Employee or independent contractor? The tax benefits of being an independent contractor are great, but make sure your position as an independent is well defined.

The changing nature of the workplace has opened up a lot of opportunities for more flexible employment arrangements. Given the chance, many people become independent contractors, selling their services to the highest bidder. Whether you are an employer or an independent contractor in such an arrangement, you have to make sure that the relationship is clear, so that the tax benefits of such an arrangement can be reaped. If you don't, it could mean a world of trouble.

From a tax perspective, the difference between an employee and an independent contractor is the number of deductions a person can claim, and payroll deductions for income tax, CPP and El (among a host of other considerations). Employees are severely restricted in the types of expenditures that they are entitled to deduct from employment income. Independent contractors, on the other hand, are generally entitled to deduct all reasonable business expenses, although numerous exceptions to the general rule do exist.

Employers are required to deduct and remit amounts for income tax, CPP and El. For CPP and El the employer also has to remit an employer premium. For businesses, this makes hiring an independent contractor rather more appealing.

How does one define an independent contractor? A number of cases have tackled this issue. In 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. ("Sagaz") Mr. Justice Major of the Supreme Court of Canada stated: "The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account." In making this determination, the Court noted that control is always a factor. But other factors to consider include:

1. Whether the worker provides his or her own equipment;

2. Whether the worker hires his or her own helpers;

3. The degree of financial risk taken by the worker;

4. The degree of responsibility for investment and management held by the worker; and

5. The worker's opportunity for profit in the performance of his or her tasks.

The Court went on to note that the above factors did not constitute an exhaustive list and that the relative weight given to each factor will depend on the particular facts and circumstances of the case.

Following the Sagaz, decision, a number of lower courts have had occasion to consider the employee versus independent contractor issue. Although the Sagaz. decision is still fundamentally important, an interesting trend has arisen which appears to have its origin in the Tax Court decision of Sara Consulting & Promotions Inc. v. MNR. In that case, Judge Bell stated that, "in the absence of clear and credible evidence that the description of a relationship is other than as agreed between arm's length parties, the description agreed upon by those parties must stand." So if parties say that it's an arm's-length arrangement, it should be considered as such.