Independent Contractor Tax Guide
How contractors are taxed, CRA's contractor vs employee tests, T4A slips and GST/HST.
The short version
- An independent contractor is self-employed: no tax, CPP or EI is taken off what clients pay you. You report it on form T2125 and pay income tax plus both halves of CPP.
- Clients who pay you more than $500 in a year may send a T4A with the amount in box 048. Report all contract income, slip or not.
- Whether you're really a contractor depends on the working relationship, not what the contract calls you. CRA can rule you an employee.
- Over $30,000 of sales in four calendar quarters, you must register for GST/HST and charge it.
- Incorporated contractors who act like employees can fall into the “personal services business” rules, with much higher tax.
Independent Contractor Taxes Canada
Construction runs on contractors. So does IT, trucking, home care and half the gig economy. Being one means bigger cheques and nobody taking tax off them, until April. The two questions that matter most are: are you actually a contractor in CRA's eyes, and are you setting aside enough?
Contractor or Employee? CRA's Questions
CRA and the courts look at the whole relationship. The main factors:
| Points to contractor | Points to employee |
|---|---|
| You decide how, when and where the work is done | The payer controls your hours, methods and location |
| You supply your own tools, vehicle and equipment | The payer supplies them |
| You can hire helpers or subcontract | You must do the work personally |
| You can make or lose money (you bid jobs, carry costs, fix defects at your expense) | You're paid for time regardless of results |
| You have several clients and market yourself | You work for one payer, like their staff |
The intention in your written contract counts, but only if the reality matches it. Either side can ask CRA for a ruling with form CPT1. If CRA rules you an employee, the payer owes back CPP and EI. More on the T4A side in the T4A slip explained, and the full test, with the money on both sides, is on contractor vs employee.
How Your Contract Income Is Taxed
- Report all revenue on form T2125, including clients who didn't send a T4A.
- Deduct business expenses: tools, vehicle (with a logbook), phone, insurance, software, home office. See T2125 explained.
- Pay income tax and CPP on the profit. The full calculation is on how self-employment tax works.
- Pay by April 30, or quarterly once CRA asks for instalments.
Contractor or employee? And what to set aside?
Describe the work: who sets your hours, whose tools, how you're paid, how many clients. The assistant applies CRA's tests and estimates your tax and CPP on the contract income.
GST/HST for Contractors
Once your taxable sales pass $30,000 in a calendar quarter, or over four consecutive quarters, you must register and charge GST/HST from that point. Registered contractors claim back the GST/HST they pay on tools, fuel and materials as input tax credits. In construction, it's usually worth registering early. The test is on the $30,000 small supplier rule. Rates by job location, holdbacks and subcontractors are on GST/HST for contractors.
Get your GST/HST set up right the first time
The GST/HST SmartFile runs both $30,000 tests on your sales, compares the quick method with the regular method, and fills in form GST74 if the quick method wins.
Incorporated Contractors: The Trap
Incorporating can save tax for a real business. But if your corporation provides services that would make you an employee if the corporation weren't there (one client, their schedule, their tools), CRA can call it a personal services business. Then the corporation loses the small business rate, pays roughly the top corporate rate, and can deduct almost nothing. If that describes you, get advice before incorporating. See small business taxes.
Five Rules for Contractors
- Have a written contract that matches how you actually work.
- Work for more than one client when you can.
- Set aside 25% to 30% of each payment, plus any GST/HST collected.
- Keep a mileage log and every receipt.
- Check the return before filing. Return Check matches your T4A box 048 slips against your T2125. The self-employed tax calculator gives the year-end number.
Independent Contractor Questions
How are independent contractors taxed in Canada?
As self-employed people. Contract income is reported on form T2125, expenses are deducted, and the profit is taxed at personal rates plus both halves of CPP. No tax is withheld.
How does CRA decide if I am a contractor or an employee?
By looking at the whole relationship: who controls the work, who supplies the tools, whether you can hire helpers, whether you can make or lose money, and the parties' intention. You can request a ruling with form CPT1.
Do contractors get a T4A?
Payers generally issue a T4A when they paid you more than $500, with the amount in box 048. All contract income must be reported whether or not you get a slip.
When does a contractor have to charge GST/HST?
Once taxable sales exceed $30,000 in a calendar quarter or over four consecutive calendar quarters.
What is a personal services business?
A corporation that provides services that would make the individual an employee if the corporation did not exist. It is taxed at a much higher rate with very limited deductions.
Sources: CRA, CPP/EI explained: construction workers (RC4110 was replaced in January 2026 by CRA's “Employment status: Employee or self-employed” pages); Filling out the T4A slip. Checked October 2026. The personal services business rules are summarized; the detail has its own page in the corporate section.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.