How CRA Determines If You Are Self Employed

One of the most consequential questions in Canadian tax law is whether a worker is an employee or self-employed. The distinction affects CPP contributions, EI eligibility, tax deductions, GST obligations, and potential CRA penalties. Here is how CRA makes the determination.

Why It Matters

If a worker is an employee, the business must deduct income tax, CPP, and EI from their pay and remit employer contributions. If the worker is self-employed, no deductions are made — the worker handles their own taxes. Misclassifying an employee as self-employed means the business owes retroactive CPP, EI, and penalties, potentially for multiple years.

CRA's Tests

CRA examines the overall working relationship using several factors:

• Control. Does the business control how, when, and where the work is done? More control = employee.
• Tools and equipment. Does the business provide the tools? If yes, that points to employment. Self-employed workers typically provide their own.
• Financial risk. Can the worker profit or lose money on the engagement? Self-employed workers bear financial risk; employees do not.
• Integration. Is the worker integrated into the business's operations, or are they providing an independent service?
• Intent. What did both parties intend? A written contract helps, but CRA looks at the reality of the relationship, not just the paperwork.

Common Calgary Scenarios

A plumber who works set hours at your shop using your tools? Likely an employee. A web designer who works from home, sets their own hours, has multiple clients, and uses their own equipment? Likely self-employed. A delivery driver who works exclusively for your company and follows your routes? Probably an employee despite being called a "contractor."

Consequences of Getting It Wrong

If CRA reclassifies a contractor as an employee, the business owes both the employer and employee portions of CPP and EI for the entire period of misclassification, plus interest and penalties. The amounts can be substantial, especially if multiple workers are involved.

Protect Your Business

Castle Bookkeeping helps Calgary business owners evaluate their worker classifications and set up proper payroll or contractor payment structures. If you're unsure about the status of your workers, contact us for a free consultation before CRA decides for you.