In the construction industry, hiring subcontractors is standard practice. But CRA has been increasing its scrutiny of worker classification, and getting it wrong can result in back taxes, penalties, and interest going back several years.

The question is simple: is the person you are paying an employee or an independent contractor? The answer determines your obligations for CPP, EI, income tax withholding, WSIB, and HST.

Why it matters financially

If CRA reclassifies a subcontractor as an employee, you owe:

  • Employer’s share of CPP contributions (retroactive)
  • Employer’s share of EI premiums (retroactive)
  • Income tax that should have been withheld
  • Penalties of 10% on the amounts that should have been remitted (20% for repeat offenders)
  • Interest from the original due dates
  • Potential WSIB premiums and penalties

For a busy contractor with 10-15 workers misclassified over two or three years, this can add up to six figures.

How CRA decides

CRA does not go by what you call the worker or what the contract says. They look at the actual working relationship using a multi-factor test:

  • Control: Do you tell the worker when to start, how to do the work, and what tools to use? Employees are controlled. Independent contractors control their own methods and schedule.
  • Tools and equipment: Does the worker supply their own tools, vehicle, and safety equipment? Independent contractors typically supply their own. Employees use the employer’s.
  • Financial risk: Can the worker make a profit or suffer a loss? Independent contractors bear financial risk. Employees get paid regardless.
  • Ability to subcontract: Can the worker hire their own helpers or delegate the work? Independent contractors can. Employees cannot.
  • Integration: Is the worker integrated into your business (wears your uniform, uses your truck, appears on your website)? That points toward employment.

What good subcontractor documentation looks like

  • A written contract that clearly defines the relationship as independent contracting
  • The subcontractor has their own business number (HST registration)
  • The subcontractor invoices you for work (not the other way around)
  • The subcontractor carries their own liability insurance and WSIB coverage
  • The subcontractor works for other clients, not just you
  • You do not provide tools, materials, or a uniform
  • You pay by the job or by milestone, not by the hour on a regular schedule

The T4A obligation

If you pay a subcontractor more than $500 in a calendar year for services, you must issue a T4A slip reporting the payment. Many contractors skip this, but CRA uses T4A data to match income. Not issuing T4As draws attention.

WSIB considerations

In Ontario, construction is a mandatory WSIB industry. If a subcontractor does not have their own WSIB coverage and is later reclassified as an employee, you may be liable for their WSIB premiums and any workplace injury claims. Always ask subcontractors for their WSIB clearance certificate before they start work.

Protect yourself

The construction industry is one of CRA’s top targets for worker classification audits. The best protection is to structure your relationships properly from the start, document everything, and review your arrangements with a CPA.

L&R Accounting works with construction businesses across Ontario on payroll, tax compliance, and CRA audit support. If you are not sure whether your workers are properly classified, let us review your setup.

Geetha Srinivasan, CPA (Ontario), CPA (US)
L&R Accounting Services Ltd.