Arlene and Joanne Grove*, twin sisters who live in London, Ont., have run a promising event planning business for the last three years. A former corporate trainer, Arlene incorporated Events By Arlene while still employed full time, and brought on her sister as equal partner shortly after. Revenues and referrals have increased steadily to the point where Arlene felt comfortable quitting her job last month.
Thus far, the Groves (both 38) have handled all administration, client service and event planning on their own. But they need help. For their last six events, the Groves paid Nicole Robinson, who recently obtained her special events diploma from Fanshawe College, $400 to assist with planning. They met Robinson at a local networking event and bonded when they discovered Robinson was a fellow member of the Six Nations First Nations community.
Robinson invoiced Events By Arlene for the gross amount; the Groves expect Robinson will report the income and remit taxes as necessary. They’ve also secured Robinson for another nine events, which takes them to the end of the year.
Events By Arlene is already booked for 50 events in 2019 and the Groves expect they’ll need Robinson’s support. Robinson has tentatively agreed, but has asked for a raise, as well as for the promise of long-term employment.
Arlene and Joanne are wondering whether to hire Robinson as an employee or to continue using her as a contractor. They are projecting $200,000 in net income next year if they pay Robinson $500 per event ($25,000 total). What challenges and opportunities might they face by turning her into an employee?
* These are hypothetical clients. Any resemblance to real persons is coincidental.
VP of Ontario and
Canadian Federation of Independent Business, Toronto
Partner, Ericksons LLP, Thunder Bay, Ont.eg
Partner at BDO, Thunder Bay, Ont.
Plamen Petkov: This is a common scenario for a lot of small business owners, especially startups: Should they hire their first employee or subcontract services? There are different implications, not just for the business owner, but also for the worker.
The sisters talk about the money and what they could pay her. But before we even get to that, Arlene and Joanne need to define the role and what they expect from Nicole. Then they should obtain a ruling from CRA, which determines eligibility for EI or CPP. There is no cost to apply for the ruling, outside of the postage (see “Applying for a CRA ruling”).
The agency has a series of questions designed to establish what the relationship between Nicole and the sisters would look like. Does Nicole get to set her own time of work? Does she supply her own tools during the event? Does she use her own vehicle to get to the events? What kind of office space will she use, or is she working from home and only there the day of the event? Does she have other clients?
The questions help determine the dependency between Nicole and the Groves. When you’re in an employer/employee relationship, the expectation is that the employer would be providing things like supplies, tools and, in some cases, transportation. The employer would also be setting work hours and have to comply with employment standards for breaks and overtime.
Only CRA can determine what that relationship is—an employee or contractor. A lot of business owners assume they get to determine, but it’s CRA that has the final word.
If Nicole has some independence, like if she’s [planning events] for other clients, then she could be treated as a contractor.
If we determine she will be an employee, then they have to set up payroll. They need to look at labour laws. Depending on how much time she’s spending on each event, is $500 per event enough? Is it above minimum wage? A total of $25,000 per year is low for a full-time employee.
Jason Williams: There are additional costs for hiring an employee. They’ll have to withhold income tax, and CPP and EI will be due. They’ll also have to look at Ontario’s Workplace Safety and Insurance Board and whether they have some kind of coverage for the employee.
PP: They also need to think of what happens beyond 2019. Are they going to have a similar number of events? If business proves to be not as good in 2020, will they have to terminate Nicole?
Theodore Scollie: [That’s something that should be outlined in the employment contract.] Time should be spent considering the mechanism for termination, so that where termination without cause is required by the employer, there is some certainty for both the employer and employee as to what the notice period and cost would be.
Due to the competitive nature of the business, the Groves will want to prevent Nicole from taking their business and clients. In reality, it’s difficult to stop an employee from earning a living, but [the Groves will want] provisions on non-solicitation of existing clients and non-competition.
All aspects of the employment relationship, including remuneration, benefits, vacation, hours of work and details of the job requirements [should also be in the employment contract].
PP: This could more easily be set up as a one-year contract for 50 events, which could be renewed for 2020 if there are a similar number of events. There has to be some need that would merit hiring a full-time employee, and in this case, I don’t think they’re there. If their business grows and they have repeat business from clients—say someone contracts them for an annual event—then the decision is a bit easier.
JW: I agree. Jumping in with a full-time employee right now seems a bit premature until they’ve worked out how this business is going to unfold.
JW: The business income is taxable because all of the activity is taking place off-reserve.
There is a tax exemption in the Indian Act, which is valuable for Indigenous employers. If they qualified, they’d pay zero tax on their business income. To qualify for the exemption, it comes down to the “connecting factors” test and a lot of it is related to what is physically taking place on-reserve. I don’t want to re-engineer how they operate their business, but this would be worth a conversation.
TS: It’s complicated. For profits to be exempt, there has to be a link to the reserve. For example, First Nations can often structure their businesses into limited partnerships that allow the First Nation to take the position that profits are not taxable because the First Nation is a public body.
Individual businesses do not have access to this exemption. If the Groves’ corporation earned all revenue strictly on-reserve [e.g., all their events were held on reserve], they may be exempt. Having the head office on-reserve will not change this.
For Nicole’s employment, there are typically four tests CRA has developed to determine whether income is exempt. The first three are with respect to for-profit businesses, such as the Groves’.
The first scenario is where the employee works mostly on a reserve. This would be the case only if Nicole did more than 90% of her actual work on-reserve. In the scenario described, where she has to be on-site [at events], this would not be the case. There may be a way for her to pro-rate her income as partly non-taxable if she did some of her work on-reserve, like planning or administration.
In the second scenario, if both the employer and the employee live on-reserve, typically all income is exempt. It’s difficult to see how this could be achieved in this situation.
In the third scenario, if either the Groves’ business is considered on-reserve or Nicole lives on-reserve, and she performs at least 50% of her work on a reserve, then her wages may be exempt.
PP: We don’t know Nicole’s age. There are some federal and provincial programs that provide tax credits for youth. Ontario just passed one where if you hire youth, you get a $1,000 hiring credit and, if they remain on the job for six months, you get another $1,000 retention credit. But there are strict conditions. It has to be done through a different process through Employment Ontario. I’d say if she’s under 30, there might be some opportunities.
Of course, a business owner shouldn’t hire someone just for tax credits. They’ll do it because there is a need in the business. I think the Groves need a longer-term plan with projections before making that decision.
Applying for a CRA ruling
- Use form CPT-1. This can be requested by either the contractor/employee seeking clarification, or the business that has hired the person in question.
- Send the form to the tax office assigned to the business.
- Within two months, a rulings officer will contact the business owners, as well as the employee, to interview them.
- Based on the findings, the officer will make a ruling, stipulating whether the person, for purposes of EI, is considered an employee.
- The ruling will be sent by mail to the person who applied for it.
Source: The CFIB business resources department