Contractor vs. Employee: How CRA Tells the Difference

In today’s gig economy, more Canadians are asking:
"Am I a contractor or an employee?"

The difference matters — a lot — because it affects taxes, benefits, CPP/EI contributions, and even who carries legal responsibilities.
And if you get it wrong, the Canada Revenue Agency (CRA) could come knocking with penalties, back taxes, and interest.

Here’s how CRA actually makes the distinction — and what you should know to stay on the right side of the rules.

Why It Matters

Employees:

• Taxes deducted at source (employer handles deductions)

• Eligible for EI benefits, CPP contributions, vacation pay, termination rights, etc.

• Protected by employment standards laws

Contractors (Self-employed):

• No deductions at source

• Must pay their own CPP (both employer and employee portions) and income tax

• No EI coverage (unless they opt in voluntarily)

• No vacation pay or statutory benefits

Bottom line:
Employees have more protections. Contractors have more freedom (but also more risk).

How CRA Determines the Difference

There’s no single test. CRA looks at the overall relationship using several key factors:

1. Control

• Employee: Employer controls what work is done, how, and when.

• Contractor: Controls their own work — sets hours, decides how the work gets done.

Example:
If you're told to show up from 9-5, follow specific methods, and answer to a boss daily, you’re probably an employee.

2. Ownership of Tools and Equipment

• Employee: Employer provides tools, computers, office space, etc.

• Contractor: Uses their own equipment, buys their own supplies.

Example:
A freelance graphic designer using their own laptop and software looks like a contractor.

3. Chance of Profit / Risk of Loss

• Employee: Earns a steady wage or salary, no real business risk.

• Contractor: Can make more or less depending on efficiency, market rates, or client satisfaction.

Example:
If you invoice multiple clients and can lose money on bad contracts, you are likely a contractor.

4. Integration

• Employee: Their work is an integral part of the business.

• Contractor: Provides a service that’s more "external" to the company.

Example:
An IT technician on the company's payroll who fixes internal systems is likely an employee.
An outside IT consultant fixing systems for many companies is likely a contractor.

5. Written Contracts

Having a written contract is important but not absolute.
CRA can look beyond the contract if the real working conditions say otherwise.

Pro Tip:
Always have clear service agreements for contractor relationships — but make sure day-to-day operations actually match the contract.

Quick Example:

Sarah is hired by a tech company:

• They require her to work Monday to Friday, 9-5.

• They provide her with a company laptop and software.

• She only works for them.

Conclusion: Sarah is an employee, even if her contract calls her a "contractor."

Final Thoughts

If CRA audits and decides someone classified as a "contractor" is really an employee, the payer (business) could owe:

• Back payroll taxes

• Employer CPP and EI premiums

• Penalties and interest

For workers, misclassification can mean lost benefits and surprises at tax time.

👉 Whether you're a business owner hiring people or a worker trying to understand your rights, it’s essential to know where you stand.

When in doubt, get professional advice — because in the eyes of CRA, actions speak louder than contracts.

Frequently Asked Questions (FAQ)

1. Can someone be both an employee and a contractor at the same time?

Yes — it’s possible!
If a person has a side business unrelated to their employment duties, they can be an employee for one role and a contractor for separate services. CRA will look at each role separately based on the facts.

2. What if the contract says "contractor" but the CRA says "employee"?

CRA looks at the real working relationship, not just the wording.
Even if the contract calls someone a "contractor," if the work conditions match an employment relationship, CRA can reclassify them as an employee.

3. What happens if a business misclassifies workers?

The business may be required to:

• Pay back taxes (CPP, EI, and income tax withholdings)

• Pay interest and penalties

• Possibly face legal consequences under employment standards

It can be very expensive, so it's crucial to get it right from the start!

4. How can a business protect itself when hiring contractors?

• Use detailed contracts outlining independent contractor terms.

• Ensure contractors work independently (control their schedule, tools, and decisions).

• Avoid giving contractors employee-like perks (e.g., vacation pay, benefits).

• Allow contractors to work for other clients.

Documentation and reality must match.

5. Can a worker request a CRA ruling on their status?

Yes!
Either the worker or the payer can request a formal determination by filing Form CPT1 - Request for a Ruling. CRA will review the case and make an official decision.