Is your new hire an employee or a contractor (self-employed)? And why does it matter?

For one, the rules affect a person’s entitlement to employment insurance (EI) and how that person is treated under other legislation such as the Canada Pension Plan (CPP) and the Income Tax Act.

Second, if an employer fails to deduct and remit CPP contributions or EI contributions because they treat them as a contractor when in fact the person is an employee often result in audits with amounts owed plus penalties and interest. Getting it right helps with staff retention, improve profitability and reduce audit risks.

Who is this for?

  • Startups to established businesses

  • Employers

  • Self-employed individuals

Keep reading if you’re…

  • Uncertain about the rules about the status of people working in your business

  • Having staff ask about Canada Pension Plan (CPP) or Employment Insurance (EI)

  • Unsure who is taking on the risk of profit and losses

TLDR: Having employees comes with the need to understand and apply regulatory rules. Contractors may require less paperwork and oversight but comes with different risks. Understanding the rules is the first step with bringing people onboard your business.

How do you determine if person is an employee or not?

The key question to ask:

Is the person to carry out services as a person in business on their own account, or as an employee?

First, we must think about the original intention of both parties when working together. Was it:

  • a contract of service (employer-employee relationship); or

  • a contract for services (business relationship)

Second, to verify the intentions, we can ask the following questions:

  • the level of control the payer has over the worker’s activities

  • whether the worker or payer provides the tools and equipment

  • whether the worker can subcontract the work or hire assistants

  • the degree of financial risk the worker takes

  • the degree of responsibility for investment and management the worker holds

  • the worker’s opportunity for profit

  • any other relevant factors, such as written contracts.

Consider each element separately and then as a whole to “and decide if the actual working conditions are more consistent with a contract of service or with a contract for services” (1). If all the answers to the list above is a “yes” there is a strong case the business relationship is that of a contract and not that of an employee. However a further analysis needs to be carried out if the response to any of the questions is a “no”.

To put it more succinctly, the above questions considers these factors. This link to the Canada Revenue Agency’s website elaborates on each factor.


Tools and equipment

subcontracting work or hiring assistants

Financial risk

Responsibility for investment and management

Opportunity for profit

A note about non-arm’s length relationship

Sometimes business owners have their spouse or adult children work as employees. It is possible that their employment is not insurable under the Employment Insurance Act. If you are unsure, please contact Purpose CPA, or request a ruling from the CRA.

Requesting a ruling

There is “Request a CPP/EI Ruling” in the CRA My Account or My Business Account. Similarly, Purpose CPA can represent you and request a ruling on your behalf.

Payroll Processing and Contractor Payments

Once you determine the best arrangement, consider using an app like Quickbooks Online to pay employees or contractors. An accounting app will ensure the amounts are paid correctly, taxes are remitted (when necessary), and year-end forms such as T4A for Contractors are issued. Don’t be stuck doing all this manually.

In Summary

Controlling human capital costs are a necessity for any business just as it is important to provide an engaging and safe work environment. You get to choose which person to have on your team but the choice of whether they are an employee or a contractor requires understanding of the rules. Contact Purpose CPA to make sure you meet those rules as well as have a system that allows your team to thrive.


(1) CRA website. “Employee or Self-employed?” RC4110(E) Rev.20 source: