Employee vs. Contractor in Canada: How the CRA Decides
The CRA doesn't take the contract's word for it. It weighs four factors about how the work actually happens — and if it leans “employee,” your business is the one that owes the back CPP and EI.
By Antoine Joseph · Payroll & Contractors · 8 min read
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Calling someone an “independent contractor” in a written agreement doesn't make it true in the CRA's eyes. The Canada Revenue Agency looks at the total working relationship, not the label either side prefers, when it decides whether a worker is an employee or genuinely self-employed — and that decision determines who owes CPP contributions, EI premiums, and which slip (T4 or T4A) gets issued at year-end.
The CRA's four-factor test
There's no single deciding question. The CRA weighs four factors together, and no one factor settles it on its own.
- 1Control. Who decides how, when, and where the work gets done? The more a payer directs the method (not just the result) — setting hours, requiring specific work methods, requiring the worker to report to a supervisor, or requiring the worker to do the work personally rather than send a substitute — the more the relationship looks like employment.
- 2Ownership of tools and equipment. In a typical employment relationship, the employer supplies what's needed to do the job — laptop, software, equipment. A genuine contractor usually owns and maintains their own tools. The CRA's current guidance also looks at digital tools specifically: a “contractor” working exclusively on company-issued hardware and proprietary internal software leans toward employee.
- 3Chance of profit, risk of loss. A contractor can increase their earnings through efficiency, negotiate their own rate, and can lose money if a job runs over budget or costs more than quoted. An employee is paid a set wage or salary regardless of whether the business had a good or bad month. No financial risk on the worker's side points strongly toward employee.
- 4Integration. Is the work a core, ongoing part of the business, done the way employees do it, or a discrete project delivered on the worker's own terms? Work that's fully integrated into the day-to-day operation — alongside employees, under the same supervision — leans toward employment even if it's called a contract.
2026 update: RC4110 has been replaced
The CRA's long-standing guide RC4110, “Employee or Self-Employed?” was cancelled effective January 30, 2026, with its content folded into the CRA's “Employment status” web pages. The four-factor test itself hasn't changed — only where the CRA publishes the guidance.
Why the distinction actually matters
- CPP contributions. Employers and employees each contribute; a self-employed contractor pays both the employer and employee portions themselves through their tax return.
- EI premiums. Employees (and their employers) pay EI premiums, which fund EI benefits. Independent contractors generally don't pay EI on that income and aren't eligible for regular EI benefits from it.
- Which slip gets issued. Employees receive a T4 (Statement of Remuneration Paid), reporting salary and the CPP/EI/income tax withheld at source. Contractors paid $500 or more in a calendar year generally receive a T4A instead, with nothing withheld.
- Who's liable if it's wrong. If the CRA reclassifies a “contractor” as an employee after the fact, the business is generally on the hook for the unremitted employer and employee CPP contributions and EI premiums, plus interest and penalties — issuing a T4A instead of a T4 does not protect you if the underlying relationship was actually employment.
Requesting an official ruling
If the classification genuinely isn't clear after weighing all four factors, either the worker or the payer can ask the CRA to decide formally by filing Form CPT1, “Request for a CPP/EI Ruling — Employee or Self-Employed?” The request has to be made by June 30 of the year following the year the work took place. A CRA officer reviews the working relationship — sometimes requesting contracts, invoices, schedules, and pay records — and issues a binding ruling on both CPP and EI status.
A separate question: GST/HST registration
If your business genuinely engages a contractor, that contractor is a separate business themselves, and once their revenue from all their taxable supplies exceeds $30,000 over four consecutive calendar quarters, they’re required to register for and start charging GST/HST. That’s the contractor’s obligation, not yours — but it’s worth knowing so an invoice with GST/HST added doesn’t come as a surprise.
A quick self-check
- Do you control how, when, and where the work gets done, beyond just the finished result? → Leans employee
- Does the worker supply their own tools and equipment, including their own laptop and software? → Leans contractor
- Could the worker lose money on this job, or increase their profit through their own efficiency? → Leans contractor
- Is this work a core, ongoing part of your business, done alongside employees under the same supervision? → Leans employee
If you determine the person is a genuine employee, the Canadian New Employee Setup Checklist covers the paperwork (TD1, direct deposit, CPP/EI setup). If they’re a genuine contractor, the T4A Contractor Compliance Checklist covers year-end reporting. Running payroll south of the border too? The IRS uses a similarly structured but legally distinct test — see 1099 vs. W-2.
Sources
- Canada.ca, Employee or Self-employed — the CRA's official guidance on the four-factor classification test
- Canada.ca, Request a CPP/EI ruling — how to request an official CRA determination, and what it covers
- Canada.ca, Form CPT1 — the official form for requesting a CPP/EI ruling
- Canada.ca, When to register for and start charging the GST/HST — the $30,000 small-supplier threshold
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