Employee or subcontractor? The CRA checklist every trade business needs.
The number-one audit trap for Canadian trade businesses. A short checklist to tell whether your helpers are subcontractors or employees in the eyes of the CRA.
It plays out in supply houses and coffee shops across Canada every morning. You're a busy HVAC owner or general contractor. You land a renovation project that needs to be done yesterday. You don't want the hassle of hiring a full-time employee, setting up payroll, and paying workers' compensation premiums (WSIB in Ontario, WCB elsewhere) for a three-week rush.
So you call a guy you know. Let's call him Steve. Steve has his own truck and says, "Just pay me an hourly rate and I'll invoice you."
It sounds perfect. You cut Steve a cheque, he does the work, everyone goes home happy.
Six months later, the CRA audits you. They decide that Steve wasn't a subcontractor, he was an employee. Suddenly you owe thousands of dollars in back-dated CPP, EI, and penalties.
This is the employee versus independent contractor trap. The CRA is scrutinizing it closer than ever.
Why the CRA cares so much
To the average business owner, the difference feels like semantics. To the government, the difference is massive.
When you hire an employee, you act as a tax collector. You withhold income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. You also contribute the employer's share of those premiums.
When you hire an independent contractor, no taxes are withheld. The contractor gets the full gross amount and is responsible for their own taxes.
The CRA prefers employees because compliance is higher. A business with a payroll department is far more likely to remit taxes correctly than a loose network of folks trading cash and invoices. In any grey area, the CRA almost always rules that a worker is an employee.
How the CRA actually decides
You can't decide on your own that someone is a subcontractor. You can write a contract that says independent contractor in bold red letters at the top, but if the working relationship looks like employment, the CRA will call it employment.
When a CRA officer reviews your files, they apply a four-factor test drawn from guide RC4110, Employee or self-employed? to determine the real nature of the relationship.
You tell the worker to show up at 8 AM at 123 Main Street. You decide which pipes to install, which method to use, and you supervise them throughout the day. If they want to leave early, they ask you. You have the right to hire or fire.
You tell the worker, 'I need a bathroom roughed in at 123 Main Street by Friday.' They decide when to show up, how to do the job, and when to leave, as long as the result meets the standard.
You provide the van, the heavy machinery, the ProPress tool, and the materials. The worker brings a few hand tools (hammer, tape measure), but you supply the capital required to do the job.
The worker shows up in their own vehicle with their own tools. If a special tool is needed, like a concrete saw, they rent or own it themselves.
If a worker installs a furnace incorrectly and it leaks, you pay to fix it. You pay the worker for their time regardless of whether the job was profitable or a disaster. The worker has no financial risk.
A true subcontractor goes back and fixes it on their own time and their own dime. They bear the financial risk of their own work. If the job goes over budget, they can lose money.
An employee generally cannot make a profit. They can earn a bonus or overtime, but they can't decide to work faster to increase their margin. They are paid for their time.
A subcontractor can negotiate a flat rate for a job. If they are efficient and finish in two days instead of four, they have made a profit on their time. They are also free to accept work from other clients.
If you are micromanaging day-to-day activities and supplying the capital, the worker is almost certainly an employee, no matter what the invoice says.
The "intent" factor (and why contracts matter)
While the four-point test is the ultimate judge, the CRA does look at the intent of both parties. A written agreement helps here.
If you genuinely intend for a worker to be a subcontractor, you should have a signed contract that says:
- They carry their own liability insurance, and you keep a copy of their workers' compensation clearance certificate (WSIB in Ontario, WCB elsewhere).
- They are free to accept other work.
- They are responsible for correcting their own defective work.
Without a contract, the CRA will infer intent from your actions. If Steve has worked for you 40 hours a week for five years, has no other clients, and drives a truck with your logo on it, no amount of arguing about intent will save you.
The cost of getting it wrong: the PIER review
So what happens if the CRA decides you misclassified Steve?
They open a Pensionable and Insurable Earnings Review (PIER). These reviews often begin when payroll records and invoices don't line up. They calculate the total CPP and EI that should have been deducted from Steve's pay for the entire period he worked for you.
The catch: you can't ask Steve for that money back.
You, the employer, are responsible for paying:
For a single worker earning CAD 60,000 a year, this reassessment can run CAD 7,000 to CAD 10,000 in liabilities per year. PIER reviews typically reachback four years, so a single misclassified worker can leave you with CAD 28,000 to CAD 40,000 on the line.
The classification checklist
Before you bring on help for your next project, run through these six questions. If the answer leans toward the employee column more often than not, the worker probably belongs on your payroll.
- Exclusivity. Do they work only for you, or do they have other clients and their own business?
- Schedule. Do you set their specific hours, or do they decide when to show up to complete the work?
- Tools. Do you provide the van and heavy gear, or do they arrive with their own vehicle and major tools?
- Expenses. Do you reimburse them for gas and meals, or do they cover their own overhead?
- Payment. Do you pay an hourly or weekly wage, or do they invoice you by project or milestone?
- Correction. Do you pay them to fix errors, or do they fix mistakes on their own time and cost?
The full Employee vs. Subcontractor checklist.
A one-page PDF version of the six-question checklist above, with the CRA’s four-factor test on the back. Pin it to the truck dash before your next hire.
You probably already know, but the cost of a misclassified worker is rarely the back taxes. It is the audit that follows.
Final thoughts: payroll versus invoicing
There is a time and place for subcontractors. They are essential for specialized work (like hiring a gas fitter for a specific hookup) or for handling overflow during peak season.
If you are hiring someone to show up every day, drive your truck, and represent your brand, the safest path is payroll. Yes, it requires more paperwork. Yes, you pay CPP and EI. But the cost of doing it right is a fraction of the cost of a CRA audit.
- Canada Revenue Agency. RC4110, Employee or self-employed? The CRA's guide to the four-factor test.
- Canada Revenue Agency. Determining the employer-employee relationship for CPP and EI purposes.
- Canada Revenue Agency. Pensionable and insurable earnings review (PIER).
Get a free review of your books. Find out what classification risk is on the line.
At Numinor, we work with trade businesses on flat plans: CAD 299 a month for Starter, CAD 499 a month for Growth. Bookkeeping, sales tax, and year-end, scoped on the discovery call. No hourly billing, no surprise invoices in March.
Book a 30-minute discovery call and we'll review last year's books at no cost. You'll walk out with a written read on your subcontractor exposure, whether you sign on or not.