Tax & Trade Blog

Staffing agencies (as well as Employment Agencies, Temporary Labour, Placement Agencies and other similar entities – “Agencies”) play a growing role in connecting businesses with Canadian workers, but these models can come with unexpected tax “strings attached”.

For example, did you know that in some cases, Agencies hiring workers classified as independent contractors can still be required to make Canada Pension Plan (“CPP”) and Employment Insurance (“EI”) contributions (as if the workers were their employees)?  This tax quirk can be difficult to understand, especially when the Canada Revenue Agency (“CRA”) views one’s workers to be non-employees!

When it comes to a Direct Selling Company’s legal relationship with its Distributors, Canadian direct sellers are treated differently from those in the US, where IRS deeming rules operate to clarify that Distributors are independent contractors and not employees!

In Canada, there is no such special status, and the “common law” determines employee vs. independent contractor (“IC”) status, making this a perennial compliance issue.

A common theme of our direct selling blogs is that direct selling businesses should pay close attention to the wording of their key documents (compensation plans, contracts, and policies and procedures, etc.) to ensure that plan participants are properly characterized as independent contractors and not as employees.

While not in a direct selling context, a recent decision at the Tax Court of Canada serves as a cautionary tale for businesses that fail to examine the details of their documents – their workers may be characterized contrary to their intentions!

Direct sellers in the United States could soon faceupdated rules which would ban businesses from relying on non-competition clauses in worker contracts. This parallels recent moves in certain Canadian provinces to further restrict same and is a perfect opportunity for direct sellers in Canada to review their own non-competition clauses in anticipation of potential changes.

Direct sellers in the US have a “safe harbour” which does not exist in Canada. Specifically, section 3508 of the US Internal Revenue Code expressly excludes the salesforce from the definition of “employee” for federal tax purposes! By contrast, direct sellers operating in Canada need to be proactive about making sure that the salesforce stays on the right side of the employee – independent contractor divide, which is a “common law” test in Canada.

The recent Tax Court of Canada (“TCC”) case of Mazraani provides a good refresher – and some positive comments for Canadian direct sellers – on the difference between employees and independent contractors.

Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!

While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.

In the fifth of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:

The Employee or Independent Contractor Issue

The distinction between employees and independent contractors has always been an important one in Ontario because while employees are covered by the protections of the Employment Standards Act, 2000 (e.g. sick pay, maternity leave, etc.), independent contractors are not.

While there is no simple formula to determine whether a worker is an employee or an independent contractor, the Ontario government has outlined some factors to consider when trying to make this determination.