Employee or Subcontractor? The CRA Rules Every Ontario Contractor Must Know

The employee vs. subcontractor question is one of the most consequential decisions an Ontario contractor makes when bringing someone on to help with the work. Get it right and you run a lean, efficient operation. Get it wrong and you could owe years of back payroll remittances, penalties, and interest — plus face an employment standards complaint you weren't expecting. Understanding how CRA determines employee vs. subcontractor status isn't just about tax strategy; it's about protecting your business from a liability that can compound quietly for years.

Why the Distinction Matters So Much

When someone works for your trades business as an employee, you are required to:

• Deduct and remit Canada Pension Plan (CPP) contributions — both the employee and employer portions
• Deduct and remit Employment Insurance (EI) premiums — plus pay the employer's 1.4x share
• Withhold and remit income tax on every paycheque
• Issue a T4 slip at year-end
• Comply with Ontario employment standards: vacation pay, statutory holiday pay, and termination notice

When someone works as a subcontractor, none of that applies to you. They invoice you, you pay them, and they are responsible for their own taxes, CPP, and EI. You may owe a T5018 slip (if you're in construction), but there are no source deductions.

This difference is so significant that some Ontario contractors are tempted to call everyone a subcontractor regardless of how the relationship actually works. CRA is well aware of this and actively audits worker classification in the construction industry.

CRA's Four-Factor Test

The Canada Revenue Agency — and the courts — look at the overall picture of the working relationship. There is no single test that determines the answer. Instead, CRA applies a four-factor framework that emerged primarily from the Supreme Court of Canada's decision in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (2001). That case established that the central question is: whose business is it? Is this person in business for themselves, or are they working as part of your business?

The four factors used to answer that question are:

Factor 1: Control

Does your business control how, when, and where the work is done — or does the worker control their own methods? An employee typically works set hours you establish, follows your instructions on how to perform tasks, and works under your supervision on site. A subcontractor is engaged to produce a result: they frame the basement, they install the panel, they finish the drywall. How they do it and when they show up is largely up to them, within the parameters of the project.

Red flag: if you're telling someone what time to arrive, what order to do tasks in, and supervising their every move, CRA will likely see that as an employment relationship.

Factor 2: Ownership of Tools and Equipment

Does the worker supply their own tools, equipment, and vehicle? A genuine subcontractor typically arrives with their own tools of the trade. An electrician sub should have their own electrical tools; a plumber sub should have their own pipe equipment. If you're supplying all the tools and the worker simply shows up with their hands, that's a strong indicator of employment.

This factor is less determinative in industries where specialized equipment is necessarily rented or shared, but in most trades contexts, tool ownership matters.

Factor 3: Chance of Profit and Risk of Loss

Can the worker make more money by being efficient and taking on more jobs? Can they lose money if they underbid a job or make a mistake that requires a do-over? A subcontractor operates with genuine business risk: they quoted $4,500 to do the rough-in, and if it takes longer than they planned, that's their problem. They also have upside: by being efficient and running multiple jobs, they can increase their earnings.

An employee, by contrast, gets paid their hourly rate or salary regardless of efficiency. They don't bear the financial risk of the job going sideways. If the person you're paying has no skin in the game — no risk of loss and no real chance of profit beyond their daily rate — that's an employment indicator.

Factor 4: Integration

Is the worker's business activity integrated into your business, or do they operate independently? A subcontractor typically has multiple clients, markets their own services, has their own business name, and is not dependent on your business for all their income. An employee's work is fully integrated into the employer's business — they don't have other clients, and the work they do is an extension of your business operation rather than a separate enterprise.

Signs Someone IS an Employee

• You set their hours and schedule
• You supply the tools and materials (beyond what's included in a subcontract scope)
• They work exclusively for your business
• They have no financial risk — they earn the same whether the job goes well or not
• They don't market themselves or have other clients
• The work they do is your core business activity, performed the same way your employees do it

Signs Someone IS a Subcontractor

• They set their own schedule within project deadlines
• They supply their own tools and equipment
• They have multiple clients and market their own services
• They carry their own liability insurance
• They charge GST/HST on their invoices (indicating their own registered business)
• They can subcontract the work to someone else without your approval
• They bear financial risk if the job goes over budget

What Happens If CRA Decides You Got It Wrong

A misclassification ruling from CRA is expensive. The agency can reassess up to three years back — or further if they believe there was misrepresentation. You'll owe:

• The employer's share of CPP you should have remitted
• The employer's share of EI premiums (1.4x the employee's share)
• The income tax that should have been withheld, plus interest
• Late-filing and failure-to-remit penalties

For a trades business in Ontario that has been paying three or four workers as subs when they were actually employees — over three years — this can easily run into five figures. And that's before any employment standards liability under Ontario's Employment Standards Act for vacation pay, statutory holidays, and termination entitlements.

Practical Steps to Protect Your Business

Use a written subcontractor agreement. Every subcontractor relationship should be documented. The agreement should clearly describe the scope of work, confirm the sub is operating as an independent business, require them to carry their own liability insurance, and state that they are responsible for their own taxes. A written agreement doesn't override CRA's analysis of the actual relationship, but it's an important piece of evidence that the parties understood this was a subcontract.

Require a GST/HST number. A legitimate subcontractor providing more than $30,000 in services per year is required to be registered for GST/HST. If someone is invoicing you but not charging HST and has no HST number, that's a concern. Ask for their Business Number before you start paying them.

Keep records of their other clients. You don't need a list, but it's worth knowing whether your subs work for other contractors. If you have a worker who is exclusively dependent on your business year over year, the relationship deserves a closer look.

For Ontario contractors in Barrie and across Simcoe County who use subcontractors regularly, having a bookkeeper who understands how to document and track these relationships is valuable. At Moyano & Co., we help trades businesses set up their subcontractor files properly from the start — collecting the right information, flagging relationships that may carry classification risk, and keeping records that stand up to scrutiny.