Subcontractor or employee? CRA’s tests for construction businesses

In construction and the trades, “he’s a sub, not an employee” is one of the costliest assumptions to get wrong. Status is decided not by a label or an invoice but by the working relationship, using tests the CRA (and the courts) apply consistently. Get it wrong and the bill for missed source deductions can land on you, not the worker. This guide explains how the CRA weighs the question and how to keep your classifications defensible.

Why subcontractor or employee is the question that matters

When you pay an employee, you withhold and remit source deductions — income tax, Canada Pension Plan contributions and Employment Insurance premiums — plus the employer’s share. A genuine subcontractor handles their own taxes and CPP. That is why misclassification is costly: if the CRA rules a “subcontractor” was really an employee, your business can be assessed for the CPP contributions and EI premiums that should have been withheld, often both portions, plus interest and potential penalties. The worker keeps what they were paid; the shortfall is yours.

The factors the CRA weighs

There is no single deciding factor and no points formula. The CRA looks at the whole relationship through several lenses: The same test decides fee-split arrangements in group therapy and counselling practices.

• Control — who decides how, when and where the work is done? The relevant question is the payer’s right to control the work, not whether they use it. Detailed direction and set hours point toward employment; a worker who sets their own methods points toward self-employment.
• Tools and equipment, a worker who supplies their own significant tools, equipment and workspace, and bears the cost of maintaining them, looks self-employed. Being provided everything points to employment.
• Ability to subcontract or hire helpers, a genuine business can hire its own people or subcontract the job out. A worker who must do the work personally looks more like an employee.
• Chance of profit and risk of loss — can the worker actually profit or lose money based on how they run the work? Real financial risk — quoting fixed prices, covering their own costs, redoing defective work at their own expense — signals a business relationship.
• Integration — is the worker running their own business, or are they an integral part of yours? Someone who works only for you, under your brand, indefinitely, is harder to call independent.

No one factor wins on its own; the CRA weighs them together to see whose business the work really belongs to.

Intent and written contracts

The CRA also considers the common intention of both parties. A written contract stating a self-employed arrangement helps, but only if day-to-day reality matches it. If the work is performed like employment — your control, your tools, your schedule, no real risk to the worker, a “subcontractor agreement” will not change the answer. The strongest position is a written agreement that accurately describes how the work is done.

T5018, T4A or T4, which slip?

Once the relationship is clear, the reporting follows. Employees get a T4, with source deductions remitted through payroll. Construction businesses that pay subcontractors for construction services generally report those payments on a T5018 information return. A T4A covers certain other payments. Because the slip depends on the classification, the employee-versus-self-employed question always comes first — our guide to T5018 reporting for construction contractors covers the mechanics once you have it settled. The wider service for incorporated trades is on the contractor accounting page.

Fixing a misclassification

If you suspect misclassification, correct it proactively rather than wait for a review: move the worker onto payroll going forward, correct prior remittances and update the paperwork to match reality. If you are genuinely unsure, the CRA offers a ruling process on worker status, and a CPA who works with contractors and construction businesses can assess your arrangements before they become a problem.

Before the next crew member starts, it is worth being deliberate about the document you hand them. Employment contract vs contractor agreement covers what belongs in each — tools, subcontracting rights, insurance, GST/HST, and why a template that only recites “independent contractor” adds almost nothing.

The bottom line

Subcontractor or employee is a question of substance, not labels. Map each of your workers against control, tools, the ability to subcontract, chance of profit and integration; make sure your contracts describe what actually happens; and report on the right slip. Do that and your classifications hold up — leave it to a handshake and an invoice, and a single CRA review can turn years of “subs” into an assessment.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Worker classification turns on your specific facts — please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an Abbotsford small business accountant.

The same classification question decides which cross-border regime applies when the worker is a non-resident: Regulation 102 for employees, or Regulation 105 withholding for everyone else.