CRA Payroll Audits & Worker Classification Reviews: Employee vs. Contractor, CPP/EI Reassessments, Penalties, and Enforcement — A Montreal CPA Firm Guide

Payroll audits are among the most dangerous and expensive CRA audit types.
When CRA audits payroll, they examine whether workers are properly classified as employees or contractors, whether payroll deductions were withheld and remitted correctly, and whether corporate officers, shareholders, or family members received taxable benefits.
If CRA believes workers were misclassified or payroll was not handled correctly, they may reassess CPP/EI for multiple years, impose trust fund penalties, and pursue directors personally for unremitted deductions.
This guide explains how payroll audits work, why CRA conducts them, and how Mackisen protects businesses from payroll reassessment and enforcement.

Legal and Regulatory Framework

Payroll compliance is governed by:
• the Income Tax Act
• the Canada Pension Plan Act
• the Employment Insurance Act
• the Excise Tax Act (for GST/QST implications)

Employers must:
• classify workers correctly
• withhold CPP/EI and income tax
• remit payroll deductions on time
• issue T4 slips and summaries
• maintain payroll records
• comply with labour and tax legislation

CRA may:
• audit payroll and contractor payments
• reassess CPP/EI for multiple workers
• impose payroll trust penalties
• deny business expense deductions
• issue director liability assessments
• seize refunds or freeze accounts

Key Court Decisions

Canadian courts consistently support CRA’s authority to reassess payroll when workers are misclassified. Important principles include:
• worker status depends on control, tools, risk, and integration
• written contracts do not override the actual relationship
• undocumented subcontractor payments raise suspicion
• failure to withhold CPP/EI results in automatic employer liability
• trust fund penalties apply when remittances are missed
• directors are personally liable for unpaid payroll deductions
• personal vs corporate benefit rules apply to shareholders

Courts emphasize substance over form.

Why CRA Targets Payroll Audits

Payroll audits are triggered when CRA detects:
• contractor payments with no invoices
• subcontractor expenses that seem too high
• T4/T5 inconsistencies
• low salary paid to shareholders
• undocumented cash payments
• family members receiving pay without proof of work
• delivery platform (Uber, Lyft, etc.) subcontractors
• GST/QST claims inconsistent with payroll activity
• large fluctuations in payroll
• failure to remit deductions on time
• worker complaints to CRA or RQ

Quebec has especially high payroll audit rates due to strict labour and tax rules.

How CRA Conducts Payroll Audits (Deep Expansion)

1. Worker Classification (Employee vs. Contractor)

CRA examines:
• control over work
• ownership of tools
• opportunity for profit or risk of loss
• integration into the business
• exclusivity
• ability to subcontract
• invoicing patterns
• payment structure

If CRA finds the worker is actually an employee, the employer becomes liable for:
• CPP
• EI
• employer contributions
• employee portions
• penalties and interest
• potential T4 reassessments

2. Review of Payroll Deductions

CRA checks:
• remittance dates
• accuracy of calculations
• CPP/EI thresholds
• bonuses
• vacation pay
• overtime
• taxable benefits
• allowances
• shareholder salaries

Late remittances trigger trust fund penalties.

3. Examination of Subcontractor Payments

CRA requests:
• invoices
• contracts
• proof of business registration
• GST/QST numbers
• T5018 (construction reporting)

Undocumented subcontractors trigger reassessment.

4. Shareholder Payroll Review

CRA checks for:
• unpaid shareholder salaries
• undocumented dividends treated as payroll
• personal expenses charged to corporation
• taxable benefits (vehicles, rent, phone)

These may create personal reassessments.

5. GST/QST Impact

CRA may:
• deny ITCs related to contractor misclassification
• reassess GST/QST on payroll-taxable benefits

6. T4/T5 Reconciliation

CRA compares T4/T5 slips to:
• corporate financial statements
• bank deposits
• shareholder loans
• payroll accounts

Discrepancies lead to reassessment.

7. Enforcement After Payroll Reassessment

Payroll reassessments trigger immediate CRA collections:
• refund seizures
• bank freezes
• wage garnishments
• receivable seizures
• Federal Court certificates
• director liability assessments

Payroll issues escalate faster than any other category.

Immediate Financial Risks

Payroll audits can cause:
• large CPP/EI reassessments
• multi-year penalties
• trust fund enforcement
• director liability
• GST/QST denial
• wage or receivable garnishment
• bank account freezes
• liens
• increased audit frequency
• business shutdown risk

Contractor-heavy businesses face the highest exposure.

Mackisen Strategy

Payroll audits require immediate intervention due to trust fund exposure. Mackisen uses a structured defence model.

Step 1 — Payroll Reconstruction

We rebuild:
• payroll journals
• CPP/EI calculations
• contractor vs employee analysis
• taxable benefit schedules
• shareholder salary/dividend planning
• missing T4/T5 slips

This creates accurate payroll evidence.

Step 2 — Worker Classification Defence

We prepare documentation for each worker including:
• contracts
• invoices
• independence analysis
• control and tools review
• subcontractor agreements

This helps defend contractor status.

Step 3 — Correct Bookkeeping & GST/QST

We fix:
• expense classification
• payroll coding
• GST/QST misallocations
• contractor expense documentation

This reduces reassessment exposure.

Step 4 — Legal Objection Preparation

We prepare:
• Notices of Objection
• worker classification legal arguments
• payroll penalty relief submissions
• evidence binders
• case law references
• recalculated CPP/EI amounts

CRA Appeals often reduces payroll reassessments significantly.

Step 5 — Stop Collections

We negotiate:
• enforcement holds
• freeze lifts
• instalment plans
• liability limitation for directors
• reduction of trust fund penalties

This stabilizes cash flow.

Step 6 — Long-Term Compliance

We implement:
• proper payroll systems
• subcontractor documentation
• GST/QST validation
• monthly remittance calendar
• corporate governance controls

This prevents future payroll audits.

Real Client Experience

A Montreal renovation company classified all workers as subcontractors. CRA reclassified them as employees and assessed more than $87,000 in CPP/EI and penalties. Mackisen reconstructed contracts, provided subcontractor evidence, and reduced the reassessment by over 60 percent.

Another client, an IT consultant corporation, faced penalties for late payroll remittances. Mackisen proved due diligence and removed repeat-failure penalties entirely.

Common Questions

• Can CRA force me to reclassify contractors as employees? Yes.
• Can CRA reassess CPP/EI retroactively? Yes, for multiple years.
• Are directors personally liable? Yes, for payroll trust amounts.
• Can CRA deny ITCs related to payroll? Yes, in some cases.
• Can CRA freeze accounts after a payroll audit? Yes.
• Can I overturn a payroll audit? Yes, with strong evidence.
• Does CRA audit payroll frequently? Very frequently in Quebec.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.