If you run a small business in BC or elsewhere in Canada, you will eventually need to decide whether someone working for you is an employee or an independent contractor. Get it wrong and you can face back CPP and EI remittances, interest, penalties, and disputes with both the CRA and the worker.
This guide explains how the CRA decides, what you must do for each type of worker, and where BC rules add another layer. For related topics on sole proprietor tax, bookkeeping, and payroll, see our Small Business & Self-Employed hub.
Why classification matters
The label on your agreement does not control the outcome. The CRA looks at the facts of the working relationship.
For an employee, you generally must withhold income tax, CPP, and EI (where applicable), remit on schedule, issue a T4, and provide a Record of Employment when employment ends. You may also have obligations under BC employment law.
For a contractor, you usually pay an invoice and may need to report the payment on a T4A or, in construction, a T5018. You typically do not withhold CPP or EI on fees for services paid to a self-employed contractor, but the worker handles their own tax and CPP. If the CRA later decides the person was actually an employee, you can owe unpaid source deductions plus interest and penalties.
Misclassification is common when owners want flexibility or lower upfront cost. It is worth sorting out before you file, not after a CRA review.
How the CRA decides
The CRA uses a two-step approach set out in RC4110, Employee or Self-employed. First, what did the payer and worker intend when they made their agreement? Second, do the facts of the relationship match that intent?
The CRA examines the whole relationship. Common indicators include:
- Control over how, when, and where work is done
- Who owns or provides tools and equipment
- Whether the worker can subcontract or hire help
- Chance of profit and risk of loss
- How integrated the worker is in your business
You are more likely dealing with an independent contractor when the worker, for example:
- Agrees on results but controls how and when the work is done (within reason)
- Uses their own tools and equipment
- Invoices for services and is not on payroll with regular deductions
- Can profit or lose from the work
You are more likely dealing with an employee when you control how, when, and where the person works, pay them on a regular schedule with tax withheld, and treat them like other staff.
A written contract that says “independent contractor” does not override these facts. For a worker-focused look at CPP, EI, and deductions, see Employee or Contractor? on our site.
If they are an employee
Treat the person as an employee on payroll from day one unless you have a solid basis and documentation to classify them otherwise.
You generally must:
- Withhold income tax, CPP, and EI (where the employment is insurable)
- Remit source deductions to the CRA on the required schedule
- Issue a T4 and, when employment ends, a Record of Employment
- Keep payroll records that support remittances
In British Columbia, employment relationships are also governed by the Employment Standards Act. That can include vacation pay, termination notice or pay, and other standards that do not apply to true independent contractors.
If you are unsure how to set up payroll, see Should I Hire an Employee or a Sub-Contractor? for a practical hiring checklist.
If they are a contractor
True contractors usually invoice you. You pay the invoice (plus GST if they are registered and the service is taxable). You do not run them through payroll unless the facts show they are actually employees.
T4A reporting
When you pay fees for services outside an employment relationship, you may need to file a T4A. Under CRA guidance on payments of fees for services, a T4A is generally required when all of the following apply:
- The payment was not made to one of your employees
- The recipient provided a service for a fee
- The fee was actually paid
- You paid at least $500 in the year to that individual, trust, partnership, or corporation, or you deducted tax from the payment
Report eligible amounts in box 48 (Fees for services). Do not include GST/HST in the amount reported. Confirm current T4A rules on Canada.ca before you file.
Construction and T5018
If you pay subcontractors in construction, you may need to report on a T5018 when payments for construction services exceed CRA thresholds for the reporting period. Construction reporting has its own rules. Check the current T5018 guide rather than relying on old threshold figures.
GST
If the contractor is a GST registrant, you may pay GST on taxable services. Keep invoices for your records and for input tax credits if your business is registered.
BC reminders for business owners
Provincial rules sit alongside federal tax rules.
WorkSafeBC may require you to pay premiums on amounts paid to workers who are not independent businesses. That comes up often in construction and trades when a “contractor” is effectively working only for you, using your direction, and not running their own operation. Confirm registration and exemption rules for your sector on WorkSafeBC before you assume someone is an independent contractor.
Contractor tax in BC follows the same CRA classification tests as elsewhere in Canada, but local employment and workers’ compensation rules can still create cost and compliance surprises if you mislabel the relationship.
When you are not sure
Either the payer or the worker can request a CPP/EI ruling from the CRA. You can apply online through My Business Account or by filing Form CPT1. The CRA will review the facts and confirm whether the employment is pensionable, insurable, or both.
See How to ask for a ruling on Canada.ca for current steps. Getting a ruling before a dispute escalates is often cheaper than fixing several years of missed remittances.
If the arrangement is borderline, speak with an accountant before you put someone on invoice-only pay.
FAQ
Am I an employee or a contractor in Canada?
The CRA decides based on the facts of the relationship, not the label on a contract. It looks at control, tools, subcontracting, chance of profit and risk of loss, and how integrated the worker is in the business. See RC4110 and our Employee or Contractor? article for the tests from a worker’s perspective.
Can a written contract make someone a contractor?
No. A contract helps show intent, but the CRA will still review what actually happens day to day. If the facts look like employment, calling the person a contractor in writing will not protect you from payroll obligations.
What if I misclassify a worker?
The CRA can reassess you for unpaid CPP, EI, and income tax withholdings, plus interest and penalties. The worker may also dispute their status. Fixing the setup early, or requesting a CPP/EI ruling when unsure, reduces that risk.
Do I withhold tax from contractors?
For most Canadian resident contractors paid fees for services, you generally do not withhold CPP or EI. You may need to file a T4A when payments meet CRA reporting rules (typically $500 or more in fees for services in a year, or if you deducted tax). Non-resident contractors and some other situations follow different rules.
Next Steps
Employee versus contractor is a fact question with real payroll and reporting consequences. Review each working relationship against CRA guidance, document how the person actually works, and set up payroll or contractor reporting correctly from the start.
For more on hiring decisions and BC obligations, see Should I Hire an Employee or a Sub-Contractor?. For contractor and sole proprietor tax topics, visit our Small Business & Self-Employed hub.
If you want help classifying a worker, setting up payroll, or cleaning up a past arrangement, contact RHN to discuss your situation.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation. Please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.
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