Might the taxman cometh?
Last month I wrote a column suggesting that when it comes to the bevy of so-called “embedded contractors” working on the Muskrat Falls hydroelectric project for Nalcor, they might not all pass the test in labour law that determines when an independent contractor is an independent contractor and when they’re actually an employee.
It’s called the Montreal Locomotive test, after a 1947 court decision in the tax dispute of Montreal vs. Montreal Locomotive Works Ltd.
In a nutshell, the test looks at the nature of the arrangement between the contractor and the company he or she is working for to determine whether the contractor is actually under the control of the overarching company (in this case, Nalcor); whether the contractor provides his or her own work tools and materials, or the company does; and whether the contractor stands to profit or lose based on how the company fares.
I was raising the issue because I was arguing that if many of these embedded contractors are, in fact, employees in contractors’ clothing, then the public has a right to know just how much they’re paid — the details of which Nalcor has refused to divulge under claims of “commercial sensitivity.”
But it’s not only you and I who might like to know whether they are de facto employees of Nalcor.
That’s an area the Canada Revenue Agency might also take more than a passing interest in.
And CRA has its own test for determining a worker’s employment status, asking the question:
“Did the two parties intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)?”
The criteria the CRA uses are similar to those of the Montreal Locomotive test and they are outlined on its website:
“• the level of control the payer has over the worker’s activities; “• whether the worker or payer provides the tools and equipment; “• whether the worker can subcontract the work or hire assistants; “• the degree of financial risk the worker takes; “• the degree of responsibility for investment and management the worker holds; “• the worker’s opportunity for profit; and “• any other relevant factors, such as written contracts.”
Those written contracts, as of now, are off limits to the people of the province, even though we are Nalcor’s shareholders.
If the Canada Revenue Agency should decide to take an interest in Nalcor’s hiring arrangements, the outcome could be costly for us all. In a 2008 article “Employee or Independent Contractor? Be aware of the risks,” Barry Kwasniewski, a partner in Carters law firm in Ontario, warns that there are potentially serious legal consequences of incorrectly classifying workers.
He writes: “An employer who fails to deduct income tax at source, as well as the required CPP contributions and EI premiums, must pay not only the unremitted taxes, but also the employer’s share and the employee’s share of any premiums owing, plus penalties and interest.
The issue of whether a worker is an employee or an independent contractor arises frequently in the Tax Court of Canada. As a result, an improper classification may be costly to the employer, both in terms of not only the premiums, penalties and interest but also the legal fees of defending a challenge by the CRA in the Federal Court.”
In his conclusion, Kwasniewski offers sound advice:
“…a well-drafted contract can serve to reduce an ambiguity regarding the status of a worker. From a risk management perspective, organizations should take care to ensure careful drafting of independent contractor agreements to minimize the potential liability of the organization.
They also need to make a careful assessment of the position being filled and whether their designation of a worker as an independent contractor or employee would survive a close scrutiny by the CRA and the courts.”
So, here’s hoping all the i’s are dotted and the t’s crossed on those embedded contractors’ contracts. Otherwise, the taxpayers will be on the hook for even more of the enormous financial burden that is Muskrat Falls.