an experienced corporate auditor and a former CRA tax auditor. Feel free to contact us for assistance with all your accounting and bookkeeping needs.

References:

Government of Canada; Canadian Revenue Agency: Hiring an Employee

Government of Canada; Pub. RC4110(E) Rev. 17: Employee or Self-Employed