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T4 vs. Incorporated Contract L...

T4 vs. Incorporated Contract Laborers: Learn The Difference

Home to thousands of newcomers, especially in recent times, Canada has generated numerous employment opportunities. As the Canadian market brims with jobs, it becomes equally important to demarcate the definitions of the diverse kinds of labour.

Many might regard the distinction in the types of employment a mere difference in terminology. However, one must be aware of the implications that employment conditions have on their income, taxation and the overall operations of work.

T4 Employees

Once an employer hires an employee to work for him/ her, the employee receives a T4 slip. In other words, a T4 employee is one who works under the standard employee-employer relationship.

The T4 slip enlists information about the employees’ income from sources other than work, so the organization may be able to account to the Canadian Revenue Agency. As per the norms of the CRA, a company will deduct taxes from their regular employees if their income exceeds a stipulated bracket.

Being a T4 employee generally entitles one to receive benefits from their employer, such as medical, dental and paid leave. The benefits come into effect after certain periods of time, such as, the probationary period.

Incorporated Contractor

An independent contractor, or, in colloquial terms, a freelancer, works for a business based on a mutual agreement, be it written or verbal.

As an independent contractor, an individual is responsible for accounting for and paying taxes to the Canadian Revenue Agency.

A group of independent contractors can incorporate their services to form a small business. All income must be declared as business income. Thus, the incorporated contractor is eligible for tax cuts privy to small businesses but will have the onus of accounting for the business’s finances.

As an incorporated worker, you will have greater ownership over the tools/ services/ intellectual property you provide to the employer. This also makes you prone to bearing the losses consequently incurred. At the same time, independent contractors have the opportunity to decide their pay grade and make profits.

An individual who works on a contract with a single client becomes a ‘Personal Services Business’, with liabilities. Such an individual loses the privilege of being taxed as a small business. Additionally, he/ she is limited, in regard to the type of expenses that can be written off.

CRA’s 6-question Assessment

In order to determine if an individual is, indeed, an employee or an independent contractor, the Canadian government asks 6 questions. Answers to these questions can help understand the nature of one’s employment. The broad categories are:

I. The amount of control over work
Ii. The right to hire or subcontract work
Iii. The ownership over tools and equipment
Iv. Financial risk and the opportunity for profit/ loss
v. The responsibility for investment and management
Vi. A contract or mutual agreement with the client

For more information, consult CRA’s Employee or Self-Employed document. Should you feel that your employer has violated or misrepresented the terms of your employment, and require legal help, reach out to the team at Soni Law.

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