Contractor vs Employee in Canada: CRA and Provincial Tests

Contractor vs employee (T4 vs self-employed): how does the CRA decide?

A worker is a self-employed contractor (also called an independent contractor) if they are in business on their own account, and otherwise an employee. The contract label does not settle it. For contracts formed outside Quebec, the CRA decides in two steps: what the worker and payer intended, then whether the working facts match that intent (CRA: contract formed outside Quebec).

1. Intent. Read the written contract, if there is one, and what both sides said and did when the work began.
2. Facts. Check control, tools and equipment, helpers or substitutes, financial risk, investment and management, and chance of profit.

The answer sets your payroll. An employee gets a T4 with CPP, EI and income tax withheld. For most resident contractors nothing is withheld, and fees go on a T4A in box 048 (CRA: fees for services).

What makes a case not simple. A worker who has invoiced month after month on your hours and tools, a worker with their own corporation, a contract formed in Quebec, and a province or workers' compensation board that applies its own test can each change the answer. A wrong call can leave the payer owing the CPP and EI that should have been deducted, plus its own share, penalty and interest. A worker asking for a T4 or a Record of Employment, or a letter from the CRA or a board, can mean past years need rebuilding.

What to gather first: the contract, invoices, the schedule, who owns the tools, and the worker's other clients. The full list is at the end.

Which facts point to an employee and which to a contractor?

These are the CRA's factors for contracts formed outside Quebec. No single fact decides it: the CRA weighs them together with other relevant facts, such as the written contract (CRA: contract formed outside Quebec).

Does a signed contractor agreement, an invoice or the worker's own request settle it?

No. A contract is step one: it shows what both sides intended. But the status they choose must reflect how the work is actually done (CRA: employment status).

Where the Income Tax Act requires an amount to be deducted, an agreement not to deduct is void (Income Tax Act, section 227(12)). A worker who asks to invoice, or who asks for a T4, adds one fact. It does not decide the status.

Invoices and a GST/HST number are signs that Alberta lists on the contractor side, but they sit beside hours, supervision, tools and risk of loss. British Columbia says that calling a person a contractor, even if the worker agrees, does not decide the issue (BC).

Is Quebec different?

Yes. The CRA keeps one set of factors for contracts formed in Quebec and another for contracts formed elsewhere. For Quebec it applies the Civil Code of Québec: it finds what the parties intended, weighs who carries out the work, how the worker is paid and the relationship of subordination, then compares the intention with how the work really operates (CRA: contract formed in Quebec). The CRA's Quebec page and its employment-status overview do not say how it decides where a contract was formed.

Subordination is the payer's power to control the worker's activities and how the work is done. The right to control counts, whether or not the payer uses it. Where subordination is hard to see, the CRA's page suggests also reviewing the indicators used outside Quebec.

The payroll side differs too. For an employee who reports to, or is paid from, your place of business in Quebec, the employer deducts QPP instead of CPP, plus QPIP and EI when the employment is insurable. QPP, QPIP and Quebec income tax go to Revenu Québec, which also has its own slip, the RL-1, beside the federal T4; EI and federal tax go to the CRA. A CRA ruling covers CPP and EI only (CRA: Employers' Guide).

Do Ontario, British Columbia and Alberta employment standards use the same test?

They weigh similar facts, but each province applies its own law, and the CRA is only one of several agencies. Alberta says that different government organizations, the CRA among them, use their own considerations (Alberta). A worker can be a contractor for the CRA and still an employee under a province's rules. Other provinces and territories are not covered here; check their employment standards office and workers' compensation board.

Do WSIB, WorkSafeBC and WCB-Alberta decide the same way?

Not necessarily. Each workers' compensation board decides coverage under its own rules, and in all three provinces a hiring business can end up responsible for premiums on a contractor's work.

What do I set up and deduct if the worker is an employee?

If the worker is an employee, the employer registers a payroll program account before the first remittance due date (CRA: register), deducts CPP, EI and income tax from each pay, adds its own CPP and EI share (CRA: make deductions), and files a T4 for the year.

• CPP: deduct the employee's share and pay a matching share yourself, 5.95% each on earnings above the basic exemption up to the year's maximum. Earnings above that, up to $85,000.00, carry the second additional contribution (CPP2), at most $416 each (outside Quebec).
• EI: deduct the employee's premium and pay 140% of it as the employer.
• Income tax: withhold it from each pay.

The employer share is a real cost of employment. Calling a worker a contractor does not remove it if the facts show employment. Remitting, the Record of Employment and year-end filing are in Running payroll; the slip is in T4 vs T4A.

What do I do if the worker is a contractor?

For most resident contractors, nothing is withheld for CPP, EI or income tax. The payer reports the fees on a T4A in box 048 when payments in the calendar year were more than $500, leaving GST/HST and PST out of the amount (CRA: fees for services). Paying fees for services is among the payments that can require a payroll account (CRA: register). The CRA is currently not assessing penalties for a missed box 048, except under its trucking-industry policy; see T4 vs T4A.

The contractor reports the fees as business income and pays both halves of CPP on their own return: 11.90% on eligible earnings up to the year's maximum, and 8.00% on earnings between that maximum and $85,000.00. A Quebec resident pays QPP instead. That side is in How self-employed income is taxed. Construction subcontractors, non-residents and missed past years follow other rules; see Reporting payments to subcontractors.

Does it change if the contractor is incorporated?

A worker's own corporation changes the CPP and EI analysis and raises a separate income-tax question, but generally not the slip: the payer still gives the corporation a T4A (CRA: PSB obligations).

For CPP and EI, the CRA says that in general the payer will not normally be seen as the employer of a worker whose own corporation holds the contract. That does not make the worker self-employed: the worker would in most cases be an employee of their own corporation (CRA: information technology consultants). That page is older, and "in general" and "normally" leave room for exceptions. If the facts look like employment, ask for a ruling.

For income tax, the corporation may also be a personal services business. The CRA says a payer of one generally must have a payroll account and file information returns even where nothing is withheld. The test and the tax result are in Personal services business.

What if I treated an employee as a contractor?

If the worker was in fact an employee, the employer owes what should have been deducted plus its own share, and may be unable to recover the worker's share. The CRA says the employer is responsible for the missing CPP and EI even if it cannot recover them from the employee (CRA: Employers' Guide).

If the worker charged GST/HST, the input tax credits you claimed on it may be at risk: under the Excise Tax Act, an employee's work for the employer is not a "service" (Excise Tax Act, section 123(1)). In Ontario, an employment standards officer can also issue a notice of contravention that results in a penalty, a prosecution or both (Ontario).

Who pays personally: a sole proprietor is the employer and owes these amounts directly. A corporation's directors at the time of the failure are jointly and severally liable with it, subject to a care, diligence and skill defence and a two-year limit after they last ceased to be a director (Income Tax Act, section 227.1; CPP s. 21.1; EI s. 83). How much of the worker's share can be recovered from the worker, how the CRA assesses income tax not withheld, partners' liability and the correction steps are in Payroll audits and worker-status rulings.

The facts are mixed: what do I gather, and when do I ask for a ruling?

Weigh the evidence one calendar year at a time. Your books are that evidence: for each worker and year, the invoice date, date paid, amount and GST/HST paid. Gather:

• the written agreement and any renewals;
• every invoice, with dates paid;
• the schedule, timesheets or messages setting hours;
• who owns the tools, vehicle or software, and who pays upkeep;
• whether the worker can send a substitute or hire help, and whether they ever have;
• the worker's other clients, advertising, business registration and insurance;
• any benefits, uniform, training or reimbursements the worker received.

A worker or payer can ask for a CPP/EI ruling on Form CPT1 or through the CRA's online accounts (CRA: how to ask). The ruling says whether the work is pensionable (CPP applies), insurable (EI applies) or both (CRA: request a ruling).

• Deadline: June 29 of the year after the year the question relates to. When June 29 falls on a Saturday or Sunday, a request the CRA receives, or that is postmarked, on the next business day is on time (CRA: when to ask). The statutes make this a limit on requests by a payer or worker (CPP s. 26.1(2); EI Act s. 90(2)). Service Canada can ask at any time, and the CRA page says the CRA can for its own programs, so a ruling can still follow after the window closes.
• Scope: a ruling applies to specific periods and is final unless appealed (CRA: after a ruling). The payer or worker has 90 days after being notified to appeal (CPP s. 27; EI Act s. 91).
• Trade-off: a ruling that finds employment can mean CPP and EI owing for the periods it covers. Until a ruling is requested for a worker, CPP and EI not deducted are presumed not to have been required (CPP s. 26.1(4); EI Act s. 90(4)), but Service Canada or the CRA can request one at any time. If a written ruling said no deduction was required, it did not rest on incorrect information from the employer, and an appeal later decides the deduction was required, the employer is not liable for the amounts not deducted or for interest and penalties, but owes its own share without interest or penalties (CPP s. 21(3); EI s. 82(5)). Whether to ask is a call to make on the facts for each year, before filing.

Example

These examples are illustrative. All amounts are in Canadian dollars.

Ontario: a designer at the office

A designer works 40 hours a week at your office on your laptop for 18 months from January 1 and invoices C$6,000 a month plus HST. On these facts the CRA's factors lean toward employment (set hours, your tools, ongoing work, no other clients), but it weighs the whole relationship.

Year one totals C$72,000 and the first six months of year two total C$36,000, both before HST. If the designer is an employee, CPP and EI should have been deducted from pay, and each year needs a T4. If year two is the current year, both years are inside the CPP four-year and EI three-year limits, so both can be assessed; the income-tax penalty and interest have no such limit. The input tax credits you claimed on the HST may also be at risk.

British Columbia: a video editor

A video editor has five clients, owns the equipment and bills C$4,000 per project. On these facts the factors lean toward a contractor. The business pays C$12,000 over the year for three projects, plus GST. If the editor is a contractor, nothing is withheld, and the T4A shows C$12,000 in box 048 because payments passed the reporting threshold. Before the work, the business can ask the editor for a WorkSafeBC clearance letter.

Alberta: a driver with mixed facts

A driver is paid a flat C$2,500 a month, sets some of the route and uses their own vehicle, but wears your uniform. The facts are mixed, so gather the contract, the route instructions and who pays for fuel and insurance. For payments made in year one, a CPP/EI ruling can be requested until June 29 of year two. After that date, the worker and payer can no longer request one for year one, though Service Canada or the CRA can still ask. WCB-Alberta applies its own business test, so check it separately.

Different for you?

• A worker has billed you on invoices for months or years, or works your hours with your tools: the status depends on the facts in each year. Get bookkeeping help to rebuild the year-by-year payments.
• A worker has asked for a T4 or a Record of Employment, or past payroll needs fixing: the open points are which payroll and slips to set up or correct, and whether to ask for a ruling before the CRA does. Get bookkeeping help to rebuild what was paid and when.
• The CRA or a provincial board has written: see Payroll audits and worker-status rulings, and get bookkeeping help to pull the payment history before you reply.
• The worker reports to, or is paid from, a place of business in Quebec: a correction runs through two payroll accounts and two slips, the T4 and the RL-1. Get bookkeeping help to rebuild both.
• The worker invoices through a corporation: see Personal services business.
• You are unsure whether to issue a T4 or a T4A, or earlier slips were wrong or missing: see T4 vs T4A and Reporting payments to subcontractors.
• You pay a spouse or children: see Paying family members.
• The worker lives outside Canada, or is a US contractor or employee: see Paying US contractors from a Canadian corporation and Hiring an employee across the border.
• You are the worker and think you are an employee, or are unsure: a worker can ask the CRA for a ruling on Form CPT1. If you are a contractor, tax on your income is in How self-employed income is taxed.