How does the CRA decide whether a worker is an employee or an independent contractor?
As of 2026, the CRA classifies a worker in two steps: what the payer and worker intended, then whether six factors back that up: control, tools and equipment, subcontracting, financial risk, investment and management, and opportunity for profit. Quebec contracts follow the Civil Code instead. Either party can request a CPP/EI ruling by June 29 of the following year.
What are the six factors, and which way does each point?
Outside Quebec the CRA uses a two step approach. Step one asks whether the parties intended an employment relationship (a contract of service) or a business relationship (a contract for services), using the written contract and how they actually behave. Step two checks the real working conditions against that intent, factor by factor and then as a whole. The status has to match reality, so a contract that calls someone a contractor doesn't settle it canada.ca.
| Factor | Points to an employee | Points to an independent contractor |
|---|---|---|
| Control | Payer sets the work, methods and pay, has the final word, and must approve outside work | Works without supervision, picks when and for whom to work, can refuse jobs |
| Tools and equipment | Payer supplies most tools and pays repairs and insurance, or reimburses the worker | Worker owns the tools, pays upkeep and insurance, has a significant investment and own workspace |
| Subcontracting or hiring helpers | Must do the work personally, can't send a replacement | Can hire and pay helpers or substitutes, payer has no say in who |
| Financial risk | No operating costs, expenses reimbursed, no liability if the work falls short | Pays unreimbursed costs, hired for a specific job, liable for nonperformance, advertises |
| Investment and management | No capital in the business, no business presence | Capital investment, manages staff, established business presence |
| Opportunity for profit | Paid by the hour, day or week, gets pension, group health or dental plans | Flat fee with own expenses, can profit or lose by controlling income and costs |
On control, the CRA looks at the payer's right to control the worker, whether or not the payer uses it, and at control over the worker rather than over the finished result. An expert who needs no daily direction can still be an employee. Commissions, piece rates and bonuses don't create an opportunity for profit, because higher earnings aren't profit canada.ca.
The CRA frames the central question as whether the person was hired to perform services as an employee or as someone running a business on their own account canada.ca. The Income Tax Act gives little help: its definition in s.248(1) says only that an employee includes an officer
laws-lois.justice.gc.ca.
Which law applies, and how is Quebec different?
Start with where the contract was formed. Common law applies to contracts formed outside Quebec, and the Civil Code of Québec (articles 2085 to 2129) applies to contracts formed in Quebec. A contract is generally formed where the offeror receives the acceptance, usually where the payer is, unless the contract says which law governs. The CRA's own example: a worker in Ontario contracting with a Quebec payer who received the acceptance in Quebec falls under the Civil Code canada.ca.
In Quebec the test has three steps: the parties' intention, then the Civil Code factors (carrying out the work, remuneration and the relationship of subordination), then a comparison of the intention with the actual relationship. Subordination is the factor that separates the two contracts, since work and pay exist in both. Signs of an employee include a payer who controls absences, sets the schedule and conduct rules, can discipline, requires activity reports, demands exclusive services or imposes a noncompetition clause. When subordination is hard to call, the CRA says you can also look at the common law indicators in the table above canada.ca.
The CRA also publishes guidance for specific trades, including construction workers, couriers, IT consultants, real estate agents, truck drivers, barbers and hairdressers, and says to review it before deciding canada.ca.
How do you get a CPP/EI ruling, and how do you appeal one?
A ruling is an official CRA decision on whether the worker is an employee and whether the work is pensionable, insurable or both. A payer or a worker can ask, and Service Canada and the CRA can ask for their own program purposes canada.ca. The deadline is June 29 of the year after the year in question, so a 2025 question had to be filed by June 29, 2026; a weekend June 29 rolls to the next business day. Service Canada and the CRA aren't bound by that date
canada.ca.
| Step | How | Time limit |
|---|---|---|
| Request a ruling (payer) | My Business Account, under Payroll, "Request a CPP/EI Ruling" | June 29 of the following year |
| Request a ruling (worker or payer) | My Account, "Request a CPP/EI Ruling" | June 29 of the following year |
| Request as a representative | Represent a Client, same option | June 29 of the following year |
| Request by mail | Form CPT1 or a letter to the CPP/EI Rulings Division of the tax services office | June 29 of the following year |
| Appeal a ruling | Online, Form CPT100, or a letter to the chief of appeals | 90 days after notification |
| Appeal a payroll assessment | Online, Form CPT101, or a letter | 90 days after notification |
| Appeal to the Tax Court of Canada | File with the Tax Court | 90 days after the Minister's decision |
The request methods come from the CRA's ruling page, which names Form CPT1 as the mail option; the mailing addresses are on the form canada.ca. CPT1 can be completed by the worker, the payer or an authorized representative
canada.ca. Appeals of a ruling are open to the worker, the payer or ESDC, and the Tax Court appeal step follows the Minister's decision
canada.ca. A ruling that isn't appealed is final
canada.ca.
What does it cost when a contractor is ruled an employee?
The payer owes both the employer and employee shares of CPP and EI that should have been deducted, plus penalties and interest canada.ca. The statutes say the same: CPP Act s.21(2) and EI Act s.82(4) make the employer liable for the whole amount. The employer can claw back the employee share only from pay made within 12 months of the payment it missed (CPP s.21(4), EI s.82(6)), which is no help once the worker is gone
laws-lois.justice.gc.ca
laws-lois.justice.gc.ca.
Worked example: your client paid an Ontario worker $60,000 in fees during 2026 with no deductions, and the CRA rules the worker an employee. The contract ended, so nothing can be recovered from later pay.
| Item | Math | Amount |
|---|---|---|
| CPP, employee share | ($60,000 minus $3,500) at 5.95% | $3,361.75 |
| CPP, employer share | Same as employee | $3,361.75 |
| EI, employee share | $60,000 at 1.63% | $978.00 |
| EI, employer share | 1.4 times $978.00 | $1,369.20 |
| Total CPP and EI the payer owes | $9,070.70 |
The 2026 inputs are the $3,500 basic exemption and 5.95% CPP rate (earnings stay under the $74,600 YMPE, so no CPP2) canada.ca and the 1.63% EI rate under the $68,900 maximum, with the employer at 1.4 times
canada.ca. See CPP max 2026 and EI max 2026 for the full figures.
Income tax is on top. Under ITA s.227(8), failing to withhold as s.153(1) requires carries a penalty of 10% of the amount that should have been withheld, rising to 20% for a repeat failure in the same year made knowingly or through gross negligence laws-lois.justice.gc.ca. Interest runs on all of it.
Incorporating or supplying tools does not make a worker a contractor
Incorporating doesn't fix it. If the worker bills through a corporation in which they or a related person hold 10% or more of any class of shares (a specified shareholder) and would reasonably be regarded as an employee but for the corporation, the corporation may be carrying on a personal services business under ITA s.125(7), unless it has more than five full time employees throughout the year or is paid by an associated corporation laws-lois.justice.gc.ca. The tax hit of that is covered in personal services business.
Tools alone don't decide it. The CRA notes that many employees, tradespeople among them, supply their own tools; what matters is a significant investment and who bears replacement, repair and insurance canada.ca.
Employee status and insurable employment are separate questions. A ruling covers both whether the worker is an employee and whether the work is pensionable, insurable or both, which matters for related workers and shareholders; see EI insurable employment for shareholders.
For a genuine contractor, deduct nothing: no CPP, EI or income tax. Report fees for services in box 048 of a T4A when the year's total passes $500 canada.ca. Filing dates are in T4A deadline.
Old files may cite Guide RC4110. The CRA cancelled it on January 30, 2026 and replaced it with web pages on employment status canada.ca. The factors carried over, so the substance of an RC4110 analysis still holds, but cite the current pages
canada.ca.
Sources
Does a signed independent contractor agreement settle it?
No. The contract is evidence of intent, which is only step one; the CRA then checks whether the actual working conditions match it, and the real relationship wins canada.ca.
Can my client ask for a ruling on a worker from three years ago?
No. A payer or worker has until June 29 of the year after the year in question, so in October 2026 the earliest year still open is 2026 itself. The CRA and Service Canada can still rule on older years for their own purposes, for example during an audit canada.ca.
Who pays if the worker was already paying both halves of CPP as a contractor?
The payer still owes both shares of CPP once the worker is ruled an employee. The worker's own contributions were worked out on Schedule 8 of their T1 as self employment CPP canada.ca, so their side is fixed by asking the CRA to change that filed return; the CRA says a worker can include a copy of the ruling letter with a change request
canada.ca.
Is the test different for EI than for CPP?
The employee or contractor test is the same one for both, applied through a single CPP/EI ruling. Whether that employment is pensionable or insurable is a second question the same ruling answers, and the two can differ canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.