Employee or Subcontractor: Why Being Told Doesn't Settle It

The Question the CRA Actually Asks

The CRA's guide puts it in one line: is the person engaged to carry out services as a person in business on their own account, or as an employee?

It answers that in two steps. First it asks what both parties intended when they set up the arrangement, which is where the contract and the word "subcontractor" come in. Then it asks questions about the working relationship to see whether that intent is reflected in the facts.

The second step is the one that decides it. In the CRA's own words, all of the facts, including the actual terms and conditions of the work, determine a worker's status, not just the intention. A contract that says "independent contractor" is evidence of what you both meant. It isn't evidence of what happened.

What It Weighs

The CRA's guide lists six factors, plus anything else relevant, such as a written contract. Here's what each one looks like on a job site.

Control. Who decides what work gets done, and how and when? An employee's payer will often direct, scrutinize and effectively control many elements of how and when the work is carried out. A self-employed person usually works independently, and is usually free to work when and for whom they choose, often for several payers at once.

Tools and equipment. Owning your tools isn't the test. Plenty of employed tradespeople buy their own, and there's a deduction for it. What points to a business is supplying the tools and equipment the work needs, paying to repair and insure them, and having made a significant investment in them. Where the payer supplies most of the equipment, or reimburses you for using yours, that points the other way.

Subcontracting and helpers. Could you send someone else to do the job, or hire a helper and pay them yourself? If the work has to be done by you personally, that's an employment indicator.

Financial risk. Do you carry costs nobody reimburses, or fixed costs that run whether or not there's work? Are you on the hook if the job isn't done? An employee usually carries no operating expenses and isn't financially liable for failing to complete the contract.

Investment and management. Did you have to invest anything to provide the service, and are you the one managing it?

Opportunity for profit. Can you make more or less on a job depending on how you run it? Being paid a flat fee and covering your own costs means you can make a profit or a loss. Being paid by the hour, with nothing at risk and access to benefit plans normally offered only to employees, means you can't.

None of these settles it on its own. The CRA looks at the answers for each element separately and then together, and the facts of the relationship as a whole decide the status. That's the part a checklist loses.

What About Integration?

You'll see "integration", meaning how much you're part of the payer's business, listed as a test of its own in a lot of summaries. The CRA's guide doesn't list it that way. It appears inside the control factor, alongside continuity, loyalty, security and subordination, as part of the picture the CRA associates with employment.

In practice it shows up as questions like these: do you wear their logo, answer to their foreman, and work only for them, month after month? Those facts feed the control question rather than standing apart from it.

Two Framers, One Invoice Template

Picture two framers who both send invoices. The first is paid by the hour by one builder, on the builder's schedule, using the builder's lift and nailers. They can't send anyone in their place, and they're paid the same whether the job runs long or not. Whatever the invoice says, that's the shape of employment.

The second quotes a fixed price per house, brings their own crew and equipment, works for three builders, and absorbs the cost when a job runs over. That's a business. Most real arrangements sit somewhere between the two, which is exactly why the facts get weighed together rather than counted.

Who Pays If It's Wrong

The payer. An employer who fails to deduct the required CPP contributions or EI premiums must pay both the employer's share and the employee's share, plus penalties and interest. It can recover the employee's share from later pay, but not a contribution that's been outstanding for more than 12 months. A ruling that reaches back a couple of years leaves most of that bill with the payer.

You. Self-employed workers pay both halves of CPP themselves when they file, and don't pay EI premiums unless they opt in for special benefits. Your employment status directly affects whether you can collect EI when the work ends. And the expenses you deduct as a business don't carry over if you were really an employee: an employee's deductions are narrower, and most need a T2200 signed by the employer. Our tax guide for trades and contractors covers what an employed tradesperson can claim.

That's why "just call it a contract" isn't free for either side. It moves costs around, and the CRA can move them back.

Asking the CRA to Decide

You don't have to wait for the CRA to raise it. A CPP/EI ruling is the CRA's formal decision on whether a worker's employment is pensionable and insurable, which turns on this same question. The worker can ask for one, and so can the payer. Service Canada and the CRA can ask too, for their own programs.

You can ask through My Account, or a payer through My Business Account, under "Request a CPP/EI Ruling". An authorized representative can ask on your behalf through Represent a Client. Or you can write a letter or fill out Form CPT1 and mail it to the CRA's CPP/EI Rulings Division.

There's a deadline: a ruling has to be requested by June 29 of the year after the year the question relates to. Work done in 2026 has to be asked about by June 29, 2027.

If either side disagrees with the ruling, the worker or the payer can appeal to the Minister of National Revenue within 90 days of being notified, and from there to the Tax Court of Canada.

Where Incorporation Fits

Incorporating doesn't make the question go away. If you'd reasonably be considered the payer's employee except for the corporation in between, the CRA treats the corporation as carrying on a personal services business, and you as an incorporated employee.

That's a worse result than either of the other two. A personal services business doesn't get the small business deduction or the general tax reduction that lower other corporations' rates, it pays an additional 5% tax, and it's limited in the expenses it can deduct. A corporation set up to turn an employment relationship into a business keeps the employment relationship and loses the small-business rate.

Incorporation starts to make sense when the business is real: several clients, your own equipment, helpers you hire and pay, and more profit than you need to take out each year, because income left in the company is taxed at the corporate rate until you pay it out to yourself. It also comes with its own work: a separate corporate return, books kept for the company, and a decision every year about paying yourself by salary or dividend.

Our corporate tax page covers the T2 side, and our bookkeeping page covers keeping the company's books. Neither is the first step. The first step is being clear which category you're actually in.