In Employment Insurance cases, like this one, either the business denies that the worker was an employee (to avoid EI and CPP payments) or the worker claims to be an employee so that he can have EI benefits. Here, the worker, Mr. Rizak, claimed he was a university employee when he worked as a graduate research assistant in neuroscience at the University of British Columbia. The TCC agreed.
Businesses often like to hire workers as independent contractors, to save paying CPP contributions or EI premiums. The savings aren’t always greater than the costs, though. For example, independent contractors earning more than $30,000 each year must collect GST/HST and some businesses, such as insurers or banks, may not be able to recover the HST paid. Because CPP and EI amounts are capped, unrecoverable GST/HST costs can exceed the savings from not paying CPP or EI. For the worker, independent contractor status can add administrative expenses, such as extra tax reporting (e.g., for GST/HST) and CPP costs. But because the EI Act now allows self-employed persons to elect to have employment insurance, “independent contractor” status may not have the same disadvantages for workers that it once had. (See Part VII.1 of the Employment Insurance Act: Benefits for Self-Employed Persons.)
Though the tax courts repeat the same criteria (such as degree of control and ownership of tools) for deciding whether a worker is an employee or independent contractor, the decisions seem random. It is impossible to predict how a court might classify a worker, even where the parties agree on how they want to treat their relationship.
In this case, the CRA had agreed with UBC that the worker was not paid as an employee. Justice Graham reviewed tax cases in which the Tax Court came to conflicting decisions on the employment status of university students and postdoctoral fellows. He decided that the normal four-factor tests that courts apply is not helpful for University stipends:
“‘The question at issue is not whether the agreement between the parties is a contract of employment or a contract for services (employee versus independent contractor status), but whether it is a contract of employment or an agreement of financial assistance regarding continuing studies (employee versus student or postgraduate student status).’” (Para. 33.)
Even so, Graham J. said that, had he applied the normal tests, he would have found Mr. Rizak was an employee, not an independent contractor.
It weakened the University’s position that it had agreed that Mr. Rizak was an “employee” during periods before and after his time as a graduate student. (Para. 38.)
In a very interesting twist at the end of the decision, Justice Graham spoke about the negative income tax effects of Mr. Rizak’s success. Though he won his claim for EI benefits, he lost on the income tax issue, for himself and for other students. (Part of his income was for the 2010 tax year, which CRA could still reassess.) As the judge noted: “Generally speaking, scholarship and fellowship payments received by graduate students are not taxable under the Income Tax Act“. (See ITA s. 56(3) and paras. 43-44 of the decision.) Employment income, though, is taxable. Mr. Rizak won because Justice Graham agreed that the amount was not a fellowship stipend and that he was paid, rather, as an employee. So, he should have paid income tax on what he called his “salary” — but he had not reported it as employment income in his tax return.