You hired someone as a contractor, they invoice you monthly, and the agreement says "independent contractor" right at the top. So they're a contractor — right? Not necessarily. The CRA decides worker status by examining the actual working relationship, and the label on the contract is close to the least important fact in the file.
The first and heaviest test: who controls how, when, and where the work gets done? An employee is told their hours, follows the payer's methods, and asks permission to take on other clients. A genuine contractor commits to a result and decides for themselves how to deliver it — their schedule, their methods, their choice to work for three other companies at the same time.
If you set the daily schedule, supervise the method, and would object to them working for your competitor, you're describing an employee, whatever the invoice says.
Contractors typically show up with their own tools, their own laptop, their own software licences — and they bear the cost of maintaining and replacing them. When the payer supplies the equipment, the workspace, the email address, and the accounts, the relationship starts looking like employment.
This test carries different weight in different industries; a tradesperson's truck full of tools says more than a consultant's laptop. It's one signal among several, read alongside the others.
An employee is paid for time; the pay arrives whether the week went well or badly. A contractor runs a business, and businesses can lose money: they quote fixed prices and eat overruns, they carry expenses that might exceed revenue, they can fix their own mistakes on their own dime, and they can profit by working efficiently.
Someone paid a steady hourly rate, with expenses reimbursed and no possibility of a losing month, has no entrepreneurial risk — and no entrepreneurial risk is a strong signal of employment.
The last test asks the wide-angle question: is this person in business for themselves, or are they a part of your business? Multiple clients, their own branding, their own liability insurance — a business of their own. One client, for years, doing the same core work as your employees, on your org chart in everything but name — a part of yours.
No single test decides. The CRA weighs the whole picture, and courts have added the question of what the parties intended — but intent only matters when the facts on the ground plausibly support it. A contract can't paper over a relationship that walks and talks like employment.
This is where the stakes get real, because the downside lands almost entirely on the payer. If the CRA reclassifies a contractor as an employee, the payer owes the source deductions that should have been withheld — including both the employer and employee shares of CPP and EI — plus penalties and interest, going back years. Add the provincial side (workers' compensation, employment standards) and one reclassified worker can turn several years of payroll savings into a much larger bill.
And it rarely stays hypothetical: a contractor relationship that ends badly and turns into an EI claim is one of the most common ways a review starts.
If your contractors are genuine, make the file show it: a written contract that matches how you actually work together, invoices from the contractor's business, their GST/HST number where applicable, proof they carry their own insurance and use their own equipment, and evidence they serve other clients. Review long-running relationships annually — contractors have a way of gradually becoming employees while the paperwork stands still. And keep it all; the CRA can look back six years, so the records need to be there when the question comes. If you're unsure where a current relationship falls, it's exactly the kind of question to bring to a tax planning conversation.
The takeaway: status is decided by facts, not labels — audit your own relationships before the CRA does. If one of yours sits in the grey zone, book a free consultation.
This post is general information, not tax advice for your specific situation.
