Employee vs independent contractor
Misclassification is the most common CRA enforcement target in self-employment. Whether you are an employee or independent contractor is a question of fact, not contractual labels — and getting it wrong creates back-taxes, penalties, and (if you contract through a corporation) the Personal Services Business trap.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact CRA. Read our editorial scope →
1. The Wiebe Door four-factor test
From Wiebe Door Services Ltd v MNR [1986] and confirmed in 671122 Ontario Ltd v Sagaz Industries [2001 SCC 59]: courts weigh four factors holistically.
- Control — who directs what, when, where, and how the work is done?
- Tools and equipment — who supplies them?
- Chance of profit / risk of loss — does the worker bear entrepreneurial risk?
- Integration — is the work an integral part of the payer's business?
2. Connor Homes intention overlay
1392644 Ontario Inc (Connor Homes) v MNR [2013 FCA 85] added a two-step approach: (1) the common intent of the parties at contract formation; (2) whether the objective facts (Wiebe Door factors) support that intent. Intention matters but cannot override clearly inconsistent facts.
3. The PSB trap at $120k — three-column comparison
| Item ($120k gross) | Employee | True contractor | PSB (CCPC) |
|---|---|---|---|
| Federal corp rate | n/a | 9% SBD | 33% (no SBD) |
| Deductible expenses | limited T2200 | full T2125 / corp | salary + benefits only (s.18(1)(p)) |
| CPP / EI | both halves via employer | CPP both halves; no EI | CPP via salary |
| Effective total tax | ~25–28% | ~15–25% deferred | ~45%+ (no integration) |
A Personal Services Business (s. 125(7)) is a CCPC where the worker would be an employee of the payer but for the corporation. Consequence: no SBD, restricted deductions (s. 18(1)(p)), additional 5% federal tax — total effective ~33% corporate rate, then dividend tax on extraction.
4. CRA ruling request — Form CPT1
Either worker or payer can request a binding CRA determination via Form CPT1. Used carefully it provides certainty; used carelessly it triggers reassessment.
5. Industry-specific enforcement
- Construction — CIS-style scrutiny on subcontractor classification
- IT — long-term single-client contractors prime PSB targets
- Beauty / hair — chair-rental documentation review
- Trucking — owner-operator vs employee driver
6. Three worked examples
Example A — clear contractor: graphic designer with five clients, owns laptop and software, invoices per project, works from home, declines additional clients to manage workload — contractor.
Example B — disguised employee: "contractor" working 9-5 at client's office for two years, supplied laptop and email, single client, paid weekly — employee in substance, despite contract.
Example C — PSB risk: developer incorporates, contracts solely to former employer at $130/hour, on-site, no other clients — meets PSB definition; corporate structure loses SBD and deductions.
7. Misclassification consequences
For the payer: back CPP/EI both halves, interest, gross negligence penalty (50% where applicable). For the worker: reassessment of business expenses, CPP reclassification, potential loss of HST collection treatment.
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