Hiring contractors can give a business flexibility. It can allow you to bring in specialized expertise, manage projects and control certain costs without adding another employee to payroll.
But there is an important distinction that business owners need to understand:
Calling someone an independent contractor does not necessarily make them one in the eyes of the CRA.
The Canada Revenue Agency looks at the actual working relationship between the business and the worker. The contract is relevant, but it is only one part of the picture. The CRA considers the relationship as a whole and looks at several factors when determining whether someone is an employee or genuinely self employed.
What does the CRA look at?
For businesses operating outside Quebec, the CRA generally considers six key factors.
1. Control
Who controls how the work is performed?
The more the business controls what the worker does, how they do it, when they work and where they work, the more the relationship may resemble employment.
Importantly, the CRA considers the right to exercise control, not simply whether the business actually exercises that control.
2. Tools and Equipment
Who provides the tools, equipment and workspace?
A genuine contractor will often provide their own equipment and absorb the associated costs of maintenance, insurance and replacement. When the business provides most of the equipment and retains control over its use, that can point more toward an employment relationship.
However, this factor is not conclusive on its own. Some employees provide their own tools, particularly in certain skilled trades.
3. Ability to Hire or Subcontract
Can the worker hire someone else to perform the work?
A contractor who can hire assistants or subcontract some or all of the work is demonstrating characteristics of running their own business.
An employee, by contrast, will generally be expected to perform the work personally and will not have the same ability to hire a replacement.
4. Financial Risk
Who takes the financial risk?
A contractor generally has expenses and business costs that continue even when there is no work. They may also be financially responsible for completing a contract and could experience a loss.
Employees generally do not carry the same business risk. They typically receive their agreed compensation without having to absorb the operating costs associated with running a separate business.
5. Investment and Management
Does the worker operate like a business?
The CRA considers whether the worker has made a significant investment in their business and whether they make business decisions that affect their profitability.
Someone who has their own business presence, manages staff, invests in equipment and makes decisions about how to generate a profit may demonstrate characteristics of a self employed business owner.
6. Opportunity for Profit or Loss
Can the worker actually make a profit or suffer a loss?
This is an important distinction.
An employee generally receives compensation for their work without having significant control over whether the underlying activity generates a profit or loss for them personally.
A contractor, on the other hand, may be able to increase their profit by managing expenses, negotiating contracts, taking on additional work or operating more efficiently. They can also lose money if their costs exceed what they receive from the client.
There is no single deciding factor
This is where business owners can get into trouble.
You cannot simply look at one characteristic and conclude that someone is a contractor.
For example, a worker might:
- Have a written contractor agreement
- Invoice the company rather than receive a paycheque
- Have their own GST number
- Work remotely
- Provide some of their own equipment
And yet, the overall relationship could still look like employment to the CRA.
The CRA looks at the total relationship and compares the actual working conditions with the stated intention of the parties. The substance of the relationship matters, not simply the label attached to it.
Why does this matter to the business?
Getting the classification wrong can create more than an administrative headache.
If the CRA determines that someone treated as a contractor was actually an employee, the business may have additional payroll obligations, including CPP and EI contributions. CFIB notes that assessments can also result in penalties and interest.
There can also be consequences beyond the tax treatment. Employment standards, workers’ compensation and other legislation may have their own definitions and requirements, so a worker’s classification for CRA purposes does not necessarily settle every other legal or regulatory question.
What should business owners do?
The best time to review your contractor relationships is before there is a problem.
If you rely heavily on contractors, take a step back and look at how the relationship actually operates day to day.
Ask yourself: Does this person genuinely operate an independent business, or do they function much like an employee within our organization?
If the answer is unclear, the CRA provides a formal CPP/EI ruling process that can be requested by either the worker or the payer.
For business owners, this is a good example of why having the right professional advice around your business matters. A contractor arrangement may seem straightforward when it is established, but the tax and payroll implications can become significant if the underlying relationship changes over time.
The takeaway is simple: don’t rely on the label. Review the relationship.
A well drafted agreement is important, but it should reflect how the relationship actually works in practice.
