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Deducting Taxes as Self-Employed Worker

Expert: J.Christa Thomas

Sue asked:

I am in Toronto, Ontario. I am currently working for myself as an office temporary. Unable to find work, I resorted to this just in the last month. After reading some of the information at your site, I have a couple of questions.

I am invoicing the company I am working for. There is no contract; I just tell them how much per hour and then invoice them. I don't know through which department they pay me since it is done in Kingston. Am I legally responsible to pay into the Canada Pension Plan out of this money I earn? Do I have to pay workers" compensation myself? Since I am working technically, maybe not legally, as an independent worker, do I have to pay employment insurance?

I was under the impression that if you are self-employed, you do not qualify for E.I. Also, once I get my first cheque, I will be putting money into an retirement savings plan, which I prefer to do rather than pay CPP since I don't know if there will ever be anything there for me when I retire the way things are going. I also intend to put the money aside to pay taxes at the end of the year.

I am working out of this company's office with their equipment and their scheduled hours, unless I need time off for whatever. Since I am temporary, I don't know how long this employment will last. I am aware it could end at any time and have accepted that risk.

I would really appreciate some help here. I don't want to end up having any part of the government coming after me for back payments because I didn't pay it when I should have. I guess I should have looked into this more before operating this way, but I thought (which shows you how much thought does) that as long as I pay my taxes I'm OK. Obviously not, but I really want to do this the right way.

J.Christa Thomas answered:

First of all, confirm with the company that it is not deducting and remitting Canada Pension Plan, Workers" Compensation, income tax and Employment Insurance premiums on your behalf.

Just because you are a temporary employee does not mean that you are an independent contractor. In determining whether an individual is an employee (versus an independent contractor), the courts look at the following factors: (i) whether the company has the power of selecting, controlling and/or dismissing you; (ii) whether the company has the right to exercise power of control over you; (iii) ownership of the tools; (iv) chance of profit and/or risk of loss.

In this case it is questionable whether you are carrying on business for yourself or on your own behalf and not on behalf of the company. You write that you are working at the company's office, using their equipment and are subject to their prescribed hours of work. It also seems that you do not provide your services to other employers. These are all indicia of your being an employee rather than an independent contractor (if your employment is terminated, you may want to seek further advice on this issue).

Nonetheless, remittances must be made, and if the company is not making them on your behalf, them you must do so. You must remit the following payroll taxes: income tax, Canada Pension Plan, Employment Insurance and possibly workers" compensation. Call (416) 954-3400 to obtain a payroll kit.

If your business will have yearly revenue from sales or services of $30,000, you are required to register for a business number. There is no fee and the term is unlimited. The "Request for a Business Number" form RC1 E can be obtained by calling (416) 954-3400. Once registered, the government will send a kit with instructions for collecting and remitting GST. GST information offices can be reached at (416) 954-0473 or 1-800-959-5525.

Your income tax return is due April 30. Sole proprietor income is included on your individual return and will be taxed at your rate. It is wise of you to set aside funds toward this expense. Depending on the amount you earn, you may also want to consider quarterly installments.

If you are operating the business under a name other than your own, you must register your trade name. The cost is $60 if by mail and $70 if over the counter. The registration is valid for five years and must be accompanied by a name search report. Business name registration forms can be obtained from and returned to:

Ministry of Consumer & Commercial Affairs
Companies Branch
Corporate Services Section
375 University Avenue, 2nd Floor
Toronto, Ontario M5G 2M2
(416) 314-8880

Most employers are also required to register with the Workers" Compensation Board within 30 days of hiring an employee. The WCB will then send a registration kit.

Workers" Compensation Board
200 Front Street
Toronto, Ontario M5V 3J1
(416) 344-1000
A useful resource for small businesses is the Canada-Ontario Business Service Centre, which can be contacted at (416) 954-4636 or 1-800-567-2345. They provide information on such issues as GST and business licences.

I hope that this has helped. Good luck with your business.

Here are some online documents you may want to read for further information:

Employee or Self-Employed? Revenue Canada's Guide:

Legally Speaking: When is an Independent Contractor an Employee? By Ron Walton of Walton Advocates:

About the author

J. Christa Thomas, lawyer: Jellinek & Road, Barristers & Solicitors Christa recently joined Jellinek & Road as partner where she is continuing her business law and estates planning practices. As a business lawyer, Christa works with the owners of both start-up and mature businesses. Christa's clientele is varied, but she is particularly sensitive to the unique issues that face business owners operating on the Internet and also Aboriginal business owners.

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