Employee vs Contractor — Determining Status

Introduction
Understanding employee vs contractor determining status is essential for every business in Canada—whether you hire full-time staff, freelancers, consultants, tradespeople, or gig-economy workers. Misclassifying a worker can lead to massive CRA or Revenu Québec reassessments, including retroactive payroll deductions, penalties, interest, and employer CPP/QPP/EI/QPIP liabilities. Worker classification affects tax withholding, payroll compliance, employment rights, benefits, WSIB/CNESST obligations and legal exposure. Businesses must apply CRA’s and Québec’s legal tests correctly to avoid misclassification. This guide explains the rules, key factors, court interpretations and best practices for determining employee vs contractor status.

Legal and Regulatory Framework
Employee vs contractor determining status is governed by:

• Income Tax Act
• Employment Insurance Act
• Canada Pension Plan Act
• Québec Taxation Act
• QPP, QPIP and CNESST legislation
• Common law and civil law court decisions

CRA evaluates the actual working relationship, not the wording of a contract.

The main tests include:

1. Control Test

Who controls how, when and where the work is performed?
• Employees → employer controls schedule, tasks, supervision
• Contractors → independent control over work methods and timing

2. Ownership of Tools

• Employees → employer supplies tools/equipment
• Contractors → use their own tools and equipment

3. Chance of Profit / Risk of Loss

• Employees → no financial risk
• Contractors → incur expenses, risk losses, manage profitability

4. Integration into the Organization

• Employees → integral part of business
• Contractors → separate business providing services

5. Written Contracts vs Reality

Courts analyze behaviour, not the contract alone.

Understanding employee vs contractor determining status requires evaluating all these factors together.

Key Court Decisions
Courts have issued landmark decisions shaping worker classification:

• Sagaz Industries — The Supreme Court clarified the modern test for distinguishing employees from independent contractors.
• Connor Homes — Courts ruled contractual wording is not enough; real working conditions determine status.
• 1392644 Ontario Inc. — Contractors who depend on one company may still be employees.
• Québec civil law focuses on subordination, control and economic dependence.

Courts routinely uphold CRA assessments when businesses misclassify workers to avoid payroll deductions. These decisions underline the importance of properly applying employee vs contractor determining status rules.

Why CRA and Revenu Québec Target This Issue
Worker misclassification is one of the top audit triggers in Canada because it often results in:

• unpaid CPP/QPP
• unpaid EI/QPIP
• unpaid payroll taxes
• incorrect GST/HST treatment
• denied business expense deductions
• lost government revenue

CRA focuses heavily on industries with high misclassification risks:

• construction
• trucking and logistics
• IT consulting
• real estate and sales
• personal care and wellness
• hospitality
• gig-economy platforms

Audit triggers include:

• issuing many T4A slips instead of T4s
• paying one contractor repeatedly like an employee
• contractor working only for one business
• contractors using company tools
• long-term contractors with fixed schedules
• payroll significantly reduced after switching workers to contractor status

Understanding employee vs contractor determining status protects businesses from payroll audits.

Mackisen Strategy
Mackisen CPA provides a full compliance strategy to classify workers correctly:

• analyzing real working relationships
• applying CRA and Québec’s multi-factor tests
• reviewing contracts for alignment with actual work conditions
• identifying high-risk contractor arrangements
• preparing written agreements that reinforce contractor independence
• restructuring working arrangements to reduce audit risk
• registering payroll accounts when an employee relationship is confirmed
• calculating retroactive payroll deductions when required
• representing clients in CRA and Revenu Québec worker-classification audits

We also help businesses transition from high-risk contractor relationships to compliant structures.

Real Client Experience
Many companies approach Mackisen after CRA reclassifies contractors as employees:

• A construction company used “contractors” for years. CRA reclassified them as employees and demanded payroll deductions. Mackisen negotiated reduced penalties.
• A Québec wellness clinic paid practitioners as contractors even though the clinic controlled schedules. Revenu Québec issued assessments. We restructured the relationships correctly.
• An IT consultant worked exclusively for one company for five years. CRA considered him an employee. Mackisen corrected filings and managed back-dated payroll.
• A trucking firm misapplied subcontractor rules. We prepared proper contracts, separated business activities and passed CRA review.

These cases show how critical proper worker classification is.

Common Questions
Business owners frequently ask:

• Can I choose whether someone is an employee or contractor?
No—the relationship is determined by law, not preference.

• If I have a contract saying “contractor,” is that enough?
No—CRA looks at the true working arrangement.

• If a worker uses their own tools, are they a contractor?
Not automatically—other factors must be considered.

• Can a contractor work full-time for one company?
Possible, but high audit risk.

• Do contractors charge GST/HST?
Yes—if they are self-employed and registered.

• Are Québec rules different?
Civil law emphasizes subordination, but the analysis is similar.

These answers clarify employee vs contractor determining status.

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 handling payroll, hiring contractors, or facing a CRA worker-classification audit, our expert team ensures precision, transparency and protection from audit risk. When assisting clients with employee vs contractor determining status, Mackisen provides full evaluation, contract restructuring, payroll implementation and audit defense.