Quick answer
It depends on the whole working relationship, not on what the two of you call it or what a contract says.1 The CRA asks whether the person works as someone in business on their own account or as your employee, and weighs control, tools, the right to hire helpers, financial risk, investment and the chance of profit.2 If the person is an employee, you deduct CPP, EI and income tax from their pay and remit them with your own share.2
Why does it matter?
The answer decides who pays what. For an employee, you deduct CPP contributions, EI premiums and income tax from their pay, and remit them to the CRA along with your own share of CPP and EI.2 A self-employed worker pays both halves of their own CPP when they file their return, and pays EI premiums only if they opt in for special benefits.3
Getting it wrong is expensive in one direction. An employer who fails to deduct the required CPP contributions or EI premiums has to pay both the employer’s and the employee’s share, plus penalties and interest.2
It matters to the worker too. Employees are protected by employment standards, health and safety, and workers’ compensation laws.3
Does a contract settle it?
No. A written contract that calls someone self-employed shows what you both intended, but the CRA cannot treat a worker as self-employed if there is evidence of an employer-employee relationship.1 The facts of the working relationship as a whole decide.1
The CRA starts by asking what each side intended when the arrangement began, then checks that against how the work is actually done.2 A contract that says one thing while the work runs another way is weighed by the work.
What does the CRA look at?
Outside Quebec, the CRA looks at each of these factors on its own and then at all of them together.2 No single one decides it.
| Factor | Points toward an employee | Points toward their own business |
|---|---|---|
| Control | You have the right to direct what work is done and how, whether or not you use it | They decide how the work gets done |
| Tools and equipment | You supply them | They own and supply what the work needs |
| Subcontracting or hiring helpers | They must do the work themselves | They can hire helpers or pass the work on |
| Financial risk | You cover their costs | They carry their own costs, without reimbursement |
| Investment and management | They have nothing invested | They have invested significantly in their business |
| Opportunity for profit | They are paid for their time and cannot lose money | They can make a profit or a loss, as on a flat-rate job |
Supplying tools is a good example of why no factor stands alone: many tradespeople bring their own tools and are still employees.2 A flat rate for the job, on the other hand, generally points to a business relationship, especially when the worker pays expenses out of it.2
In Quebec the test is different, because it comes from the Civil Code of Québec.2
Can the same person be both?
Not under one contract. Under one arrangement a worker is either an employee or self-employed, but the same person can be your employee under one contract and a subcontractor under another.4 In construction, the employment income then goes on a T4 and the subcontract work on a T5018.5
A worker who invoices you through their own corporation is a different case. For CPP and EI, that worker is usually an employee of their own corporation rather than yours.4 Income tax has its own rules for that arrangement, known as a personal services business.4
What do you report for a subcontractor?
Paying a subcontractor still comes with paperwork. When you pay a fee to a person for a service outside an employment relationship, you generally fill out a T4A slip and report the payment in box 048.6
Construction is different. A business that earns most of its income from construction reports what it pays subcontractors for construction services on T5018 slips, once a subcontractor’s payments for the year pass a small threshold.5
A subcontractor who is registered for GST/HST charges it on their invoices, and a business that is registered itself can generally claim that tax back as an input tax credit.7 Whether a subcontractor has to register follows the small supplier rules in when a small business has to register for GST/HST.
Workers’ compensation is a provincial program with its own rules about subcontractors. Our guides for Nova Scotia and Newfoundland and Labrador cover two of them.
What if you are not sure?
Either you or the worker can ask the CRA for a ruling on whether the work is employment, and whether it is pensionable or insurable.2 A payer can ask through My Business Account, either side through My Account, and either side by letter or with Form CPT1.8
The request is due by June 29 of the year after the year the question is about, and either side can appeal a ruling within 90 days.2 Because a ruling looks at how the work is actually done, paperwork alone will not carry it.
Setting it up properly
If the answer is employee, the work that follows is regular, and it runs on deadlines:
- a payroll account, opened before your first remittance is due1
- deductions from every pay, and your own share on top2
- remittances on time, and a T4 slip for each employee for the calendar year9
Our managed payroll runs all of that. If the answer is subcontractor, monthly bookkeeping keeps their invoices, any GST/HST on them and the slips that follow in order. Where the answer is not clear, talk to us before the first payment, not after the first year.
Frequently asked questions
Is a worker self-employed if they have a GST/HST number?
Not on that alone. A GST/HST registration is one fact among many, and the facts of the working relationship as a whole decide.1
Who decides, me or the worker?
Neither of you, in the end: the relationship does. If you disagree, or neither of you is sure, either of you can ask the CRA for a ruling.2
What if I have been treating an employee as a subcontractor?
An employer who did not deduct the required CPP or EI is responsible for both the employer’s and the employee’s share, plus penalties and interest.2 Fixing the past and setting up payroll for the future are separate steps, and both go better with the books in order.
Do I need a payroll account for just one employee?
Yes. An employer has to register for a payroll account, and must do it before the first remittance is due.1
Sources
- Determine if you need to register (for a payroll account), Canada Revenue Agency. Accessed .
- Employee or Self-employed? (RC4110), Canada Revenue Agency. Accessed .
- Responsibilities, benefits and entitlements for employees and self-employed workers, Canada Revenue Agency. Accessed .
- Construction workers (CPP and EI explained), Canada Revenue Agency. Accessed .
- T5018 slip – Statement of contract payments, Canada Revenue Agency. Accessed .
- Payments of fees for services, Canada Revenue Agency. Accessed .
- Input tax credits, Canada Revenue Agency. Accessed .
- Request a CPP/EI ruling: How to ask for a ruling, Canada Revenue Agency. Accessed .
- T4 slip – Information for employers, Canada Revenue Agency. Accessed .
This article is general information about how things usually work in Canada, current as of the date it was last updated. It isn’t advice about your own tax or accounting position, which depends on facts we haven’t seen.