When working for a new employer we can sometimes get caught up and forget to review the boring admin details with the employer. Especially if we are busy with the new found work and other activities associated with moving to a new city. This can leave us unaware of our employment status, which can have costly results.
Determining your employment status
If you are being paid through a payroll system, whereby you are receiving a paystub outlining your gross pay, tax, EI, CPP, and net income, you are an employee. This means your employer is correctly deducting tax from your income and paying it to CRA on your behalf. You will receive a T4 at the end of the year summarizing your pay and tax contributions, this will be used when filing your tax return.
However, if you are not receiving a pay stub, and are in fact being paid either cash or EFT into your bank account, you may not be having any tax deducted from your pay. This could mean that you are being treated as a contractor/self-employed by your employer. We would recommend that you speak with your employer to discuss your employee status, and to make sure you know where you stand.
What can go wrong?
Whether deliberately or accidentally, some employers have failed to inform workers that they are contractors rather than employees until year end, when the worker usually asks for their T4 to file their tax return. Why is this a bad thing? Well, as a contractor you do not have tax deducted from your pay cheques, meaning you are required to pay the tax to CRA at year end, upon filing a self-employed/contractor tax return. This can come as a complete surprise, and can be a very large, unexpected tax bill to the CRA.
Why would an employer do this?
When paying a worker on a contractor basis, it can benefit small businesses who do not wish to make the employer contributions of tax to CRA. Therefore, saving themselves money by recruiting contractors as opposed to employees, they do not always inform workers of their decision. This sort of behavior from employers is technically legal, and a complaint against them to CRA would not wipe of the outstanding tax balance because you ‘did not realize’. It is always best to ask your employer for a pay stub (if they do not automatically issue one to you) and make sure you are aware of your employment status.
We see cases where people decide to leave Canada at the end of the financial year, rather than paying the unexpected bill to CRA. This is illegal and would be a red flag against any future work permit applications. Also, it can force people who wanted to stay in Canada and seek permanent residency to flee.
Benefits of being Self-employed / Contractor
If you are aware of your contractor status from the beginning of your work agreement, you can make the most of the benefits from being self-employed / contractor. You will be able to start keeping track of your allowable expenses, and making sure you have copies of receipts. Depending on your industry and role, you can often pay lass tax to CRA when being a contractor as opposed to being in the same position as an employee when paid the same hourly rate.
How does it affect your tax obligations?
It is typically more difficult to file a tax return when being self-employed / contractor. This is because there are a wide range of expenses which can be used to apply against your income. The aim being that the lower your taxable income, the less tax you pay. We advise that self-employed/contractors get in contact with our experienced team to ensure the lowest possible balance owing to CRA.
If you have any more questions about your tax return or all other tax related issues, please send us a message. We are more than happy to answer any questions you may have, after all, tax doesn’t have to be taxing.