Employee or self-employed contractor - how CRA decides

When it comes to payroll taxes, it’s important to determine whether the Canada Revenue Agency (CRA), considers a worker an employee or a self-employed contractor.  

To determine a worker's status, CRA examines the entire working relationship, not just the details in the contract, and takes six main factors into consideration. None of the following factors on their own are conclusive, but all contribute to the decision on whether a worker is an employee or an independent contractor. 

Control over the worker 

An employer’s authority to exercise control over what will be done and how it will be done is one of the most important criteria for an employee. It does not matter if the control is exercised; a master/servant relationship exists if the right to control exists.

Ownership of tools and equipment

Where the payer supplies tools, materials, etc., and retains the right of use it is indicative of control over the worker. This supports an employer/employee relationship.

Subcontracting work or hiring assistants

This factor can help determine a worker's business presence because workers that can subcontract work or hire assistants take on the chance of profit and risk of loss. This supports a payer/independent contractor relationship.

Degree of financial risk taken by the worker 

The higher the degree of financial risk the worker takes, the more likely they will be deemed a self-employed contractor as they may not be reimbursed for any fixed ongoing costs they incur.  

Responsibility for investment and management held by the worker 

A significant investment by the worker is evidence that a business relationship may exist. You should also consider if the worker is free to make business decisions that affect their profit or loss.

Worker's opportunity for profit or loss

Consider whether the worker can realize a profit or incur a loss. Employees normally do not have the chance of a profit and risk of a loss. Self-employed individuals normally have the chance of profit or risk of loss, because they can pursue and accept contracts as they see fit.

Penalties:

Failure to understand these government rulings on independent contractors can, in some instances, result in cost increases and penalties that may be greater than the cost of hiring the contract labour in the first place.

If your company is audited and the CRA rules that your "contract workers" are employees each party will be responsible for the following:
Payer:

• CPP and EI employer and employee contributions for the current and previous year.
• 10 % penalty on the total assessment and interest of approximately prime plus one 1% from the date each of the contributions were due.

It is important to note that the CRA's definition of a contractor or employee is different than that given by Employment Standards and Workers’ Compensation in each jurisdiction.

Getting a ruling

If a worker or payer is not sure of the worker's employment status, either party can request a free ruling from the CRA to have the status determined. 

• Log in to My Business Account if you are a payer and select "Request a CPP/EI Ruling"
• Log in to My Account if you are a payer or a worker and select "Request a CPP/EI Ruling"
• Ask your authorized representative to request a ruling for you by logging in to Represent a Client and selecting "Request a CPP/EI Ruling"
• Write a letter or print and complete Form CPT1, Request for a CPP/EI Ruling – Employee or Self-Employed? and mail it to your designated tax services office

Have questions? CFIB members can contact Business Resources at 1-833-568-2342 or cfib@cfib.ca 

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