Bob Gauvreau breaks down when to use T4 versus T4A slips in Canada. The key difference: T4s are for employees (single employer, employer direction, no income risk), T4As for contractors (multiple clients, own tools, variable hours). Employers should default to T4 to avoid assessment risks.
Okay, let's talk about a T4 versus a T4A. What are the differences? Now there's so much more than just the form that needs to be a discussion here. It's actually the underlying relationship with an individual and an organization. So really there's a relationship that's either an employee or a contractor relationship. And we have to be very clear on this because there are risks to getting this wrong. And what I will say is if you're unsure of how this should be characterized, we can always ask for a ruling with the Canada Revenue Agency and they'll give an advance ruling to say you're either an employee or a self employed contractor. Now what are some of the circumstances that would identify you one way or another? Well, as an employee, if you only have one source of income, you're likely an employee of that organization, especially if it's full time. If there's no risk to you as an employee and you're going 40 hours a week, nine to five, the company is really dictating to you what it is that you're supposed to do. That's an employee relationship. If there's no risk associated with pay going up or down, likely an employee relationship. On the other side, if you've got multiple sources of income, you're providing your own tools, there's risk to earn and there's risk to lose. And also looking at different hours and you can essentially choose when you're going to work and when you're not going to work. That's more of a self employed individual concept. Now the reason I wanted to jump into this, aside from the fact that it's very important and if you're unsure of which one you are, especially as a business owner, which relationship should we have? We should default to the employee relationship because that's the conservative approach. If the government were to assess the situation and you were to say someone's a self employed individual, you, you could be entitled as the employer to pay all of their Canada pension plan and employment insurance contributions for the period that they were there. So there is a risk associated with that. If you determine them to be an employee, there's really no risk that they're going to say, oh, that person was self employed, they wouldn't do that. So we would default to being an employee. Now the reason I want to get into those details when we're talking about a T4 versus a T4A. A T4 is issued to employees. A T4A is issued to self employed individuals. Now how does that work for that individual? Well, that T4 goes on their personal tax return. It's got all the withholdings taken off and everything like that. But they don't get access to deductions on their personal tax return related to employment unless you've got a specialized agreement that allows you to deduct certain expenses because you've incurred them. Rent. Really as an employee you get a T4 and that goes on your tax return as a T4A. It's essentially referred to as a statement of self employed income. So you are a self employed contractor with a T4A. It would actually go on your personal tax return as a statement of business activities. So you get access to all the deductions available for a small business. Now these are important to understand the differences. But again I think it goes back to we should be defaulting to employees if we're not sure that they're self employed contractors. Now I will say that sometimes employees want to say that they're self employed contractors because they want access to those deductions. They want to be a little bit aggressive with their personal tax filing. That actually puts you at risk. So we don't want to mess with that too much. Again, we want to err on the side of caution of being an employee. Now give you an exception. If that employee wants to be self employed, you can tell them that they have to incorporate and that corporation can be the self employed individual and it pulls the risk off of you as the small business owner for those source deductions. So if your employee is adamant, you say no problem, we're going to engage or create a contract with your corporation to pay you as a self employed individual. So that way any risk associated with being self employed goes on to that employee and it's off of you. So T4s get issued for employees. T4As get issued for anyone who's considered self employed. Any further questions? Feel free to reach out to our office. Happy to help.
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