A few years ago, my friend James was told he should take up the bagpipes because it might help his asthma. So he did, which might be an example of the solution being worse than the problem. As it turns out, James still has asthma – and his bagpipes. Actually, he's become so good at performing that after he retired last year he was hired by an entertainment booking service. He works every day playing the bagpipes at various events.
James plans on filing his tax return this week, and he's going to report his bagpipe income as a self-employment activity. After speaking with him, I'm not so sure the taxman will agree he's self-employed. He might be considered an employee of the company he works for – which will change the types of deductions he can claim. If you want the tax deductions that come with being self-employed, you've got to meet certain tests. Let's look at this more closely.
Our tax laws don't provide a definition of who is self-employed and who's an employee. Instead, we have to look to court decisions to provide guidance. A landmark case on this topic is Wiebe Door v. M.N.R. (87 DTC 5025) in which the Federal Court of Appeal suggested there are four factors to consider when determining whether someone is self-employed or not:
(1) Control. If you're self-employed you'll generally control many aspects of the services you provide, often including when, where and how you work.
(2) Integration. A self-employed person can often be replaced and is not so integral to the business that his or her absence would jeopardize the success of the business.
(3) Ownership of tools. A self-employed person generally provides his or her own tools.
(4) Financial risk. A self-employed person bears the risk of loss but also reaps the rewards of profit.
Another case – Royal Winnipeg Ballet (RWB) v. M.N.R. (2006 DTC 6323) – introduced the notion of "intention," that is, the intention of both parties when entering the arrangement for services also matters. Many tax experts believe that the decision in RWB makes the intention of the parties a significant and almost determining factor.
There also have been other court decisions since RWB. Generally, where the intention of the parties is not clear – that is, you and the business you work for are not clear on whether you are self-employed or an employee [see North Delta Real Hot Yoga Ltd. (2012 TCC 369), and Dean (2012 TCC 370)] or there is conflicting evidence of the intention [see A&T Tire & Wheel Limited (2012 TCC 150) and 875527 Ontario Inc. (2012 TCC 214)], then the taxman, and the courts, will look to the four factors in Weibe Door to make a determination.
But what if the intention is clear that you are supposed to be self-employed? There's no guarantee the taxman will agree. It seems that recent court decisions have placed less weight on the intention of the parties. In the case TBT Personnel Services Inc. v. The Queen (2011 FCA 256), 93 workers were fighting the taxman over their employment status. CRA divided them into two groups: Those who had written agreements describing them as self-employed (that is, the intention was clear), and those who had no such agreement. For the first group, the court concluded the four factors in Weibe outweighed the intention of the parties, and the individuals were considered to be employees. As for the second group, the four factors from Weibe alone were applied since the intention wasn't clear, and they were also deemed to be employees.
If you're hoping to file your tax return as a self-employed individual, you'd be wise to do two things. First, ensure that you have a written agreement with the business you are working for. That agreement should specifically say that your relationship is that of a self-employed, independent contractor, not an employee. This should clarify the intention.
Next, you should make sure that you consider the four factors set out in the Weibe case: Control, integration, ownership of tools and financial risk. Structure your affairs so that you can answer the taxman's questions, if required, in a manner that points to self-employment.