Freelancer vs employee: how does the CRA decide?

Getting this classification right matters a great deal. For a payer, treating a worker as a freelancer means no obligation to deduct CPP contributions, EI premiums, or income tax. But if the CRA later decides the worker was actually an employee, the payer must pay both the employer's and the employee's share of CPP and EI owing, plus penalties and interest.

Why does the distinction matter?

Employment status directly affects a worker's entitlement to employment insurance (EI) benefits, and it also affects treatment under the Canada Pension Plan and the Income Tax Act. Employees have tax and payroll deductions taken at source; self-employed individuals pay their own tax, make their own CPP contributions, and can deduct business expenses. The label on a contract or invoice never settles it — the CRA examines the facts of the relationship as a whole.

What is the first step: the parties' intent?

The CRA asks the worker and the payer what they intended when they entered the arrangement:

• Did they intend a contract of service — an employer-employee relationship?
• Or a contract for services — a business relationship between a payer and someone in business on their own account?

Intent can appear in a written agreement or in the parties' testimony, and both sides may agree (common intent) or disagree (no common intent). Intent forms part of the context, but workers and payers cannot simply choose a label: the actual terms and conditions of the work determine the status, not the intention alone.

What are the six factors the CRA examines?

In the second step, the CRA asks questions that verify whether the intent is reflected in the facts. The questions cover these elements:

1. Control. The key question is who controls how, when, and where the work is done. Employees typically work under subordination — the payer directs and scrutinizes many elements of the work, sets schedules, and must approve the worker taking on other clients. Self-employed workers usually work independently, choose when and for whom they work, and can accept or refuse assignments. Importantly, it is the payer's right to exercise control that counts, not whether the right is actually used.

2. Tools and equipment. Does the worker own and provide the tools needed for the work? A significant investment in tools, equipment, or a workspace — with the worker bearing the costs of replacement, repair, and insurance — points toward self-employment. Note the nuance: some employees must supply their own tools of the trade (mechanics are the classic example), so this factor alone does not decide anything.

3. Subcontracting work or hiring assistants. Can the worker hire helpers or send a substitute, and does the payer have any say in who is hired? The ability to delegate the work, at the worker's own cost, signals a business relationship. A worker who must perform the work personally, with no right to hire help, looks more like an employee.

4. Financial risk. Does the worker face fixed ongoing costs and unreimbursed expenses, even when no work is coming in? Self-employed individuals can incur losses because they pay overhead whether or not they are billing. Employees generally have no financial risk: their expenses are reimbursed and their pay does not depend on the payer's costs.

5. Responsibility for investment and management. Has the worker invested capital to provide the services, and are they free to make business decisions that affect profit or loss? Capital investment, managing staff, and an established business presence all indicate self-employment. A worker with no capital investment and no business presence points the other way.

6. Opportunity for profit. Can the worker realize a profit or incur a loss by controlling proceeds and expenses? Self-employed individuals can negotiate or set their prices, take on multiple clients, and manage costs to maximize net earnings. Employees normally have a guaranteed return for work done — even commission or bonus pay is not treated as "profit" in this sense.

How does the test differ in Quebec?

Where the contract was formed in Quebec, the CRA uses a three-step approach based on the Civil Code of Québec rather than the common-law factors. It examines carrying out the work, remuneration, and the relationship of subordination — the payer's capacity, authority, or right to exercise control over the worker's activities and the manner in which the work is done.

Can you get a ruling from the CRA?

Yes. If either the worker or the payer is unsure, they can request a CPP/EI ruling from the CRA, which determines whether the worker is an employee or self-employed and whether the employment is pensionable or insurable. Rulings can be requested through My Business Account or My Account, or by completing Form CPT1 (Request for a CPP/EI Ruling – Employee or Self-Employed?) and mailing it to the designated tax services office. A ruling request must be made by June 29 of the year following the year the question relates to. If either party disagrees with the decision, an appeal can be filed within 90 days (Form CPT100).