Hiring someone as an “independent contractor” does not automatically make them self-employed.
For Canadian businesses, getting worker classification wrong can lead to unexpected CPP contributions, EI premiums, interest and penalties.
1. HOW DOES CRA DETERMINE EMPLOYMENT STATUS?
For Ontario and other common-law provinces, CRA examines the actual working relationship, including:
✔ Control: Who decides how, when and where the work is performed?
✔ Tools and equipment: Who provides and maintains them?
✔ Financial risk: Can the worker incur expenses or suffer a business loss?
✔ Opportunity for profit: Can the worker increase earnings through business decisions?
✔ Subcontracting: Can the worker hire others to complete the work?
✔ Integration and independence: Is the worker genuinely operating a business?
No single factor automatically determines the answer.
2. EMPLOYEE — TAX OBLIGATIONS
An employer generally must:
• Deduct income tax, CPP and EI from wages.
• Pay the employer’s CPP contributions and EI premiums.
• Remit payroll deductions and issue T4 slips.
Employees generally have more limited employment-expense deductions, subject to specific CRA requirements.
3. SELF-EMPLOYED — TAX OBLIGATIONS
A genuine independent contractor generally:
• Reports business income and eligible expenses.
• Pays both the employee and employer portions of CPP through their personal tax return, subject to applicable limits.
• Does not normally pay regular EI premiums on self-employment income; voluntary EI special-benefit coverage may be available.
• Maintains records and claims legitimate business expenses.
4. DON’T FORGET GST/HST!
Employees do not charge HST on employment wages.
Self-employed contractors making taxable supplies may need GST/HST registration when the $30,000 small-supplier threshold is exceeded under the applicable quarterly rules.
In Ontario, many taxable services are subject to 13% HST.
Eligible GST/HST registrants may also claim input tax credits on qualifying business purchases.
5. WHAT IF THE CLASSIFICATION IS WRONG?
If CRA determines that a contractor was actually an employee, the payer may face unpaid payroll contributions and premiums, plus interest and penalties.
A written contract or invoice alone will not protect the business if the actual relationship is employment.
ASRANICPA TAX TIP
Before engaging a contractor, review the real working arrangement—not just the contract wording.
Where status is uncertain, the payer or worker can request a formal CPP/EI ruling from CRA.
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