Why This Matters So Much

A lot of business owners try to keep things simple by saying,

“I’ll just pay them as a contractor — less paperwork.”

But if the CRA looks at that relationship and decides the person should have been classified as an employee, you could owe both sides of CPP and EI — plus interest, plus penalties — for every pay period.

This mistake can easily cost thousands.
So it’s worth getting right from the start.

The CRA’s Big Question: Who Controls the Work?

The CRA doesn’t care what you call someone — they look at how the work actually happens.
There’s no single test, but four main factors they consider:

1. Control

Who decides how and when the work gets done?

• If you set the hours, direct the process, and oversee results → Employee.
• If they decide their own schedule and methods → Contractor.

Example:

You hire a lawn care worker to follow your route, wear your uniform, and use your tools — that’s an employee.
You hire an independent crew who bring their own equipment and invoice you monthly — that’s a contractor.

2. Tools and Equipment

Who owns the tools and pays for repairs, fuel, software, or other supplies?

• Employee → You provide everything.
• Contractor → They bring their own.

The more financial risk a person carries, the more likely they’re a contractor.

3. Chance of Profit / Risk of Loss

Employees don’t risk losses. Contractors do.

If a job goes over budget or takes longer, and the worker still earns the same — that’s employment.
If they quote a price, manage their costs, and profit only if they stay efficient — that’s contracting.

4. Integration

Is this person an independent business helping yours, or are they part of it?

If they’re on your schedule, use your systems, represent your brand, and have no other clients — the CRA will likely say they’re an employee, no matter what the contract says.

The “Contractor” Trap

Here’s the hard truth:
Many businesses misclassify staff to avoid payroll costs — and it usually works… until it doesn’t.

When the CRA audits, they don’t look at intentions — they look at reality.
If they decide someone you paid as a contractor was actually an employee, you’ll owe:

• Employer and employee CPP + EI (both sides)
• Back income tax withholdings
• Interest and penalties

This can add up fast — especially for long-term relationships.

How to Stay on the Safe Side

✅ Use written contracts — but make sure they reflect real working conditions.
✅ Keep evidence — invoices, business cards, emails, or ads showing the worker runs their own business.
✅ Ask for a business number (BN) from true contractors.
✅ Review annually — sometimes contractors “slide” into employee territory over time.

If You’re Unsure, Ask the CRA

The CRA offers a "Determination of Employment Status" service — Form CPT1.
You describe the relationship, and they’ll give an official ruling.
If you’re ever in doubt, it’s better to ask upfront than get surprised later.

The Takeaway

You don’t get to choose the classification — the working relationship does.

Get it right, and payroll is straightforward.
Get it wrong, and you’ll be paying for it long after the job’s done.

At Castle Bookkeeping, we help Canadian business owners stay compliant and confident by setting up payroll correctly from day one — so there are no surprises down the road.

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