Employee or Contractor? – A Complete Guide by a Montreal CPA Firm Near You

Introduction

For Canadian businesses, correctly determining whether a worker is an employee or an independent contractor is critical. Misclassification is one of the most common—and costly—payroll errors businesses make. CRA frequently audits worker relationships, especially in industries like construction, trucking, IT consulting, hospitality, health services, personal care, gig work, and professional services. If CRA believes a contractor should have been treated as an employee, the business may face massive liabilities: unpaid CPP and EI, interest, penalties, retroactive payroll remittances, and potential reassessments for multiple years. Understanding CRA’s worker classification rules helps you avoid costly payroll audits and protects both your business and your workers.

Legal and Regulatory Framework

Worker status is determined under the Income Tax Act, Employment Insurance Act, and Canada Pension Plan Act. CRA applies a multi-factor test to classify workers. Key legal principles include:

1. Control

Employees work under the employer’s direction:
• employer sets hours, tasks, and workflow
• employer supervises and monitors performance

Contractors maintain independence:
• set their own schedule
• perform work using their own methods
• control how and when the job is done

2. Ownership of Tools & Equipment

Employees generally use employer-provided tools.
Contractors invest in and use their own equipment, software, and tools.

3. Chance of Profit / Risk of Loss

Employees earn fixed wages.
Contractors may:
• negotiate rates
• earn more profit through efficiency
• suffer financial loss if expenses exceed revenue

4. Integration

Employees are integral to the business.
Contractors operate independently and may serve multiple clients.

5. Written Agreements vs Actual Behaviour

A contract stating “contractor” is not enough. CRA examines the real working relationship, not the document.

These rules form the legal foundation of CRA’s employee vs contractor classification.

Key Court Decisions

Courts have repeatedly reinforced that worker status depends on actual working conditions, not labels.

1. Sagaz Industries v. Canada (Supreme Court)

The Court established the modern multi-factor test for worker classification, emphasizing that control and independence are key.

2. Royal Winnipeg Ballet v. Canada

Multiple dancers classified as contractors were reclassified as employees because the Ballet controlled schedules, choreography, and performance requirements.

3. Wiebe Door Services v. Canada

Workers were reclassified as employees due to economic dependence and integration.

4. Connor Homes v. Canada

A contractor agreement was ignored because the working relationship resembled employment in all practical ways.

These decisions show that courts focus on substance over form.

Why CRA Targets This Issue

CRA audits classification aggressively because misclassification creates:

• lost CPP and EI revenue
• unreported payroll tax liabilities
• inaccurate T4/T4A reporting
• GST/HST registration errors
• improper business expense deductions by workers

CRA focuses on industries where contractors resemble employees, such as:
• construction
• trucking and delivery
• fitness and wellness
• salons and spas
• IT consulting
• daycare and tutoring
• cleaning services
• home care and nursing
• sales and commission-based roles

CRA also targets businesses issuing T4As instead of T4s without proper documentation.

Mackisen Strategy

At Mackisen CPA Montreal, we help businesses classify workers correctly and protect themselves during CRA audits. Our strategy includes:

1. Full Worker Classification Review

• analyzing control, tools, risk, integration, and independence
• reviewing contracts, actual workflows, and work patterns
• identifying high-risk worker relationships

2. Drafting Compliant Agreements

• preparing or revising contractor agreements
• ensuring contractual language aligns with real work practices
• including commercial protections (insurance, invoicing, subcontracting rights)

3. Structuring Contractor Relationships Properly

• ensuring the worker has a GST/HST number if required
• defining scope of work, deliverables, and autonomy
• clarifying ownership of tools and risk of loss

4. Payroll Compliance for Employees

• registering for a payroll account when employees are required
• calculating CPP, EI, and tax withholdings
• issuing proper T4s or T4As

5. CRA Audit Defence

• preparing classification documentation
• responding to CRA questionnaires
• negotiating outcomes and minimizing retroactive assessments

This protects your business from penalties and ensures accurate payroll compliance.

Real Client Experience

A Quebec construction company paid workers as contractors for years. CRA reclassified them as employees and assessed CPP, EI, and penalties. We defended the business, reduced the reassessment significantly, and restructured worker agreements.

A Montreal wellness clinic treated practitioners as contractors but controlled hours, pricing, and schedules. CRA reclassified them as employees. We redesigned their service agreements to create legitimate contractor relationships.

An IT freelancer hired helpers as contractors without proper contracts. CRA flagged the issue. We formalized agreements, registered the helpers for GST/HST, and resolved the audit.

Common Questions

Business owners often ask whether a written contract is enough. No—CRA looks at the actual relationship.

Others ask whether a worker with their own corporation is always a contractor. Not necessarily—personal services business rules may apply.

Some ask whether contractors need GST/HST numbers. Yes—if their revenue exceeds $30,000.

Another question: Can employees switch to contractors to save tax? Not unless the working conditions change significantly.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses classify workers correctly, avoid payroll audits, and protect themselves from CRA liabilities. Whether you hire part-time help, gig workers, or full-time staff, our experts ensure compliance, clarity, and risk-free payroll operations.