Contractor vs Employee
The test CRA uses to decide employee or contractor, what it changes in tax, and how to ask for a ruling.
The short version
- Whether you're an employee or an independent contractor depends on the actual working relationship, not on what the contract calls you.
- Outside Quebec, CRA and the courts ask: whose business is it? They look at control, who supplies the tools, whether you can hire helpers, your financial risk, your investment and management, and your chance of profit.
- Employees get CPP and EI deducted, the employer pays its share, and they have few deductions. Contractors pay both halves of CPP, usually have no EI, and deduct their business expenses.
- If CRA decides a "contractor" was really an employee, the payer owes the CPP and EI it didn't deduct, both shares, plus penalties and interest; the worker's business deductions can be denied.
- Either side can ask CRA for a CPP/EI ruling, using My Account, My Business Account or form CPT1.
Contractor vs Employee: How CRA Decides
A lot of Canadian work runs on a handshake and an invoice. That's fine when the worker really is in business. It's a problem when the "contractor" works set hours, at the payer's shop, with the payer's tools, for one client, for six years. Calling someone a contractor on paper doesn't make it so. Here's the test, and what's at stake for both sides.
The Test Outside Quebec
The courts' question, from 671122 Ontario Ltd. v. Sagaz Industries (Supreme Court of Canada, 2001), is whether the worker is performing services as a person in business on their own account. The Federal Court of Appeal later added a two-step approach: first, what did the parties intend? Second, do the facts of the relationship match that intention? Intent counts, but the facts win when they disagree.
| Factor | Points toward employee | Points toward contractor |
|---|---|---|
| Control | Payer sets hours, methods, priorities; supervises and reviews the work | Worker decides how, when and where, and is judged on the result |
| Tools and equipment | Payer supplies them | Worker owns and maintains significant tools, vehicle or equipment |
| Subcontracting and helpers | Worker must do the work personally | Worker can hire helpers or subcontract, and pays them |
| Financial risk | No fixed costs; expenses reimbursed | Worker pays their own costs, carries insurance, can lose money |
| Investment and management | None | Worker invests in the business and makes business decisions |
| Chance of profit | Paid by the hour or salary, regardless | Can earn more by working efficiently, pricing jobs, taking more clients |
No single factor decides it, and CRA has guidance for specific trades such as construction, real estate, couriers and placement agencies. Quebec uses a different test under the Civil Code; we don't cover Quebec.
Am I an employee or a contractor?
Describe the work: who sets your hours, whose tools, whether you can send a helper, how you're paid and how many clients you have. The assistant walks through each factor and tells you which way it points, and whether a CRA ruling is worth asking for.
What Changes in Your Pocket
| Ontario, 2026, $65,000 a year | Employee | Contractor (no expenses) |
|---|---|---|
| Income tax | about $9,725 | about $9,050 |
| CPP paid by the worker | about $3,660 | about $7,320 (both halves) |
| EI premiums | about $1,060 | None (and no regular EI benefits) |
| Total paid by the worker | about $14,445 | about $16,370 |
| Payer's own CPP and EI | about $5,140 | None |
| Deductions available | Limited employment expenses with a T2200 | All business expenses on T2125 |
Two lessons. A contractor rate should be noticeably higher than the equivalent wage, because the payer saves its CPP and EI, vacation pay and benefits, and you take on the CPP and the risk. And the contractor's real advantage is deductions: a contractor with $10,000 of genuine expenses pays less tax than the table shows. See independent contractor taxes for how that works, and employment expenses for what employees can claim.
When CRA Reclassifies a Worker
- The payer is assessed for the CPP and EI that should have been deducted, both the employee and employer shares, plus penalties and interest, generally for the current and recent years. It may also owe income tax that should have been withheld.
- The worker may lose business expenses claimed on the T2125, but can often recover the overpaid half of CPP, and may become eligible for EI on that work.
- GST/HST charged on the "contract" may need to be sorted out as well.
Disputes often start when the worker applies for EI after the work ends, or when a payer is audited. If you receive a reassessment, see notice of reassessment: what to do; CPP/EI decisions have their own appeal to the Minister, with a 90-day deadline.
CRA ruled on your employment status, or reassessed you?
CPP/EI rulings and income tax reassessments each have a 90-day window to dispute. The SmartFile identifies which one you received and drafts the right appeal or objection.
Asking CRA for a Ruling
If you're not sure, a payer or a worker can ask CRA for a CPP/EI ruling through My Business Account, My Account, a representative, or form CPT1, Request for a CPP/EI Ruling. CRA's guide says a worker's request about a year must be made before June 30 of the following year. A ruling settles CPP and EI; it's usually followed for income tax, too.
Incorporated Contractors: The Personal Services Business Trap
Some workers incorporate to bill one client. If the worker would be an employee of that client but for the corporation, the company may be a personal services business. Its income doesn't get the small business rate, it pays a higher corporate rate than other corporations, and it can deduct almost nothing except the worker's salary and benefits. That's a costly surprise in a CRA audit. See small business taxes, and get advice before incorporating to work for one client. The rates are on corporate tax rates.
Employment Standards Are a Separate Question
Provincial employment standards (minimum wage, vacation pay, termination pay) use their own tests, and a worker can be a contractor for CRA and still have rights under provincial law, or the other way around. Ontario's Digital Platform Workers' Rights Act, for example, gives app-based rideshare and delivery workers minimum wage protection without making them employees.
Rules of Thumb
- Write the contract to match reality, not the other way around.
- Contractors: have more than one client if you can, your own tools, insurance and invoices, and a GST/HST number once you're over $30,000.
- Payers: if you control the hours and the methods and supply the tools, put the person on payroll.
- Unsure? Ask for a ruling before the bill grows.
More on being in business for yourself: self-employed taxes in Canada. If you got a T4A but think you were really an employee, that's worth raising with CRA.
Contractor vs Employee Questions
How does CRA decide if I am an employee or a contractor?
Outside Quebec, CRA looks at what the parties intended and whether the facts support it, using factors such as control, tools and equipment, subcontracting, financial risk, investment and management, and the opportunity for profit.
Can my employer call me a contractor to avoid CPP and EI?
The label does not decide your status. If the working relationship is employment, the payer must deduct CPP, EI and income tax, regardless of what the contract says.
How do I ask CRA for a ruling on my employment status?
A worker or payer can request a CPP/EI ruling through My Account, My Business Account, a representative or form CPT1.
Do independent contractors pay more tax than employees?
Contractors pay both halves of CPP but no EI, and can deduct business expenses. With few expenses they usually pay more; with significant expenses they can pay less.
What is a personal services business?
A corporation that provides services to a client where the individual worker would reasonably be considered an employee of the client if the corporation did not exist. It is taxed at a higher rate and has very limited deductions.
Sources: CRA, Determine the employment status; Who can ask the CRA for a ruling; Supreme Court of Canada, 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. Checked October 2026. Tax figures come from our 2026 Ontario rules engine. The ruling deadline is from CRA's employee or self-employed guide; we couldn't confirm it on the newer ruling pages, so check before relying on it.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.