Contractor vs Employee Guide

Why Classification Matters

Tax Implications

Beyond Taxes

• Employment standards protection
• Vacation pay, overtime
• Termination notice/severance
• Benefits eligibility
• Workers' compensation

CRA Classification Tests

1. Control

Who controls how, when, where work is done?

• Employee: Employer directs methods, hours, location
• Contractor: Worker controls how to complete work

2. Ownership of Tools

• Employee: Employer provides tools, equipment
• Contractor: Worker provides own tools

3. Chance of Profit/Risk of Loss

• Employee: Paid regardless of business outcome
• Contractor: Can profit or lose based on efficiency

4. Integration

• Employee: Integral part of organization
• Contractor: Provides specific services as outsider

Employee Indicators

You're Likely an Employee If

• Work set hours determined by employer
• Work at employer's location
• Use employer's equipment
• Cannot subcontract the work
• Paid regular salary/hourly
• Receive benefits, vacation
• Cannot work for competitors
• Training provided by employer
• Only one "client" (the employer)

Contractor Indicators

You're Likely a Contractor If

• Control how work is done
• Set own hours
• Work from own location
• Provide own tools/equipment
• Can hire helpers/subcontract
• Have multiple clients
• Invoice for work
• Carry own insurance
• Bear financial risk
• Have registered business

Common Misclassification Scenarios

IT Contractors

• Long-term on-site work
• Single client relationship
• Company laptop provided
• Set hours and meetings
• High risk of reclassification

Gig Workers

• Uber, DoorDash, etc.
• Generally treated as contractors
• Control over when to work
• Own vehicle/equipment
• Multiple platforms possible

Trucking/Transportation

• Owner-operators often contractors
• But single-client arrangements risky
• Control and integration key factors

Consequences of Misclassification

For Businesses

• Back CPP/EI (both portions) + interest
• Penalties for non-compliance
• Unpaid vacation, overtime claims
• Wrongful dismissal liability
• Can be years of reassessment

For Workers

• May get CPP/EI credits retroactively
• Lose business expense deductions
• May owe personal taxes (if underpaid)
• Gain employment protections

Cost Example

Worker paid $80,000/year misclassified for 3 years:

• CPP owing: ~$4,200/year × 3 = $12,600
• EI owing: ~$1,400/year × 3 = $4,200
• Interest and penalties: $3,000+
• Total risk: $20,000+

Obtaining a Ruling

CPT1 Ruling

• Request CRA rule on status
• Either party can request
• CRA examines relationship
• Binding determination

When to Request

• Uncertainty about classification
• Starting new arrangement
• After CRA inquiry
• Dispute between parties

Tax Treatment Comparison

Employee Income

• Reported on T4
• Tax withheld at source
• Limited deductions (T777)
• Need T2200 for home office
• CPP/EI split with employer

Contractor Income

• Report on T2125
• No withholding—pay installments
• Full business expense deductions
• Home office without T2200
• Both CPP portions
• GST/HST if over $30K

Benefits of Each Status

Employee Benefits

• Steady income certainty
• Employer pays half CPP/EI
• Employment insurance eligibility
• Employment standards protection
• Less administrative burden
• Often receive benefits

Contractor Benefits

• Business expense deductions
• Flexibility in work
• Multiple clients possible
• Can incorporate later
• Higher gross pay often
• Build business equity

Best Practices for Contractors

Strengthen Contractor Status

• Have multiple clients
• Provide own equipment
• Set own hours when possible
• Work from own location
• Use written contracts
• Invoice for work
• Carry business insurance
• Register business name/HST

Documentation

• Written contractor agreement
• Invoices (not payroll)
• Multiple client records
• Business expense receipts
• Marketing materials

Best Practices for Businesses

Reduce Misclassification Risk

• Don't treat contractors like employees
• No set hours/location unless necessary
• Don't provide tools/equipment
• Allow them to work for others
• Pay by project/invoice, not salary
• No employee benefits
• Written contract specifying independence

When In Doubt

• Get CPT1 ruling
• Consult employment lawyer
• Consider employee status safer
• Review relationships periodically