Half a million people enter the Canadian self-employment market every year, and if you are one of these individuals, it is important to understand the relevant business laws in Canada. As an independent contractor, you have obligations to the Canada Revenue Agency as well as other industry-specific and general legal issues to keep in mind.
1. Independent Contractors vs. Employee
The CRA uses a four-point test to distinguish between independent contractors and employees. In particular, independent contractors have control over the work they do and when they do it. They typically own their tools and carry their own risk of profit or loss.
If a client pays you as if you are an independent contractor when in fact you fall under the umbrella of employee, he may face tax or legal consequences. Additionally, for your own financial and professional protection, it is important to ensure you truly are an independent contractor. In cases where the line is blurry, you may want to draft a contract outlining the terms of your relationship with the person paying you.
2. Reporting Income
You must report all of your earnings to the CRA, and the agency has strict provisions in place to deal with individuals who fail to report income. Luckily, however, you may deduct your business expenses from your profits, and that helps to lower the amount of income on which you pay taxes.
3. Industry Requirements
Depending on the type of work you do, you may not need to have licences, degrees, or certifications. For example, if you are a construction worker, electrical contractor, or skilled tradesperson, you need the right certificates of qualification and licences just as you do as a professional masseuse, accountant, or lawyer. However, in other cases such as freelance writers, business consultants, and social media managers, you don’t need any special permits or licences. Make sure you research and understand the legal requirements for your particular industry.
4. Business Registration
In some cases, independent contractors do not have to register as businesses with federal or provincial authorities. However, if you sell taxable goods or services, you must register for a sales tax account with the CRA once your revenues exceed $30,000 per year. To set up a sales tax account, you need a business number, meaning you have to register your business with the CRA. Similarly, if you ever hire employees, you also have to register and obtain a business number.
If you live in a province with provincial sales tax, you likely have to set up a business number and a sales tax account right away. Most provinces do not have a threshold in place like the CRA that allows you to avoid registering if you have a small volume of business.
5. Liability Concerns
As an independent contractor, you are personally liable for a number of things. For example, you are personally liable for any loans you take out for your business. Similarly, if a delivery person takes a package to your home and trips and falls, you may also be liable. Ensure you have the right insurance policies in place to cover these risks.