An Employee By Any Other Name: CRA Assesses “Employer” for EI and CPP Premiums

By Matthew Canzer
Categories: Blog, Employment Law

Whether a worker is engaged as an employee or as an independent contractor has several legal consequences. Although the parties usually sign a seemingly clear written contract, the Tax Court of Canada is regularly called upon to review the working relationship to determine whether the work was insurable and pensionable employment under the Employment Insurance Act and the Canada Pension Plan.

This distinction matters for several reasons.

One reason is that employers must deduct premiums from employees’ pay and remit them to the government because employees are entitled to collect Employment Insurance (“EI”) if they lose their jobs. Contractors on the other hand get to keep their whole paycheques, but their incomes are not insured by EI when the work dries up. If a business thinks that they’ve hired a contractor, and the Tax Court decides that the worker is actually an employee, the business will be on the hook to remit those premiums even if the business did not, and cannot now, deduct those premiums from the worker’s pay. The financial hit is compounded when you consider that CRA will often reassess a business for three years back, resulting in a potentially devastating and unpredictable assessment.

Such a reassessment seems unfair to business owners, especially if the matter comes to the government’s attention because workers, who had clearly agreed to contract out their services as independent contractors, turn around and apply for employment insurance when the work dries up. On the other hand, it seems unfair for workers, who really have no control over whether or when the work will dry up, to be without a safety net when the business that they work for no longer needs them. This is partly why these matters end up before the Tax Court so often.

The uncertainty in this area of the law creates risk for business owners. The Tax Court recently released reasons in Lippert Music Centre Inc. v. M.N.R, 2014 TCC 170, illustrating the problem.

Lippert operated a music school and required music teachers. It wanted the flexibility to engage more teachers when it had more students, and to reduce its workforce when business was slow. Lippert offered the music teachers a contract for service, whereby the teachers would provide music instruction and Lippert would pay them for their service. The written contract explicitly stated:

…the Teacher is employed as an independent contractor and as such the Teacher is responsible for the [sic] reporting all School income. It is agreed that the School is not responsible for the withholding or remitting of income tax to Revenue Canada or any other deductions including Canada Pension Plan or Employment Insurance.1

Case closed, right?


Citing the Federal Court of Appeal’s decision in 1392644 Ontario Inc. v. Minister of National Revenue, 2013 FCA 85, the Court explained the two-step test to determine whether a worker is an employee or an independent contractor. First, determine subjective intent. The Court will look at evidence such as a written contract, any invoices issued by the worker, whether the worker registered for GST purposes, and the worker’s income tax returns to determine what type of relationship the parties intended.

In Lippert, the purported “written contract” may not have been actually signed by anyone. Woops. Still, the teachers admitted that they orally agreed to be hired as independent contractors at the beginning of each school year, so the Court determined their subjective intention was to offer services under a contract for service.

Second, the Court will determine whether an objective reality sustains the subjective intent.2 In other words, did the parties walk the walk? Was the worker performing services as a person in business on his own account, or in service to his employer? The Court considered the objective factors relevant to determining whether the relationship was that of employee-employer or independent contractor: control; tools; chance of profit; and risk of loss.3

Was Lippert the boss, or were the teachers their own bosses? The Court found that in almost every way, Lippert exercised control over the teachers as if he were their employer. He established rules for the conduct of classes and grading, held staff meetings, and set out a mandatory invoicing system. He scheduled lessons and required the teachers to attend recitals outside of working hours, without pay. On the other hand, Lippert allowed the teachers flexibility in working schedules and allowed them to teach for competitors on the side. All things considered, the Court considered Lipper the boss and awarded the point to Team Employer.

Employees usually don’t have to bring their own tools to work. In this case, the Teachers mostly supplied their own “tools” (i.e., “musical instruments”). The Court awarded the point to Team Contractor, but only a half point because not many tools were required to teach music.

If the teachers were paid $20 per hour, could they hire a replacement teacher at $17 per hour and pocket the difference as profit? No. The only way that the teachers could earn more money would be by working more hours, and this does not amount to a chance of profit4. Point for Team Employer.

Did the teacher have to invest in any capital, such as a building or overhead, such that they risked financial loss if revenues didn’t cover their expenses? Nope. Lippert paid for all of the overhead and bore the risk of loss. Another point for Team Employer.

The Court dismissed the appeal, holding that despite the parties’ subjective intention to form a relationship under a contract for service, the objective reality could not sustain it. The workers were held to be employees, and Lippert was required to remit the employment insurance and Canada Pension Plan premiums that he should have deducted from the teachers’ paycheques. Yikes.

Does your business use independent contractors? Are you sure that they’re not employees? Has CRA assessed you for unremitted premiums? We can offer advice specific to your business, and we can represent you in dealings with the CRA. If necessary, we can help you appeal the Minister’s decision and represent you before the Tax Court of Canada. Contact us to discuss your situation.


1 Lippert at para. 7.
2 Connor Homes, at para. 40.
3 The relevant factors were developed in a line of authorities that include Wiebe Door Services Ltd. v. MNR, 87 DTC 5025, [1986] 2 CTC 200 (FCA); 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983, 2001 SCC 59; and , Sagaz Industries and Royal Winnipeg Ballet v. MNR, 2006 DTC 6323, 2006 FCA 87. The CRA has issued a guide on employment status, found here.
4 City Water International Inc. v. Minister of National Revenue, 2006 FCA 350.


Matthew Canzer can be contacted at 250-869-1122 or