Hiring help is a big step for any small business — and a sign your business is growing. Whether you're bringing on a contractor for a short-term project or hiring your first employee, it’s important to get the setup right from the start. The way you classify and document your working relationship can have serious tax and legal implications down the road.
At True North, we’ve seen too many business owners run into trouble with CRA audits and costly reclassification issues — simply because they didn’t know the rules. Here's what you need to know to make the right call, stay compliant and build a strong foundation for your growing team.
You might think you’re hiring a contractor. You might even have a signed subcontractor agreement. But if the Canada Revenue Agency (CRA) disagrees, that contract won’t protect you — and the consequences can be expensive.
When you classify someone as a contractor, you don’t withhold or remit CPP (Canada Pension Plan) or EI (Employment Insurance), and you're not on the hook for vacation pay or other employee entitlements. But if CRA later decides that person should have been an employee, you could be facing:
And it doesn’t just affect you. The person you hired could now owe back taxes and face their own penalties if CRA decides they weren’t running a true business. That’s not a fun call to make — or receive.
The CRA doesn't go by job titles or what your contract says. They’ll look at the real working relationship to determine whether someone is a contractor or an employee.
Here are the main factors the CRA considers:
If you’re calling them a contractor, but treating them like an employee, the CRA could reclassify the relationship — and the cost can add up fast.
When done right, working with independent contractors can be a great option — especially for project-based work, seasonal needs or accessing specialized expertise.
The advantages:
But these benefits only apply if the contractor is genuinely independent. That means they’re likely working with other clients, setting their own hours and using their own tools.
Whether you’re bringing on an employee or a contractor, good documentation matters — for both legal protection and CRA compliance.
If you’re hiring an employee, make sure to:
If you’re working with a contractor, you’ll want to:
A well-documented file helps protect your business if CRA ever audits or questions the classification.
At True North, we help small business owners like you plan ahead and avoid surprises.
If you’re unsure how to classify someone, or you’ve already brought someone on and want to double-check, we can:
We’ll give you the clarity and confidence to move forward without second-guessing.
Bringing someone on — whether contractor or employee — should feel like a step forward, not a risk. Getting the setup right from day one keeps your business compliant, protects your working relationships and helps you avoid expensive surprises down the road.
Don’t guess. If you’re not sure how to proceed, ask. We’re here to help.
🔎 Have questions? Ask us about our advisory services. We’re here to help you plan ahead and protect what you’ve built.
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The Path to Starting Your Own Business has everything you need to get set up, stay compliant and build your business the smart way — from day one.
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