Are your contractors actually employees? The CRA's test, from the payer's side

Summary

If you pay a worker who invoices you, rather than putting them on payroll (i.e. paying a wage and taking deductions off it before the money reaches them), the Canada Revenue Agency (the CRA) can revisit that decision years later. Where the CRA decides the person was really your employee, it bills your corporation for the deductions you never made, plus a penalty and interest. If the corporation can’t pay, the CRA can collect the same amount from you personally, since as the owner you’re almost certainly also a director, the person the law makes answerable for the corporation.

Outside Quebec the CRA works in two steps. First it asks what the two of you meant to set up, employment or a deal between two businesses. Then it tests that intention against seven elements, set out below, of which control, the right to send a substitute and the worker’s chance of profit decide most files.

Three points matter most for whoever writes the cheques:

1. What counts is whether you’re entitled to tell the worker how to do the job, not whether you ever actually tell them.
2. You’re assessed both your share and the worker’s share of Canada Pension Plan contributions (CPP, the national retirement pension) and Employment Insurance premiums (EI, which pays benefits between jobs). At the 2026 maximums that reaches $11,988.27 for one worker for one year, though you only hit that ceiling at about $85,000 of pay. Below that, budget roughly 14 to 15 cents per dollar paid.
3. Old years are less settled than owners assume. The penalty and the interest can be assessed at any time. CPP assessments normally have four years from the contribution due date, while EI assessments have three years from the end of the year premiums were due. Both deadlines fall away where the CRA says you misrepresented something.

We’d put a worker on payroll wherever you’d refuse to let them send a competent substitute. For everyone else, change how the arrangement actually works rather than how the contract is worded, and ask the CRA for a written ruling only where you honestly can’t call it. Our employee or contractor checker asks one plain question about each of the seven elements below and shows you which way your answers lean, alongside what a reclassification of that worker would cost.

What the CRA is actually testing

Outside Quebec the CRA’s test has two steps. Step one is intention: what did the two of you understand yourselves to be setting up? A written agreement is the usual evidence, and failing that the CRA reads what both sides said and did. Step two tests that intention against seven elements, three of which decide most files:¹

1. Control. What matters is your right to direct how, when and where the work gets done, not whether you use it. Nobody supervises a skilled professional day to day (e.g. an IT consultant), so the CRA weighs daily control alongside your wider influence, such as whether you can move the worker onto another job or approve their other clients.
2. Tools and equipment, meaning who supplies them and who paid. Ownership rarely settles anything, and the CRA points at employed mechanics who buy their own toolboxes.
3. Subcontracting and helpers. Whether the worker can send somebody else in their place is the fact that tells a payer the most and the easiest to check across a roster. A self-employed worker needn’t do the job personally, and can hire a helper you get no say over.
4. Financial risk, meaning whether the worker can lose money on a job by covering costs you don’t reimburse.
5. Investment and management, meaning how much of the worker’s own money sits in equipment or premises, and whether they run an operation of their own.
6. Opportunity for profit. The CRA looks at the worker’s finances rather than yours, and a business needs money coming in and costs of its own going out. An hourly rate with every expense reimbursed looks like employment, while a fixed price with the worker absorbing any overrun looks like a business.
7. Anything else relevant, including the written contract. A signed agreement calling somebody a contractor settles nothing by itself, because the law says an agreement to take no deductions off a worker’s pay has no effect.²

The CRA’s instruction is to read the indicators under each element separately, then look at all of them together against what the two of you intended. No single fact settles the question, and the four elements not expanded above rarely change an answer alone.³ A business number, a GST/HST registration and a logo on the invoice are thin evidence that the worker runs a business of their own. The popular rule that a contractor is safe below 80% of their revenue from one payer appears nowhere in the test.

What a reclassification costs

Under CPP, you and the worker each pay 5.95% of what they earn in the year between $3,500 and $74,600, so at most $4,230.45 each. A second slice takes 4% of earnings between $74,600 and $85,000, at most $416 each.⁴ Under EI, the worker pays 1.63% of earnings up to $68,900, at most $1,123.07, and you pay 1.4 times that, at most $1,572.30.⁵ A payer who fails to deduct is assessed for both sides of all of it, which is how one worker for one year reaches $11,988.27.

You can recover the worker’s half only out of later pay to that same worker, within twelve months of the payment the deduction should have come off, and one missed amount per later payment.⁶ Since these arrangements usually surface after the work has ended, that right is normally worthless.

An employer also has to take income tax off every pay cheque, and a reclassification raises that too. One piece of the bill is smaller than owners fear. Where the worker lives in Canada and files their own return, the CRA collects the back income tax from them, not from you. Interest on that slice also stops at the earlier of the day you pay it and April 30 of the following year.⁷

The penalty is 10% of what you should have withheld, doubling to 20% on a second failure in the same calendar year that the CRA decides was deliberate or extremely careless.⁸ Interest runs on what you owe at a rate the CRA resets every three months and compounds daily. The current quarter’s figure is stated on our CRA interest rates page, which owns it. Interest on the contributions and premiums keeps running until you pay them.⁹

Old years are the part owners misjudge, because the penalty and the interest can be assessed at any time, with no deadline at all. The contributions and premiums do have limits, four years from the day a CPP contribution was due and three from the end of the year an EI premium was due. Both limits lift where the CRA says the employer misrepresented something, and a payer who treated a worker as a contractor and filed nothing is exactly what it argues into that exception.¹⁰

Directors are the other exposure: if you’re a director of your corporation, as almost every owner-manager is, the CRA can collect the unmade deductions from you personally. That can’t happen straight away, because the CRA has to fail to collect from the corporation first, through a Federal Court judgment or a claim in a wind-up or bankruptcy. Your defence is showing you took specific steps to prevent the failure (e.g. taking written advice before treating the worker as a contractor), and the exposure ends two years after you stop being a director.¹¹

Options for a worker you’re unsure about

Put them on payroll. Payroll ends the question and gives the worker a T4, the slip reporting employment income that mortgage lenders read. Your cost is your own share of CPP and EI, at most $6,218.75 per worker in 2026 and roughly 7 to 8 cents on every dollar of wages below the ceilings. On top come vacation and holiday pay, a schedule for sending the deducted money to the CRA with its own late penalties, and a provincial payroll tax above a threshold your province sets.

Change three facts rather than three clauses. Give a real right to send a substitute you’d accept, drop any requirement that the worker ask permission before taking other work, and move from an hourly rate to a fixed price for a defined scope. Changing facts is cheap next to payroll, and it survives scrutiny because it’s true. On the flip side you’re giving up control you presumably wanted, and none of it repairs earlier years.

Ask the CRA to rule. You or the worker can request a written CPP/EI ruling, an official CRA decision on that worker’s status for a stated period, on Form CPT1 or through My Business Account, the CRA’s online portal for businesses. The request has to be in before June 30 of the following year, so June 29, 2027 for a 2026 arrangement.¹² The protection a favourable ruling buys is real but partial. Where the CRA later reverses it you can’t be charged the worker’s share, the interest or the penalty, but you still owe your own contributions once the reversing decision reaches you.¹³ You also can’t unask the question, and an adverse ruling tells the worker where they stand and reaches the CRA division that audits payroll.

How often this changes

Worker status is decided per worker and per period, so a good answer on one person tells you nothing about the next. We’d re-run the question whenever an engagement’s terms change materially, once a year as you prepare slips in February, and before June 30 if you’re weighing a ruling.

Federally regulated payers carry one extra exposure worth naming. Interprovincial trucking, banking and airlines get the same CRA test, plus a separate federal labour law that puts the burden of proving somebody isn’t an employee on the employer.¹⁴

Closing thoughts

The law here isn’t especially unclear, and the genuinely hard cases are hard for one reason. The payer wants the control that comes with an employee and the cost that comes with a contractor, and the test is built so you can’t hold both.

How we handle it

We sort a payer’s workers into three groups before touching any paperwork. One group goes on payroll now, another needs a few facts about the arrangement changed going forward, and a small number are worth a written ruling. From there we register you for a payroll account with the CRA, work out how often you have to send the deducted money in, and file the year-end slips.