Dean Blachford, Tax Litigation Lawyer
Brittany Rossler, Law Student


Your clients rely on you to advise them on how to structure their work relationships in order to meet their goals and comply with the law. A worker’s status as an employee or independent contractor has significant implications, including whether or not their hirer has to deduct and remit income tax, CPP, and EI. Due to the significance of these implications and the sometimes-blurry distinction between employees and independent contractors, this issue leads to frequent reassessments by the CRA and litigation before the Tax Court of Canada.

In this article, we review the legal test for distinguishing independent contractors from employees and then extract themes and practical advice from the most recent judgments on this issue so that you can help your clients avoid these disputes.


The courts use a two-pronged test to determine whether an individual is an employee or independent contractor, first assessing the stated mutual intent of the parties and then the objective facts of the work relationship.

(1) Intent of parties

In The Royal Winnipeg Ballet v MNR,[1] the Federal Court of Appeal recognized the importance of the parties’ mutual intent regarding the structure of the legal relationship.[2] Simply using the term “independent contractor” in the agreement, however, will not be enough. The intention must also be reflected in the contractual terms of the agreement and surrounding aspects of the relationship. For example, courts are less likely to find an independent contractor relationship where:

  • the hirer imposed a new agreement on a worker;[3]
  • the worker was unable to distinguish between employment and independent contractor status due to language barriers, recent immigration, etc. [4]
  • the worker characterized the income as “employment income” on their tax return;
  • the worker did not invoice the hirer or charge GST for their services; or
  • significant uneven bargaining power existed between the two parties.

(2) Objective facts of the work relationship

The second step applies the four-in-one test[5] to determine whether the objective facts are consistent with the common intent to form an independent contractor relationship[6]:

  1. Chance of profit: unlike independent contractors, employees typically do not share in their employer’s chance of profit and are instead guaranteed a relatively fixed wage at regular intervals regardless of their performance.
  2. Control: the relationship between an employer and employee is characterized by subordination, whereas an independent contractor provides his or her services as a business on equal footing with the hirer.
  3. Ownership of tools and equipment: employees are provided with tools and equipment, whereas independent contractors typically bring their own to complete the work.
  4. Risk of loss: independent contractors contribute capital and bear financial burdens associated with poor performance. While employees may occasionally incur expenses that are not reimbursed by the employer, these amounts are typically minimal or personal in nature, and arise outside the work relationship.[7]

Overlooking small details can cause big tax consequences

Using the term “employee” in the contract: In the past two years, the tax court has dealt with multiple cases where the intent of the parties was held not to be mutual due to the use of the term “employee” throughout “Independent Contractor Agreements.”[8] If using a template contract, conduct a quick search of the document for the terms “employee” and “employment” to help your clients avoid this costly mistake.

Further correspondence: in Coathup v MNR, the appellant’s claim that a worker was an independent contractor was easily disproved when the Minister of National Revenue tendered an email from the appellant in which she accused the worker of breaching their “employer/employee relationship”.[9] Clients should be advised to treat all of their communications with their workers as though they may one day be tendered as evidence.

Unsigned contracts: the Tax Court rejected an unsigned independent contractor agreement as evidence in Coathup.[10] Remind your clients that it is important to keep signed copies of any agreement they may need to rely on if a dispute arises regarding a worker’s status.

Knowledge as tool

In Sistema, the Court rejected the argument that a music teachers’ knowledge of music should be considered a tool within the context of the “ownership of tools and equipment” factor of Wiebe Door framework: “I do not believe that such knowledge is property of the kind contemplated by this test.”[11] An earlier case, Wilford v MNR, similarly concluded that “the ‘tools’ guideline in Wiebe Door refers to material objects, not personal capabilities: equipment, not expertise; implements, not ingenuity; supplies, not skills.”[12] In circumstances where an intended independent contractor contributes personal capabilities, it will be even more import that the other factors of the four-in-one test support this intention.

Retroactivity is rarely reliable

In two recent cases the tax court denied the applicability of new contracts that were created either to alter or clarify existing work relationships. One case involved a music school that required music teachers, who had formerly been working as employees, to sign a new “Independent Contractor” agreement.[13] The court held that the manner in which the new contract was imposed on the workers did not indicate a mutual intention.

Another case involved a music school that began treating its new music teachers as independent contractors in 2012.[14] The school realized that the agreement they had been using had no noticeable differences from the earlier employment contracts except for the lack of deductions and, in 2014, sent out a modified engagement letter to clarify that the music teachers were independent contractors. The court rejected the 2014 agreement as evidence of the music teachers’ retroactive acceptance of independent contractor status.


At HazloLaw – Business Lawyers we have extensive experience successfully representing individuals and corporations in tax disputes with the CRA and at the Tax Court of Canada. We look forward to partnering with you to help your clients resolve any tax disputes they may have or to avoid them before they arise.


[1] The Royal Winnipeg Ballet v MNR, [2007] 1 FCR 35, 2006 FCA 87 [Royal Winnipeg Ballet].

[2] Ibid at 64.

[3] See: Sistema Toronto Academy Inc. v MNR, 2016 TCC 193 [Sistema]; Cyr v MNR, 2017 TCC 25 [Cyr].

[4] Coloniale Maid Service Ltd v MNR, 2010 TCC 115.

[5] Wiebe Door Services Ltd v MNR [1986] 2 CTC 200, 87 DTC 5025 (FCA).

[6] Royal Winnipeg Ballet, supra note 1 at 64.

[7] See Cyr (the cost incurred by music teachers for purchasing their instruments were held to be extraneous to their teaching duties).

[8] See for example: Apex Language and Career College v MNR, 2016 TCC 109.

[9] Coathup v MNR, 2017 TCC 54 at para 45 [Coathup].

[10] Ibid at para 54.

[11] Sistema, supra note 3 at 42.

[12] Wilford v MNR, 2011 TCC 6.

[13] Cyr, supra note 3.

[14] Sistema, supra note 3.

This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today.  613-747-2459 ext.310,