A contract calling someone a contractor settles nothing. Canada Pension Plan section 6 and Employment Insurance Act section 5 make employment pensionable and insurable where it is performed under a contract of service, express or implied. If CRA finds one, the corporation owes both halves of CPP and EI plus penalties and interest — and a share buyer owns that corporation.
Key takeaways
SECTION 01 OF 10
Neither payroll statute uses the word contractor. CPP s.2(1) defines employment as “the state of being employed under an express or implied contract of service or apprenticeship”, and section 6(1) then makes pensionable “employment in Canada that is not excepted employment”.
EI Act s.5(1)(a) is built the same way: insurable employment is “employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral”. Parliament assumed the paperwork may not describe the relationship.
The diligence question is not what the consulting agreements say, but whether a contract of service exists in fact with each person paid by invoice — Treadstone Law’s point about a seller who called an employee a contractor.
SECTION 02 OF 10
A checklist naming guide RC4110 points at a dead page. CRA’s listing now reads: “This publication was cancelled as of 2026-01-30 and replaced with Employment status: Employee or self-employed”.
Outside Quebec the replacement guidance sets a two-step test. CRA states the object: “the key question to ask is whether the person was engaged to carry out services as an employee or as a person doing business on their own account”. Step one is intention; step two weighs six elements, among them control, tools, subcontracting and “the degree of financial risk the worker takes”.
Then the sentence that answers “but we signed a contract”: “Workers and payers can choose how they set up their affairs; however, the employment status they choose must reflect their working relationship.” That is CRA’s position, not the Act. Its references name Wiebe Door, Sagaz and Connor Homes, none readable from a primary source here, so nothing is cited to them.
SECTION 03 OF 10
Owners test control by asking whether anyone is actually supervised. CRA does not: “It is the right of the payer to exercise control that is relevant, not whether the payer actually exercises this right.” A developer nobody manages is not self-employed if the corporation could direct the work.
CRA concedes the hard case: “Deciding the degree of control can be difficult when examining the employment of professionals such as engineers, doctors, and IT consultants” — exactly who a services or technology target pays by invoice. It adds that supplying tools of the trade does not in itself make a worker self-employed. Treadstone Law on dependent contractors covers the category between the two.
SECTION 04 OF 10
CPP s.21(1) requires an employer to deduct the employee’s contribution and remit it with its own. Subsection (2), marginal note Liability for failure to deduct and remit, does the damage: an employer that fails “is liable to pay to Her Majesty the whole amount that should have been deducted and remitted”.
EI Act s.82(4) mirrors it for premiums, word for word. CRA puts it plainly: “An employer who fails to deduct the required CPP contributions or EI premiums must pay both the employer’s share and the employee’s share of any contributions and premiums owing, plus penalties and interest.”
Recovery from the worker is nearly closed. Section 21(4) allows recoupment only “from any subsequent payment of remuneration made to the employee within 12 months”, and only one missed amount.
SECTION 05 OF 10
For 2026 CRA publishes maximum pensionable earnings of $74,600 and an employee and employer CPP rate of 5.95 per cent and a maximum annual contribution of $4,230.45 each; on the EI side, maximum insurable earnings of $68,900, a rate of 1.63 per cent, and maximum premiums of $1,123.07 and $1,572.30.
Arithmetic on those rates, not a claim about any business: one worker at or above both ceilings, reclassified for one calendar year, costs the corporation $8,460.90 in CPP and $2,695.37 in EI — $11,156.27. Twelve such workers in one year is $133,875.24, before the second additional CPP contribution and before any income tax penalty or interest.
SECTION 06 OF 10
Income Tax Act s.153(1) requires a payer of salary or wages to “deduct or withhold from the payment the amount determined in accordance with prescribed rules” and remit it. Section 227(8) prices it at “10% of the amount that should have been deducted or withheld”, and “20% of that amount” for a knowing or grossly negligent repeat.
Section 227 imposes liability to pay an amount “as tax under this Act on behalf of the other person” in exactly two places: subsection (8.4), confined to non-residents, and subsection (9.4), for amounts actually deducted and not remitted. For a resident worker who filed and paid, the employer is left with penalty and interest.
Subsection (4) is the one that changes negotiations: amounts actually deducted are deemed held “separate and apart from the property of the person” in trust for the Crown, ahead of security interests — why unpaid source deductions follow a share purchase.
SECTION 07 OF 10
EI Act s.85(3), marginal note Limitation on assessments, is the shortest: none may be made “after three years have elapsed after the end of the year in which any premium… should have been paid, unless the employer has made a misrepresentation or committed fraud”.
CPP s.22(3) gives a year more and measures it differently, barring assessment “after four years have elapsed from the earliest of the days on or before which any contribution… should have been paid”. Two statutes, one payroll, different answers: a memo quoting one number for the CRA window is already wrong.
The income tax penalty has no window. Section 227(10): “The Minister may at any time assess any amount payable under” subsections 227(8) to (8.4). Corporate income tax runs on different clocks, set out in how long the CRA can come back.
SECTION 08 OF 10
Both payroll statutes create their own director liability. CPP s.21.1(1): on a failure to deduct or remit, “the persons who were the directors of the corporation at the time when the failure occurred are jointly and severally or solidarily liable, together with the corporation” for the amount, interest and penalties. EI Act s.83(1) does the same for premiums.
Each imports subsections 227.1(2) to (7) of the Income Tax Act — the gating conditions, the due diligence defence and the two-year limitation — set out in the liability a share buyer takes on.
Personal liability attaches to the directors at the time of the failure, so the seller’s board carries the past. What travels to the buyer is the corporation’s own liability, plus any failure continuing after closing. Treadstone Law draws that split on overtime and on a pre-closing shortfall.
SECTION 09 OF 10
In Ontario, Employment Standards Act, 2000 s.5(1) voids any attempt to “contract out of or waive an employment standard”, and s.5.1(1) adds that “An employer shall not treat… a person who is an employee of the employer as if the person were not an employee under this Act.” Subsection 5.1(2), which reversed the burden of proof, was repealed effective 1 January 2019.
What does shield an employer is a ruling. CPP s.21(3) removes liability, interest and penalties where “the employer is informed in writing in a ruling under section 26.1 that the employer is not required to make the deduction”; EI Act s.82(5) mirrors it for a section 90 ruling.
But CPP s.26.1(2) requires that “a request by any other person must be made before June 30 of the year after the year in respect of which the question relates”; EI Act s.90(2) sets the same cut-off in slightly different words. A buyer closing in the autumn cannot get a ruling for the seller’s earlier years: the past is priced, not cured.
SECTION 10 OF 10
Ask for the list before the contracts: every person or personal corporation paid by invoice in the last four years, with amounts, and how many invoice anyone else. Then test a sample against the six CRA elements instead of reading the agreements — who set the hours, who supplied the equipment, whether a substitute could be sent.
Structure changes who carries it, not whether it exists. On a share purchase the corporation that failed to withhold is the one being bought. On an asset purchase the pre-closing liability generally stays with the seller if the agreement says so, but the buyer generates its own by keeping the same people on the same terms: see contractors in a business sale and an injury afterwards.
Price against the longest clock that can still run. CPP reaches back four years, EI three, the withholding penalty not at all, so twelve-month survival on the tax representations is shorter than the exposure. Sizing sits in the clocks behind a holdback, properly classified staff in what happens to the staff, and the wider Ontario exposures in consequences of misclassification.
No. Neither the Canada Pension Plan nor the Employment Insurance Act uses the word contractor — both test for a contract of service, which the EI Act says may be written or oral. Workers and payers can choose how they set up their affairs, but the employment status they choose must reflect their actual working relationship, not the label on the page.
No. Where an employer fails to deduct and remit, it becomes liable to pay the whole amount that should have been deducted and remitted — both the employer’s and the worker’s share of CPP and EI, plus penalties and interest. Recovering the worker’s share back from them is nearly closed, limited to one missed amount within 12 months.
No, that one never expires. The Minister may assess the withholding penalty at any time under section 227(10). The two payroll statutes do carry limits — three years for EI assessments and four years for CPP — so three different clocks apply to the same misclassified worker.
Sources
