Article
Employee vs Independent Contractor in Canada: CRA Decides, Not Your Contract
Employee vs independent contractor is decided by CRA's six-factor test, not by your contract. The factors, what a misclassification costs, and the ruling route.
The employee vs independent contractor question gets settled in a way that surprises most owners. It isn't settled by the agreement you both signed, or by the fact that they invoice you, or by whether they call themselves a business. It's settled by what the working relationship actually looks like when someone from CRA asks about it, and that assessment can arrive years after the hire.
The good news is that CRA publishes the test. It isn't a judgment call hidden in a back office somewhere. Here are the factors, in CRA's own words, and what it costs when the answer comes back differently than you assumed.
What actually decides whether someone is an employee or an independent contractor?
CRA uses a two-step approach. It first asks what the two parties intended, then it checks whether the facts of the relationship match that intention.
Step one is intent. CRA asks "what their intent was when they entered into the working arrangement. Did the two parties intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)?" Step two is verification: CRA "asks the worker and the payer questions that will help us understand the working relationship and allow us to verify whether the intent of the parties is reflected in the facts." The order matters. Intent opens the conversation. Facts close it.
What does CRA look at, factor by factor?
Six factors, all drawn from CRA's own guidance on employee or self-employed status. No single one decides it; they're weighed together against the whole relationship.
| What CRA examines | Points toward employee | Points toward contractor |
|---|---|---|
| "the level of control the payer has over the worker's activities" | You set hours, methods, order of tasks, who they report to | They decide how and when the work gets done |
| "whether the worker or payer provides the tools and equipment" | You supply the laptop, software, workspace, vehicle | They supply and maintain their own |
| "whether the worker can subcontract the work or hire assistants" | The work must be done by them personally | They can send someone else or hire help |
| "the degree of financial risk the worker takes" | They're paid regardless of how the job turns out | They can lose money on a job |
| "the degree of responsibility for investment and management" | No real investment, nothing to manage | Real capital at risk, a business to run |
| "the worker's opportunity for profit" | Fixed rate, no upside for efficiency | They keep the gain from working smarter or faster |
Read down the employee column. If most of it describes someone you currently pay by invoice, that's worth looking at before somebody else does.
Does the contract you both signed count for anything?
It counts as evidence of intent, which is step one, and it does not survive facts that contradict it. A worker who signs a contractor agreement and is then managed like staff is an employee who happens to have signed something.
Ontario is blunter still. Under the province's own employment standards guidance, "employers are not allowed to treat employees covered by the Act as if they are not employees," and where that happens "an employment standards officer can issue a notice of contravention that results in a penalty, a prosecution or both against the employer." So a misclassified hire can be two problems at once: a federal payroll assessment and a provincial employment standards contravention.
What does getting it wrong actually cost?
You pay the worker's half as well as your own. CRA's position is that "an employer who fails to deduct the required CPP contributions or EI premiums must pay both the employer's share and the employee's share of any contributions and premiums owing, plus penalties and interest."
Run that on one worker paid $60,000 for a year, using the 2026 rates. Employer CPP at 5.95 per cent on earnings above the $3,500 exemption is $3,361.75, and you owe the employee's identical share too, so $6,723.50 of CPP. Employer EI at 1.63 per cent times 1.4 is $1,369.20, plus the employee's $978.00, so $2,347.20 of EI. That's $9,070.70 before anything is added. Then the failure to deduct penalty: "10% of the amount of Canada Pension Plan (CPP), employment insurance (EI), and income tax you did not deduct," which on the undeducted employee portions alone is another $434, more once income tax is counted, and 20 per cent "if you are assessed this penalty more than once in a calendar year" and the failures "were made knowingly or under circumstances of gross negligence." Interest runs on top.
So roughly $9,500 per worker per year as a floor, before income tax and interest. Multiply by the number of years and the number of people on the same arrangement, because a reassessment rarely finds just one.
What if the answer is genuinely unclear?
Ask CRA to rule on it rather than guessing. You can request a CPP/EI ruling through My Business Account, through an authorized representative, using Form CPT1, or by mail to your tax services office.
There is a deadline, and it's easy to miss. A ruling can be requested "by June 29 of the year following the year to which the question relates," so a 2026 working relationship needs its request in by June 29, 2027. Past that, you've lost the cheap way to get certainty. For a genuinely borderline arrangement, or one with real money attached, this is also the point to bring in your CPA or an employment lawyer rather than settle it internally.
Which of your own workers should you look at first?
Start with anyone who has been invoicing you for more than a year on the same terms. Length of relationship isn't one of CRA's six factors, but it's the best proxy for how much a wrong answer would cost, because the assessment covers every year the arrangement ran.
Then look for the specific combinations that read badly: a contractor who works only for you, a contractor using your equipment on your premises during hours you set, a contractor who cannot send a substitute. Any one of those can be fine on its own. Together they're the employee column.
The YNL Group Inc. approach
Nobody misclassifies a worker on purpose. It happens because a short contract was the easy way to get help in a busy month, the arrangement worked, and it quietly became permanent without anyone re-reading CRA's six factors.
We handle this as part of the back office: the classification looked at before the first payment rather than after a review letter, the remittances set up correctly if the answer is employee, and the documentation kept in a state where the facts support whatever you concluded. We're not a law firm and we don't replace your CPA on the close calls. We do make sure the easy calls are made correctly and on time, which is most of them. Organized records. Correct deductions. No surprises two years later.
If you have people on invoice arrangements you've never formally assessed, that's worth an hour. Schedule a free consultation and we'll walk the six factors through your actual roster with you.