Both the person paying for the work and the person doing the work often want to call the relationship a contractor relationship. The problem is that calling it that does not make it that. CRA looks at the substance, not the title. If the relationship looks like employment in practice, CRA will treat it as employment and assess the unpaid CPP, EI, and source deductions, with interest and penalties.

Why the distinction matters to the payer

Engaging an actual independent contractor (not a misclassified employee) skips a number of employer obligations:

• No employer share of CPP
• No employer share of EI
• No paid vacation
• No statutory holiday pay
• No severance obligations on termination

Those costs add up to roughly 15% on top of the wage. That is the size of the temptation, and the size of the audit assessment if you get it wrong.

Why the distinction matters to the worker

Operating as a real independent contractor opens deductions a T4 employee cannot access:

• Home-office expenses
• Promotional and entertainment expenses
• Capital cost allowance on equipment
• Income-splitting opportunities through reasonable payments to family members for actual work performed
• The option to incorporate and access the small business deduction

For higher-earning contractors, those deductions and structures can materially reduce tax. For the wrong situation, they trigger a reassessment.

How CRA actually decides

CRA looks at the “total relationship of the parties.” The core question: Is the person performing these services a person in business on their own account? If yes, contractor. If no, employee. The factors below are how that question gets answered in practice.

Factors pointing to independent contractor

• The worker controls their hours and works without supervision
• The worker owns their own tools and equipment
• The worker provides services to more than one business
• There is a written contract that describes the relationship as a hirer / contractor relationship
• The worker submits invoices for services rendered
• The worker charges GST
• The worker has a real risk of loss from their enterprise
• No services performed means no payment
• The worker pays their own expenses (rent, equipment, software)
• The worker is not required to perform the services personally and may subcontract
• The contract is for a limited period or a specific project

Factors pointing to employee

• The worker works exclusively for one hirer
• Expenses are paid by the hirer
• The worker is paid a salary or hourly wage rather than for services delivered
• The hirer controls and supervises the work
• The hirer sets the hours
• The hirer provides all tools and equipment
• The worker has no expenses related to performing the work
• The worker is integrated into the hirer’s business (indispensable to it)
• The hirer provides a pension or retirement plan
• The hirer provides group benefits (life insurance, extended health, dental, long-term disability)

What this looks like in practice

No single factor decides the question. CRA weighs the whole relationship. A worker can have a written contract calling them a contractor, send invoices, charge GST, and still be reassessed as an employee if they work exclusively for one hirer, are supervised, and use the hirer’s tools.

We help businesses structure these relationships correctly from the start, and we help workers decide whether their current arrangement is defensible. Get this right at the beginning. Re-classifying after a CRA assessment is far more expensive than setting it up properly the first time.