Employee or contractor: the payer's side of the test

An invoice does not make someone a contractor. Neither does their GST/HST number, an agreement calling them one, or the fact that they asked to be paid that way. The CRA looks at the working relationship, and if it decides the person you have been paying on invoices was your employee, the assessment lands on you: the CPP and EI that should have been withheld and remitted, both shares, plus penalties and interest, reaching back over years you consider closed.

That asymmetry is why the question belongs to the payer. A reclassified worker files differently and loses some deductions. You get the bill, the slips to amend, and a provincial letter behind it. The worker’s side of the invoice, where their own corporation is what is at risk, is a separate guide.

The factors, read from the assessor’s chair

Everyone quotes the same list: control over how and when the work is done · who supplies the tools · the worker’s chance of profit and risk of loss · whether the work can be subcontracted · how far the person is integrated into your organization. An assessor is asking you for the evidence, and every factor has a document behind it.

Control is not whether you check the work; it is whether you set the hours, the sequence and the method, and whether someone supervises. A deadline and a specification are consistent with a contract. A shift and a supervisor are not. Tools are read by value, not by count: a worker who brings his own hand tools but uses your C$40,000 machine has not supplied the tools that matter. Profit and risk asks whether the worker can lose money; paid by the hour for hours present, nobody can. Substitution asks whether he could send someone competent in his place; a right you would never have honoured is not one. Integration is the one payers create without noticing: the company email address, the shirt, the website listing.

No single factor decides it. The file is read whole, which is why one strong contractor fact rarely rescues four weak ones.

What a reclassification costs the payer

The CPP and EI come first, and they come doubled: the worker’s share, which you never withheld, and the employer’s share, which you never paid. The rules contemplate recovering the employee’s portion from the worker; a technician who left eighteen months ago is not writing you a cheque.

Then the penalty, charged on the amount you failed to remit rather than on tax you eventually owed, and interest running from each original remittance date. A four-year finding is four years of compounding. Income tax you should have withheld is a separate exposure, generally reduced where the worker has already reported the income and paid tax on it.

The paperwork follows: T4s, the employment-income slip, for years in which you filed a T4A — the slip for fees paid to a non-employee — or nothing at all, each late information return generally carrying a per-slip penalty. And the finding rarely stays with the CRA: workers’-compensation premiums (WSIB in Ontario, CNESST in Quebec, the equivalent board in your province) and provincial payroll levies run their own assessments off the same facts, so one determination can produce three letters.

Where the CRA looks first

The pattern is industries where genuine contractors are ordinary, because there an invoice never looks odd on its own. Construction and trades, where the T5018 list reads as a ready-made worker roster. Trucking, where a second driver on your truck, your plates and your loads is a different file from an owner-operator. Software and agencies, where developers invoice for months at a time. Clinics, where associates, hygienists and front-desk staff are paid three different ways. Auto and repair shops, where apprentices and bay renters sit on both sides of the line.

Being in one does not make you wrong; it means the question gets asked more often.

The contract describes the relationship; the conduct is the finding

The starting point is generally what the two parties genuinely and mutually intended, and the written agreement is how you show that intention existed. The objective facts are then checked against it, and where the two diverge the facts win. From the payer’s chair that carries a consequence the worker cannot fix: you write the conduct — your scheduling system, your supervision, your equipment.

The clauses that fail are predictable. A substitution right nobody could exercise. “Sets their own hours,” for someone on the 7am schedule. Papering a relationship you do not have is worse than papering nothing: the contract shows you knew the test.

Putting the worker’s own corporation between you does not by itself end your CPP and EI exposure — it changes what else is in play, since a personal services business finding lands on their corporation rather than on your payroll accounts. Both questions get asked off the same facts; each is answered on its own.

Which slip you file follows the answer; it does not set it

Three lanes. Employment income goes on a T4. A non-employee’s fees for services go on a T4A, above a reporting threshold, filed and given to the recipient by the last day of February for the previous calendar year. Where construction is your main business activity, subcontractor payments for construction services go on a T5018 instead — C$500 or more to one subcontractor across the reporting period, due six months after the period end you elected. Both dates sit on the deadline table.

Filing a T4A does not make the recipient a contractor. It records that you treated them as one, which is where the CRA starts.

Asking the CRA before it asks you

Either party can ask the CRA to rule on whether a worker’s employment is pensionable for CPP and insurable for EI; from your side the request goes in on Form CPT1. You describe the arrangement, the CRA generally puts questions to both of you, and the answer comes back in writing for that worker and period, with an appeal route after it. Time limits apply to both steps.

Worth doing before you repeat an arrangement across a crew: the ruling on one worker prices the pattern.

A worked example: the shop’s four-year contractor

Illustrative, round numbers, December 31 year-end. No rates are applied — what matters here is how many years of pay the assessment reaches.

An auto shop owner has paid the same body technician C$5,000 a month for four years: C$60,000 a year, C$240,000 in total. He invoices, he is GST/HST registered, and a one-page agreement calls him an independent contractor. He works Tuesday to Saturday, 8 to 5, on the shop’s lift, with the shop’s diagnostic equipment, in the shop’s paint booth. The service writer assigns his jobs, he is paid for hours whether the job runs long or short, and he has no other customers. Each factor points at employment, and the agreement is the only fact pointing the other way.

On reclassification the base is not the shop’s profit for those years. It is the C$240,000 of earnings: both shares of CPP and EI on the pensionable and insurable portion of each year’s pay, plus the penalty on what was never remitted and interest from each month’s original due date. Add four years of T4s filed late with a per-slip penalty on each, and the workers’-compensation premiums the same facts imply provincially.

Set that against the going-forward number: the employer’s share of CPP and EI, the workers’-compensation premium, any provincial payroll levy. That is the price of the arrangement being what it is. The four-year exposure is the price of having called it something else.

The file that makes the answer defensible

For workers you are satisfied are contractors, the evidence gets built while the work happens, not after a letter arrives:

• Invoices issued by the worker, on their letterhead, with their business number — not generated for them by your bookkeeper.
• Something showing other clients: a website, a listing, a note that they turned down a week for another job.
• No set hours in your scheduling system, no reporting line into your team.
• Their own equipment for the expensive items; where they use yours, a rental charge that actually moves.
• A written agreement matching all of the above, revisited when the work changes.

None of that creates a contractor. It records one.

What Cadence does

Contractor-versus-employee analysis sits inside GST/HST and payroll, and we run it before an arrangement starts. We review how each worker is engaged, set payroll up where that is the answer, keep the T5018 on schedule where construction is your main activity, and request a CPP/EI ruling where you want the answer in advance. For auto, repair and local service shops it is a standing item. Where an arrangement has run for years and the facts are mixed, someone has to read the contract and the working relationship together before anything is filed or amended. We will tell you what we think you are looking at, and where it needs a specialist.