Getting It Right in the Eyes of the CRA (and Your Wallet)
When I was still in the corporate world, my employer had a number of individuals that we determined were “contractors.” It was a mutually beneficial arrangement between the two parties.
The company liked it because it saves some payroll taxes (including WSIB, which can be expensive), but perhaps more importantly, it brings flexibility. The company could modulate the workforce to match the workload. In a project-oriented business like ours that was an important benefit.
The contractors liked it because they earned a higher wage and enjoyed additional autonomy. They could also incorporate if desired, claiming more deductions and lowering taxes. The downside for them was that they didn’t have the protections that being an employee brings under the law.
This means no notice or severance pay, no Employment Insurance, and no paid time off for vacation, family matters, or illness.
It also means no benefits, such as pension, health, or dental coverage, and no Workers’ Compensation, which can be important in some jobs.
The Consequences of Getting It Wrong
CRA audited us and found that they were contractors in name only and declared these folks employees. It cost us well into the six figures for back CPP and EI contributions (interestingly, the “employees” had no liability).
Understanding the difference between a contractor and an employee is critical for small business owners. Whether you’re growing your team or outsourcing your next project, this decision can carry financial and legal consequences.
Let’s unpack what you need to know to make the right call.
The CRA’s Perspective: Intent and Facts
The CRA doesn’t care what you call someone on paper. You can have a beautifully worded agreement that calls someone an independent contractor, but if their role looks, smells, and functions like employment, the CRA will treat them like an employee.
The Canada Revenue Agency uses a two-part test: intent and facts. First, they’ll consider the intention of both parties at the time of engagement. But far more important is the second part, which examines how the relationship actually operates day to day.
The core factors the CRA uses include control (who decides how and when the work gets done), ownership of tools, chance of profit or risk of loss, and integration into the business. If the worker is dependent on you, works only for you, uses your tools, and is tightly supervised then they’re probably an employee.
Here are some of the key questions that CRA considers:
- Can the the worker control the method of doing the work?
- Does the worker have the power to control and discipline other employees?
- Can the worker hire and fire other employees?
- Where does the worker get most of their income from?
- Does the worker work exclusively (or almost exclusively) for the employer?
- Can the worker determine the place of work?
- Does the worker have much freedom in performing the work?
- Is the worker supervised?
- Does the worker have the power to delegate?
- Can the worker prescribe exactly the work to be done?
- Does the worker use their own tools?
- Does the worker have a risk of losing their own money?
- Does the worker do the same thing as employees?
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Pros and Cons: Contractors vs Employees
Hiring a contractor often feels simpler.
No payroll, no deductions, no long-term commitment.
But that simplicity can come with risk.
Here’s how the tradeoffs typically stack up:
| Aspect | Contractor | Employee |
|---|---|---|
| Flexibility | High – can easily end contract | Low – ESA rules apply |
| Cost | Lower (no CPP, EI, benefits) | Higher all-in cost |
| Control | Lower – can’t dictate how/when | Higher – you set hours/methods |
| Risk of Penalties | High if misclassified | Low |
| Commitment/ Buy-in | Often lower | Typically higher |
Cost Comparison: The Real Price Tag
Let’s take a $50/hour worker as an example. If you hire them as a contractor, you pay $50 an hour. That’s it. No deductions, no admin, no vacation or holiday pay.
But if they’re an employee, your true cost might look more like $60–$65 an hour once you account for employer contributions to CPP and EI, paid vacation, statutory holidays, and the time spent on payroll and paperwork.
Additionally, employees enjoy further privileges under the Employment Standards Act, including specific notice periods and termination rules.
The Penalty for Getting It Wrong
As the opening story illustrates, misclassifying a worker can come back to haunt you. If the CRA or a provincial authority finds that your contractor is actually an employee, you could be on the hook for retroactive CPP and EI contributions, interest, penalties, and even unpaid vacation or overtime. WSIB, too, if they get wind of it.
This isn’t theoretical.
In high-profile cases like this Foodora case, Canadian courts ruled that gig workers were actually dependent contractors, entitled to many of the same protections as employees.
How to Stay on the Right Side of the CRA
The safest way to avoid misclassification is to structure the relationship correctly from the start. A few tips:
- Focus on actual working conditions, not just contract language.
- Check out the CRA’s RC4110 guide to review classification
(https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4110/employee-self-employed.html) - Get a formal ruling from the CRA if you’re unsure:
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4110/employee-self-employed.html#toc4
When to Use Each
Contractors are best when the work is project-based, the person brings their own tools or expertise, and they clearly work with multiple clients. Employees are a better choice when the work is core to your business, you want control over the output, or you’re looking for long-term continuity.
This Isn’t Just a Tax Question
It’s a strategic business decision. Hiring contractors might save you money upfront, but the tradeoff is less control and potentially more risk. Hiring employees costs more, but can provide stability and commitment.
The key is to be deliberate. If you treat a contractor like an employee, don’t be surprised when the CRA agrees with you.
