Subcontractor or employee? What decides it, and what a wrong answer costs

What the invoice calls someone does not decide their status. CRA looks at how the working relationship actually ran, and if it concludes the person was an employee, the bill lands on the payer for money already paid out. CRA's page on the impact of employment status says it in one sentence: "An employer who fails to deduct the required CPP contributions or EI premiums must pay both the employer's share and the employee's share of any contributions and premiums owing, plus penalties and interest."

Both shares. On payments that went out the door months or years ago, to a worker who has moved on. The employee's half is recoverable in theory. It is not recovered in practice.

Why the question bites harder in construction

Most industries answer this for one agency. A trades or construction business answers it for three, and all three are reading the same list of names.

The people you pay as subcontractors are the people who go on your T5018 return. That return tells CRA exactly who you treated as a business and what you paid them, which means the classification decision is already documented and filed before anyone asks about it. The same names drive your WSIB position, where a principal who directly retains a contractor has to hold a clearance certificate before the work starts and can be left carrying that contractor's unpaid premiums up to the labour portion of the contract. We cover that side in our post on WSIB coverage for Ontario trades.

Ontario's Employment Standards Act is the third. The ministry's guidance on employee status states that "employers are not allowed to treat employees covered by the Act as if they are not employees," and that an employment standards officer "can issue a notice of contravention that results in a penalty, a prosecution or both against the employer." The officer can also order the entitlements that were never paid: overtime, vacation pay, public holiday pay.

The trigger is usually not an audit. A worker whose winter work dried up applies for employment insurance, Service Canada asks how the arrangement worked, and a file opens from there.

The two-step approach CRA applies

For a contract formed anywhere outside Quebec, CRA uses a two-step approach built on common law principles and case law. A contract formed in Quebec goes through a three-step civil law analysis instead, which matters if you are bidding work across the river.

Step one is intent. What did the worker and the payer actually agree to? A written agreement, how the parties described the arrangement to each other, and how they behaved all speak to this.

Step two is whether the facts back it up. CRA's guidance on determining employment status puts the limit on step one plainly: "Workers and payers can choose how they set up their affairs; however, the employment status they choose must reflect their working relationship." And: "All of the facts, including the actual terms and conditions of employment, determine a worker's employment status, not just the intention."

At step two CRA works through six categories. Control over the work. Ownership of tools and equipment. Whether the worker can subcontract the job or hire their own assistants. Financial risk. Responsibility for investment and management. Opportunity for profit. Each is examined on its own, then the whole picture is weighed against what the parties said they intended.

Anyone who researched this before 2026 will have read a different framing. CRA's long-running guide RC4110, Employee or Self-employed?, was cancelled as of January 30, 2026 and replaced by the employment status pages. A great deal of the advice still circulating, including summaries that describe four tests with "integration" as one of them, is built on the withdrawn guide.

Working the categories properly takes one relationship at a time, which is why we built a separate subcontractor or employee check. It runs the factors in order, shows which way each one points for that specific worker, and gives you something to put in the file.

What a reclassification costs, at 2026 rates

Take one framer paid $75,000 in 2026 who is reassessed as an employee.

That is one worker, one year, before income tax that should have been withheld, before the penalty for failing to deduct, and before interest compounded daily from each remittance date that was missed. Two workers across three years is just over $67,000 on the same arithmetic. The current CPP and EI figures also sit on our 2026 rates page.

There is a sales tax tail as well. If that framer billed $75,000 plus 13% HST, you claimed $9,750 in input tax credits on invoices for what CRA has now decided was employment. Wages do not attract HST. That question does not resolve itself.

What helps, and what people wrongly think settles it

Documentation that carries weight, because it evidences a real business on the other side of the transaction: a scope-based agreement priced as a job rather than as hours, invoices the subcontractor writes themselves referencing a job and a scope, a verified HST registration number, a WSIB clearance certificate pulled before the start and again at each renewal, a certificate of insurance, and evidence the worker has other customers.

Four things people believe are decisive and are not:

• A written subcontractor agreement. It is evidence at step one. If the day-to-day reality contradicts it, the reality wins, and a carefully drafted agreement describing a relationship that does not exist reads badly.
• The worker having a business number. A BN is issued on request. It says nothing about how the work was controlled or who carried the risk.
• The worker asking to be paid this way. Preference is relevant to intent and decides nothing at step two.
• Having the worker incorporate. This can create a worse problem. A one-person corporation working for a single payer can fall inside the personal services business rules, which deny the small business deduction and the general rate reduction, apply an additional 5% federal tax, and disallow most ordinary deductions.

Asking CRA for a ruling

Where a relationship genuinely sits on the line, either the payer or the worker can ask for a binding answer. A payer requests it through My Business Account by selecting "Request a CPP/EI Ruling" under Payroll. A worker uses My Account. An authorized representative uses Represent a Client. Anyone can instead write a letter or complete Form CPT1 and mail it to the CPP/EI Rulings Division at the tax services office for their province.

There is a clock on it. CRA's guidance is that "a payer or worker can ask for a ruling by June 29 of the year after the year the question relates to." Miss that and you are dealing with the question retroactively, on CRA's timing rather than yours.

Fixing it forward

Where a worker is plainly an employee, moving them onto payroll for the next pay period caps the exposure at what has already happened. Every additional cycle adds another month of both shares plus interest. That is the single cheapest decision available on this topic, and it costs nothing but the conversation.

Two boundaries worth naming. If you disagree with how WSIB has classified your business, that goes through WSIB's own objection and appeals process rather than through your accountant. If the dispute is about the employment contract itself, termination, or amounts claimed under the Employment Standards Act, that belongs with an employment lawyer.

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General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.