7 Factors for Classifying Your Side-Gig Income with the CRA

About 32 per cent of workers are starting their own businesses on the side for a variety of reasons — including 25 per cent of those who earn more than $75,000 and 19 per cent of those with income over $100,000. For tax purposes, it’s critical to know the difference between someone who is employed and someone who is considered self-employed.

The research conducted in the U.S. by CareerBuilder.com also confirms that self-employment is embraced more frequently by women and by those in the leisure/hospitality, transportation and health care sectors. The statistics are similar in Canada.

According to Finance Canada’s most controversial proposals on the taxation of private corporations, released on July 18, 2017, the proportion of incorporated self-employed individuals almost doubled between 2000 and 2016.  “CCPCs now account for more than twice the share of taxable active business income (relative to GDP) that they did in the early 2000s.”  

This brings an opportunity for tax and financial advisors to embellish on their value propositions by engaging taxpayers who are creating their own side-gigs in year end tax planning.   

The Canada Revenue Agency provides guidelines in its publication 4110. There are seven factors to consider:

1.      Equity: Responsibility for investment and management of resources.

2.      Control: The right of the payor to exercise control over the activities of the work and influence over workers, especially related to outcomes and methodology. Who has the final word?

3.      Assets: Who has the responsibilities and contractual control over the tools and equipment used in the business?

4.      HR: Ability to hire and subcontract human resources: Who does this and pays for the expenses, and has control over hiring and firing?

5.      Financial risk: Who is responsible when contractual obligations are not completed or met? Who is reimbursed for expenses and fixed costs? In this case, the payer is the self-employed person.

6.      Opportunity for profit: Control over revenues, expenses and realization of profits.

7.      Written contracts: The nature of the individual contracts, and who pays source deductions is considered.

At year-end, numerous tax planning considerations come into play for both employers and employees. In this era, in which one taxpayer may dabble in each profile, understanding the rights and obligations of each is more important than ever.

Additional Educational Resource:
T1 Professional Tax Preparation for Proprietorships

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

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