Subcontractor vs Employee: How the CRA Decides (for BC Trades)

The CRA determines whether a worker is a subcontractor or an employee by weighing four main factors: control, ownership of tools, chance of profit and risk of loss, and integration into the business. Getting this wrong can expose a trades business in Abbotsford or the Fraser Valley to years of back source deductions, CPP contributions, EI premiums, and significant penalties.

Why This Distinction Matters

Many trades businesses across the Fraser Valley pay workers as subcontractors, issuing T4As instead of T4s, collecting no source deductions, and remitting no employer payroll contributions. This arrangement is straightforward and reduces administrative burden. But if the CRA reviews the working relationship and reclassifies those workers as employees, the consequences fall primarily on the payer.

What a Reassessment Can Cost You

• Back source deductions — the employer becomes liable for income tax that should have been withheld from each pay period, up to the statutory limitation period.

• Employer CPP contributions — both the worker's and employer's share of Canada Pension Plan contributions for every affected year (confirm for the current tax year).

• EI premiums — both shares of Employment Insurance premiums, plus interest from the date each amount was due.

• Penalties — the CRA can assess gross negligence penalties if the misclassification is deemed careless.

• Director liability — if the business is incorporated, directors can be held personally liable for unremitted source deductions.

The reassessment period can reach back several years for most employers, and longer where misrepresentation is found. For a trades company running five to ten workers, the cumulative exposure can be substantial.

The Four Factors the CRA Uses to Decide

CRA rules do not rely on a single test. Instead, the CRA applies a multi-factor analysis drawn from court decisions and its own administrative guidance, most notably the publication Employee or Self-Employed? (RC4110). Every factor is weighed together; no single factor is automatically decisive.

1. Control

The central question is: who controls how, when, and where the work is performed, not just what the final result must be.

• Does the payer set the work schedule, start times, and daily methods?

• Must the worker follow specific instructions on technique, sequence, or process?

• Can the payer discipline the worker or require attendance at training?

A true subcontractor typically decides how to complete the job and is accountable for the result, not the process. A framing crew that shows up at the time and sequence directed by the general contractor, using the GC's preferred methods, may look more like employees under this factor.

2. Ownership of Tools and Equipment

If the worker provides their own tools, vehicle, and materials at their own cost and risk, that points toward self-employment. If the payer supplies the tools or requires the use of company vehicles and equipment, that points toward employment.

In the trades, this factor is nuanced. A plumber who owns their own van, pipe cutters, and specialty equipment is in a different position than a labourer who shows up and uses the site's scaffolding, lift equipment, and materials exclusively supplied by the contractor.

3. Chance of Profit and Risk of Loss

A true business owner can make more money by working efficiently, bidding well, and managing costs. They can also lose money on a bad job. Ask:

• Does the worker quote fixed-price contracts, or are they paid an hourly rate regardless of how long the job takes?

• Can the worker profit from hiring their own helpers or completing work more efficiently?

• Is the worker exposed to the cost of redoing deficient work at their own expense?

• Does the worker carry their own general liability insurance and WorkSafeBC coverage?

A worker paid a flat hourly rate, guaranteed a set number of hours per week, with no exposure to loss, has little economic risk, a strong indicator of employment.

4. Integration

Is the work integral to the payer's business, or is it an ancillary or distinct service? This factor asks whether the worker's services are performed as part of the business, or for the business as an outside supplier.

An electrician who works exclusively for one general contractor, is introduced to clients as part of that company's team, and cannot work for competitors during the engagement looks integrated into the business, closer to an employee.

Common Scenarios in BC Trades

The Sole-Proprietor Trade Contractor

A plumber or HVAC technician operating as a sole proprietor with their own GST number, their own tools and vehicle, their own liability insurance, who quotes their own jobs and works for multiple clients, is generally a legitimate subcontractor. The fact pattern supports self-employment across most of the four factors.

The Always-Available Labourer

A labourer who works exclusively for one roofing company, five days per week, using the company's tools and truck, following the foreman's daily direction, and paid hourly, regardless of what the contract is called, is likely an employee under CRA rules. The label on the contract does not override the actual working relationship.

The Incorporated Worker

Some tradespeople incorporate and bill through their corporation. This adds a layer of complexity. While it does not automatically make someone a legitimate subcontractor, it is a relevant factor in the analysis. However, the CRA can still look through the corporate structure if the economic substance of the relationship resembles employment. This is an area where proper structuring and documentation matter significantly.

What Payers (Contractors and GCs) Should Do

• Review every working relationship against the four factors before deciding how to classify a worker.

• Use written agreements that accurately reflect the actual terms: fixed-price scope, right to subcontract, responsibility for deficiencies, worker-supplied tools and insurance.

• Do not require exclusivity if you intend to treat someone as a subcontractor, an exclusive arrangement is a strong indicator of employment.

• Verify WorkSafeBC and liability coverage for anyone you classify as a subcontractor.

• File T4As accurately and on time (confirm the current reporting threshold and deadline for the current tax year).

• Obtain a CRA ruling if uncertain. A payer or worker can request a ruling using Form CPT1, which provides certainty and protects against retroactive reassessment for the period covered.

What Workers Should Know

• If you are classified as a subcontractor, you are responsible for remitting your own income tax instalments, CPP contributions as a self-employed person (confirm current rates for the current tax year), and GST where applicable.

• In BC, GST (5%) applies to most trades services. PST (7%) may apply to materials depending on how your contracts are structured. There is no HST in BC.

• If you believe you are misclassified, you can request a ruling from the CRA using Form CPT1.

• Keep records that support your business status: multiple clients, your own insurance, separate business banking, and evidence of fixed-price contracts.

Red Flags the CRA Looks For

• A worker who works only for one payer, year after year

• Hourly pay with guaranteed minimum hours

• Payer-supplied tools, vehicle, and materials as the default

• No exposure to loss, deficiencies corrected at the payer's cost

• Worker integrated into the payer's organization or introduced as a team member to clients

• Contracts that say subcontractor but do not reflect the actual day-to-day arrangement

• No GST registration despite billing over the $30,000 small supplier threshold (confirm for the current tax year)

Frequently Asked Questions

Can a written contract make someone a subcontractor?

No. A written agreement is useful evidence, but the CRA looks at the actual working relationship, not just what the contract says. If the day-to-day reality resembles employment, the CRA can reclassify the worker regardless of the contract's label.

Who pays if the CRA reassesses and finds misclassification?

The payer is primarily liable. The CRA will typically assess the employer for unremitted source deductions, both the employer and employee shares of CPP, both shares of EI, plus interest and potential penalties.

Does incorporating change the analysis?

Incorporation is a relevant factor and adds legitimacy to a subcontracting relationship, but it is not a shield on its own. The CRA can look past the corporate structure if the substance of the arrangement resembles employment.

What is a CRA ruling and should I request one?

A CPT1 ruling is an official determination by the CRA on whether a specific worker is an employee or self-employed for CPP and EI purposes. It is binding on the CRA for the period it covers, which provides meaningful protection for both payers and workers who are uncertain.

Get Clarity Before a CRA Review Finds It First

Worker classification is one of the most common triggers for CRA reviews of trades businesses in Abbotsford and the Fraser Valley. A review after the fact is expensive, disruptive, and often avoidable with the right structure in place from the start.

EverStone CPA works with incorporated contractors, general contractors, and trades businesses across the Fraser Valley to review working relationships, assess exposure, and implement arrangements that are defensible under CRA rules. If you have workers whose status you are not confident about, get in touch to book a consultation before the CRA forms its own view.

Related reading

• What to do if the CRA audits your small business

• Do I need to charge GST as a contractor in BC?

• Tools and equipment write-offs for trades