Employee or Subcontractor? The CRA Test Every Canadian Trade Business Needs to Know

Why this question costs contractors thousands

A three-truck plumbing shop outside Barrie hired a fourth plumber last spring and called him a subcontractor. Cash rate, no source deductions, a one-page agreement the owner wrote himself. The plumber drove the shop's spare truck, wore the shop's shirts, and took his jobs off the shop's dispatch board every morning.

Eighteen months in, the owner opens an envelope from the CRA. The agency has reviewed the arrangement and reclassified the plumber as an employee for the entire period. Back CPP contributions (both halves), back EI premiums (both halves), interest, and a penalty that is a percentage of the whole bill.

The cheque clears four figures. For a two-year-old shop with two other techs on payroll, that is the summer's profit.

Worker classification is not a form question. It is a structural one. The CRA does not care what the contract calls the worker. It looks at the working relationship and decides for itself. If you are about to hire your first helper, or your third, this is the piece you need to get right before the work starts.

The four-part CRA control test (plain English)

The CRA does not have a single bright line. It uses four factors together, weighed against the whole relationship. No single factor decides the answer, but you can usually see which way a relationship is leaning once you walk through all four.

Control. Who decides when, where, and how the work gets done. An employee shows up when you tell them to, takes the jobs you assign, and does them the way you taught them. A real subcontractor decides their own hours, picks which jobs they want, and uses their own methods. If you dispatch someone every morning at 7 AM, hand them a route, and tell them the job is done when you say it is done — that is control, and control points to employee.

Ownership of tools. Who provides the truck, the gear, the software, the uniforms. A real subcontractor shows up with their own van, their own torches, their own snakes, their own phone, their own invoicing tool. If you provide the truck and the ladder rack and the tablet running your field app, you are providing the means of production, and that points to employee.

Chance of profit and risk of loss. Can the worker actually lose money on a job. A subcontractor who quotes a fixed price for a furnace install can finish under budget and pocket the difference, or blow the quote and eat the loss. An hourly worker cannot. If the only outcome of a rough day is that the worker still gets their hourly rate, there is no real risk of loss, and that points to employee.

Integration. Is the worker running their own business or are they part of yours. A subcontractor has other customers, their own business name, their own insurance, their own marketing, their own GST/HST number. They answer a call from your shop the same way they answer a call from any other shop. If a worker's entire workweek lives inside your dispatch board, shows your logo to customers, and has no other clients — they look integrated into your business, and that points to employee.

Each factor on its own rarely decides it. The pattern across all four usually does.

Red flags: when your "subcontractor" is actually an employee

If you already call someone a sub, run them against this list. These are the patterns CRA auditors look for first.

• You dispatch them daily — they don't pick their own jobs, they take what your office assigns.
• They wear your uniform or your logo when talking to customers.
• They drive your truck and use your tools.
• You are their only customer, or close to it.
• You pay them an hourly rate instead of a per-job or fixed-price quote.
• They can't send a substitute — if they are sick, the work doesn't happen, because the arrangement is personal to them.
• They have been with you full-time for more than a year without ever invoicing another client.
• Their "invoice" to you is a timesheet with hours on it, not a quote and a job number.

The 80% rule is a useful gut check. If more than 80% of a "sub's" income for the year comes from your shop, the CRA is far more likely to look at the relationship as employment. It is not a hard legal threshold, but it is a visible pattern in the data the CRA already has — and it is a signal that the four-part test is probably leaning employee anyway.

One or two red flags does not automatically mean misclassification. Four or five means you should stop and get advice before the next pay cycle.

What changes on paper: T4 vs T4A vs T5018

Once you know which side of the line the worker sits on, the paperwork follows a clear split.

Employee — T4. You withhold income tax, CPP, and EI from every pay. You remit those to the CRA on your payroll schedule. You pay the employer share of CPP and EI on top of the wage. You register the worker for WSIB (Ontario), WCB (most other provinces), or CNESST (Quebec). At year-end you issue a T4 slip. This is the most administrative path, but it is also the clearest.

Independent subcontractor in most trades — T4A. For service businesses outside construction, you issue a T4A — Statement of Pension, Retirement, Annuity, and Other Income — for any sub you paid more than $500 to during the calendar year. No source deductions, no employer CPP or EI. The sub handles their own taxes.

Construction-industry subcontractor — T5018. This is the one most trade businesses miss. If your shop's primary business activity is construction (and that includes most plumbing, electrical, HVAC, roofing, framing, drywall, painting, and general contracting), the CRA requires a T5018 — Statement of Contract Payments — for any subcontractor you paid more than $500 for construction services during your fiscal year. T5018 replaces the T4A for construction subs. Not in addition to. Instead of. Filing both, or filing the wrong one, is a common source of CRA correspondence. The slip also has its own filing deadline that is tied to your fiscal year-end, not the calendar year.

On top of the federal slip, the worker's status flips their provincial coverage. In Ontario, employees need WSIB coverage from day one, and construction subs generally need their own WSIB clearance certificate before you pay them. In most other provinces, the equivalent is WCB. In Quebec, it is CNESST. The rate, the clearance rules, and the deadlines vary by province. When a construction sub's GST/HST registration number matters for your invoice math, how to invoice GST and HST correctly has the full province-by-province breakdown.

The subcontractor paperwork checklist

Before a subcontractor starts work, and definitely before you pay the first invoice, you should have five things on file.

Signed written subcontractor agreement. Not a handshake, not an email. A real contract that names the scope of work, the pricing structure (per-job or fixed-price, not hourly), the sub's responsibility for their own taxes and insurance, the right to send a substitute, and a clean termination clause. The agreement is your first line of defence in an audit — it shows intent and documents how the relationship is actually supposed to work.

Sub's GST/HST registration number. Any sub whose worldwide taxable revenue crossed $30,000 over four consecutive calendar quarters must be registered. If they are charging GST/HST on their invoice without a number on it, something is wrong. If they are not charging it at all, confirm they are actually under the GST/HST registration threshold — you don't want to be the customer on an invoice that gets amended six months later.

WSIB, WCB, or CNESST clearance certificate. In most provinces, if you pay a construction sub without a current clearance certificate on file, you can be held liable for their unpaid premiums. Clearance certificates have expiry dates. Get a fresh one before every job or at minimum every 90 days.

Sub's own commercial general liability insurance certificate. Minimum $2M is standard in most trades, $5M on larger commercial work. Ask to be named as an additional insured on the policy. If the sub damages a customer's property, you want it to hit their insurance before it touches yours.

T5018 tracking through the year. Don't try to reconstruct a year of payments in February. Log every payment to every construction sub as you pay it, with their legal name, business number, and amount, so the T5018 filing at year-end is a report run, not a weekend's work.

How to fix a misclassification (without making it worse)

If you have been treating someone as a sub and the four-part test says they are really an employee, the fix is not complicated, but the order matters.

Pick a clean date going forward. From that date on, put them on payroll as an employee with proper source deductions, T4 setup, and WSIB or WCB coverage. Tell them why the change is happening in plain terms — the arrangement wasn't structured right, and you are fixing it before CRA does.

For the back period, talk to your accountant before you file anything. There are voluntary disclosure programs that can reduce penalties if you come forward before the CRA asks. There are also cases where the back-period exposure is smaller than a contractor fears. Either way, you want a real assessment of the number before you move money.

What not to do: issue the same person both a T4 and a T4A or T5018 for the same calendar year without a clean break between the two arrangements. That pattern — part-year sub, part-year employee, same work, no change in the relationship — is exactly what the CRA flags in its cross-referencing. The clean break matters. Put it in writing.

What your software should be doing for you

Tracking the difference between employees and subcontractors is a data problem, not a paperwork problem. Every sub has a classification status, a GST/HST registration number, a WSIB or WCB clearance date, an insurance certificate expiry, and a running T5018 total for the year. Every employee has payroll settings, source deduction history, and a T4 total. None of that should live in a CRM notes field or a shared spreadsheet.

Good field software should treat worker classification as a first-class field. It should flag you when a sub's clearance certificate is about to expire, warn you before a payment that would push the sub past $500 and trigger a slip, and roll up the T5018 totals for your accountant without a manual export. Your accountant confirms the filings. Your software should give them a clean list to confirm from.

Fixtor is built for Canadian contractors. Subcontractor records include classification, GST/HST number, WSIB/WCB clearance dates, insurance expiry, and a running T5018 total per fiscal year. Fixtor is free for solo contractors, and the year-end questions we hear most often are answered in our Canadian tax FAQ.

This article is general information, not tax or legal advice. CRA rules and provincial regulations change. Verify current rules with CRA and your accountant before making classification decisions.