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Canada Employee vs Independent Contractor Guide

the employee vs independent contractor classification in Canada. The CRA uses the 'common law' test to determine the worker's status — the control (who controls the work), the ownership of the tools (who provides the equipment), the chance of the profit / the risk of the loss (the financial risk), the integration (is the worker integrated into the business or is the worker separate?). The Form CPT1 (the "Request for a Ruling as to the Status of a Worker") is the CRA's formal ruling process — the employer or the worker can request the CRA's determination of the worker status for the CPP and the EI purposes. The employee — the employer deducts the CPP, the EI, and the income tax from the employee's wages. The employee receives the vacation pay, the statutory holidays, the termination pay, and the workers' compensation coverage. The independent contractor — the contractor invoices the business, charges the GST/HST (if the revenue exceeds $30,000), pays the self-employed CPP (the 11.9%), and deducts the business expenses (the vehicles, the tools, the home office). The dependent contractor — the worker who is economically dependent on the single client (the "economic dependency" — the "exclusive" relationship). The misclassification penalties — the employer who misclassifies the employee as the contractor is liable for the late remittance penalties (the 3% to 20% penalty), the interest, and the CPP and the EI arrears. The personal services business (PSB) — the incorporated individual who provides the services to the single client (the "incorporated employee") — the PSB is subject to the higher tax rate (the federal rate of 33% + the provincial rate) and the limited expense deductions.

CRA Classification Tests

• Control: The "subordination" test — does the payer control the "how, when, and where" of the work? The employee is subordinated to the employer. The contractor controls the method of the work.
• Tools and equipment: Who provides the tools, the equipment, the computer, the vehicle, the software, and the office? The employee uses the employer's tools. The contractor provides the own tools.
• Chance of profit / risk of loss: The contractor has the financial risk — the income depends on the expenses, the efficiency, and the business decisions. The employee has the fixed salary (the "guaranteed income" — no risk of the loss).
• Integration: The "organization test" — is the worker integrated into the payer's business (the "employee") or is the worker separate from the business (the "contractor")? The contractor carries on the own business (the "separate business" — the contractor can work for the multiple clients).
• Intent: The "intention of the parties" — the written contract (the "service agreement" or the "employment agreement") and the actual working relationship. The CRA considers the "substance over the form" — the contract wording is not determinative if the actual working relationship is different.

PSB (Personal Services Business)

• PSB definition: The corporation that provides the services to the "specified client" (the "one-client corporation" — the "incorporated employee") — the individual who incorporates and provides the services to the single client (or the related clients). The PSB is the "personal services business" under s. 125(7) of the ITA.
• PSB tax rate: The federal rate of 33% (the "PSB rate" — the general corporate rate of 15% plus the 18% additional tax). The provincial rate applies at the general rate. The combined federal+provincial rate is approximately 44% to 50%.
• PSB deductions: The PSB can deduct ONLY the "cost of the services" (the salary to the incorporated employee, the benefits, the CCA on the business assets, the legal and the accounting fees). The PSB CANNOT deduct the "expenses other than the salary" (the "PSB expense restriction" — the home office, the vehicle, the meals, the entertainment, the interest).
• PSB vs independent contractor: The PSB rules apply to the "incorporated employee" — the individual who would be the employee if the services were provided directly (the "worker status" test). The PSB rules do NOT apply to the "genuine contractor" (the contractor who carries on the own business with the multiple clients).

Misclassification Penalties

• Late remittance penalties: The employer who misclassified the employee as the contractor is liable for the CPP, the EI, and the income tax arrears plus the late remittance penalties (3% to 20% of the unremitted amount).
• Wilful misclassification: The CRA imposes the higher penalty for the "wilful" misclassification (the "knowing" misclassification — the employer knew the worker was the employee but treated the worker as the contractor). The penalty is 10% to 20% of the amount not remitted.
• Interest: The CRA charges the interest on the past-due amounts (the prescribed rate + 4%, compounded daily).

For the payroll rules and the source deductions, see our Payroll Guide →. For the self-employment and the business income reporting, see our Self-Employment Guide →.