Introduction
Subcontracting is fundamental to how construction and trades businesses operate in Canada. General contractors use subtrades; specialty contractors use helpers and labourers. The flexibility of subcontracting arrangements is part of what makes the business model work.
It is also one of the most frequently examined areas by the CRA when reviewing construction businesses. The classification of workers as employees vs. subcontractors has payroll tax, HST, and liability implications that can result in significant retroactive assessments if the CRA determines that workers have been misclassified.
Why Classification Matters
When a corporation hires an employee, it must withhold income tax, CPP, and EI from the employee's pay and remit these amounts — along with the employer's share of CPP and 1.4 times the employee's EI premium — to the CRA on a regular schedule. Failure to do so creates personal liability for the corporation's directors.
When a corporation engages an independent contractor, no source deductions are required. The contractor is responsible for their own tax and CPP obligations. The corporation issues a T4A (Statement of Contract Payments) if payments to a single contractor exceed $500 in a year.
The distinction between these two relationships determines whether payroll obligations exist. If the CRA determines that someone classified as a subcontractor was actually an employee, the corporation becomes liable for all unremitted source deductions — plus interest and penalties — retroactively.
The CRA's Classification Test
The CRA uses a multi-factor test to determine whether a working relationship is employment or independent contracting. Key factors include:
Control: Does the corporation direct and control how and when the work is done, or does the worker set their own schedule and methods? A worker told what time to show up, where to work, and how to complete tasks resembles an employee more than an independent contractor.
Ownership of tools and equipment: Does the worker provide their own tools and equipment, or does the corporation supply them? A subtrade who shows up with their own tools and vehicle is a stronger indicator of a contractor relationship.
Chance of profit and risk of loss: Can the worker profit from efficiency or lose money on the engagement? A worker paid a flat hourly rate with no financial risk looks more like an employee.
Exclusivity and integration: Does the worker provide services to multiple clients, or exclusively to this corporation? Is the work integral to the corporation's primary business or an ancillary function?
No single factor is determinative — the CRA and the courts look at the totality of the relationship.
Written Agreements Are Necessary But Not Sufficient
Many incorporated contractors believe that having a written subcontractor agreement is sufficient to establish an independent contractor relationship. It is not. The CRA looks at the reality of the working relationship, not merely what the contract says.
A written agreement that calls someone an independent contractor but in practice describes an employment relationship will not protect the corporation in a CRA review. The agreement should reflect — and the relationship should operate consistently with — a genuine independent contractor arrangement.
T4A Reporting Obligations
Corporations that pay $500 or more to a single contractor in a calendar year for services are required to issue a T4A and file a T4A summary with the CRA by the last day of February of the following year. This obligation applies regardless of whether the contractor is incorporated.
Failure to file T4As does not change the payment status, but it is a compliance failure that can attract penalties and that signals to the CRA that the corporation's contractor relationships deserve closer review.
HST on Subcontractor Invoices
A subcontractor who is registered for HST (which is required once their annual taxable supplies exceed $30,000) must charge HST on their invoices. The corporation receiving the invoice can claim an input tax credit for HST paid on genuine business inputs.
A subcontractor who is not registered charging HST — or a corporation paying a subcontractor cash without proper invoices — creates documentation problems. The CRA may disallow ITC claims on improperly documented inputs, and cash payments without documentation raise additional questions about whether the amounts are genuine business expenses.
Every subcontractor payment should be supported by a proper invoice: company name, GST/HST number (if registered), description of services, date, and amount.
When to Speak With a CPA
If a construction business uses the same group of workers repeatedly — on a recurring basis, following the corporation's direction, using the corporation's equipment — those relationships deserve a formal review. A CPA can assess the risk profile of the current arrangements and identify what changes, if any, would make the structure more defensible.