Independent contractor or PSB?

Your oil patch client’s status has major tax consequences

By Stino Scaletta | May 9, 2013 | Last updated on September 15, 2023
3 min read

  • Control.

    How much control does the independent contractor have over the work? An employee would have little control, while an independent subcontractor would have more.

  • Chance of loss.

    If a mistake is made on the job, is the independent contractor responsible for making it right — and incurring the associated costs? An employee may be reprimanded but should not be out of pocket for the mistake.

  • Ownership of tools.

    Does the company provide tools for the job? Independent contractors would provide their own while an employer would supply them for employees.

  • Integration.

    Employees are integrated into the operations of their employers. For instance, they may have a pension plan or company issued uniforms; independent contractors would have their own. Another test of integration is whether there is “enduring value.” Employees who would hurt the success of the company if they left have enduring value; in constrast, independent contractors often don’t have second assignments, and so aren’t critical to the company’s success.

The more independent contracts someone enters into, the more likely CRA will see him or her as a contractor rather than a PSB.

Conclusions

In the past, if a relationship was deemed a PSB and the contractor conceded his or her expenditures were limited, the income tax implications were bearable. The corporate tax rate would only be 15%.

When coupled with the personal tax rate, the overall tax was within 1% of the highest rate of 46.4% in Manitoba, 44.7% in Saskatchewan and 39% in Alberta.

Being classified as a PSB after the legislative changes means the rate will increase to 55.58% in Manitoba, 51.33% in Saskatchewan and 45.78% in Alberta.

Stino Scaletta is a tax specialist at MNP LLP.

Stino Scaletta

  • Control.

    How much control does the independent contractor have over the work? An employee would have little control, while an independent subcontractor would have more.

  • Chance of loss.

    If a mistake is made on the job, is the independent contractor responsible for making it right — and incurring the associated costs? An employee may be reprimanded but should not be out of pocket for the mistake.

  • Ownership of tools.

    Does the company provide tools for the job? Independent contractors would provide their own while an employer would supply them for employees.

  • Integration.

    Employees are integrated into the operations of their employers. For instance, they may have a pension plan or company issued uniforms; independent contractors would have their own. Another test of integration is whether there is “enduring value.” Employees who would hurt the success of the company if they left have enduring value; in constrast, independent contractors often don’t have second assignments, and so aren’t critical to the company’s success.

The more independent contracts someone enters into, the more likely CRA will see him or her as a contractor rather than a PSB.

Conclusions

In the past, if a relationship was deemed a PSB and the contractor conceded his or her expenditures were limited, the income tax implications were bearable. The corporate tax rate would only be 15%.

When coupled with the personal tax rate, the overall tax was within 1% of the highest rate of 46.4% in Manitoba, 44.7% in Saskatchewan and 39% in Alberta.

Being classified as a PSB after the legislative changes means the rate will increase to 55.58% in Manitoba, 51.33% in Saskatchewan and 45.78% in Alberta.

Stino Scaletta is a tax specialist at MNP LLP.