When Is a Subcontractor Actually an Employee? An Ontario Construction Guide
You're hiring someone to swing a hammer, frame walls, or run drywall. The question hits: do you put them on payroll, or just pay them as a sub?
A lot of Ontario construction owners think this is a choice. It isn't.
The relationship decides. Not the contract. Not the handshake. Not what's easier for your books.
This guide breaks down how the CRA actually decides, where WSIB plays by different rules, and what it really costs if you get it wrong.
TLDR
You don't choose whether someone is an employee or a sub. The nature of the relationship does.
The CRA looks at control, tools, financial risk, and how integrated the worker is in your business.
WSIB runs its own separate test — and you can't assume a CRA-style answer covers it.
The T5018 exists because the construction industry has a long history of misclassification. The CRA is paying attention.
Misclassification can mean back-payment of CPP, EI, income tax, WSIB premiums, plus interest and penalties.
If you've been doing it wrong, start fixing it now — not after a notice arrives.
The biggest misconception: it's not a choice
Most owners believe they get to decide. They look at the cost of payroll — CPP, EI, WSIB premiums, vacation pay, the time it takes to run a pay run — and think, "I'll just call him a sub."
That isn't how it works.
The CRA looks past the label on the contract. They look at how the relationship actually functions day-to-day. If it walks like employment and quacks like employment, it's employment.
You can write "Independent Contractor" in 30-point font at the top of an agreement. The CRA doesn't care.
How the CRA decides
The CRA uses a four-factor test to figure out whether a worker is an employee or self-employed. These factors come from decades of court rulings and the CRA's own guide (RC4110).
Control. Who decides when, where, and how the work gets done? An employee gets told to be on site at 7:00 AM, given a list of tasks, and supervised. A true sub negotiates a scope, then runs their own schedule. They show up and deliver, without being managed.
Tools and equipment. Whose vehicle, whose tools, whose materials? A real sub pulls up in their own truck, with their own gear. If they need a specialty tool, they rent or buy it. Employees use what the company provides.
Chance of profit, risk of loss. A sub bids a job. If they're efficient, they make money. If they screw it up, they fix it on their own dime. An employee gets paid for their hours regardless of whether the job ran over.
Integration. Is the worker an integral part of your business, or running their own? A sub markets to multiple clients. They have their own business name, their own insurance, and they're registered for HST/GST once they cross the $30K threshold.
In construction, the lines blur fastest around control. The strongest sign of a true subcontractor is a service-delivery relationship — they're hired to produce a result, not to be supervised through tasks. If you're managing them like a foreman manages a crew, there’s a good chance the CRA will view them as an employee.
Why "everyone in the trades does it this way" isn't a defence
Misclassification is everywhere in Ontario construction. Some owners pay workers as subs to skip CPP, EI, and WSIB. Others go further and pay cash, with no paperwork at all.
The motivation is usually the same. Avoid the cost. Skip the admin. Keep things flexible.
It's a bad trade. The CRA doesn't care that "this is how it's always been done." Cash payments don't make the obligation disappear, they just make it harder to prove your records are clean if anyone looks.
Here's a thing most owners don't think about: the worker can report you. When someone gets injured and can't claim through WSIB because they were paid cash, or gets laid off and can't access EI, they call the CRA. That's how a lot of these reviews start.
There's also a basic decency angle. Treating a worker like a sub when they're really an employee strips them of the protections employment law gives them — vacation pay, termination notice, EI access, CPP contributions. Even if you never get caught, you're shorting someone who's working for you.
WSIB plays by its own rules
This trips up almost everyone.
The CRA's classification and the WSIB's classification are not the same thing. They use different tests, different forms, and they can reach different conclusions about the same worker.
WSIB has its own determination process. You and the person you're hiring complete a questionnaire about the relationship (called an 1158a form) — how the work is structured, who controls what, whose equipment is used, how payments are made. WSIB reviews it and sends back a written determination: this person is a worker, or this person is an independent operator.
That letter matters. If you don't have one, you're guessing.
The fix is simple. When in doubt, request a status determination from WSIB before the work starts. Don't wait until there's a workplace injury and WSIB is the one asking the questions. At that point, the answer almost always lands somewhere expensive.
The T5018: built because of construction
If you pay subcontractors in construction, you're required to file a T5018 — the Statement of Contract Payments — annually. It reports how much you paid each sub during the year.
Why does this form exist? Because the construction industry has long been a concern for the CRA when it comes to tax evasion. The T5018 was introduced specifically to give the CRA visibility into the cash flowing between contractors and subs.
When you file a T5018, the CRA matches what you reported against what your subs reported on their tax returns. If a sub claims $40,000 in revenue but five GCs filed T5018s totalling $180,000, the CRA notices.
If you're paying real subs, file the T5018. Late-filing penalties start at $100 and climb fast. More importantly, skipping it is a flag. It suggests you're hiding payments, which invites a closer look at every other classification decision you've made.
What it actually costs if you get this wrong
Owners hear "misclassification" and shrug. Then the bill arrives.
If the CRA reclassifies a sub as an employee, you can be on the hook for both halves of CPP — yours and the worker's — going back years, both halves of EI premiums, income tax that should have been withheld, interest on all of it, and gross negligence penalties if they decide it was deliberate.
WSIB can come after retroactive premiums plus penalties. Ontario's Employment Standards Act adds another layer — vacation pay, termination notice, holiday pay — that the worker can claim if they walk away unhappy.
A single misclassified worker over three years can easily turn into a five-figure liability. Multiply that across a crew, and the math gets ugly.
What to do if you've been doing it wrong
If you've realized a worker on your books is misclassified, the next move matters. Catching it now is better than catching it after a CRA review. Here's how to handle it.
Start prospectively. From this pay period forward, classify the worker correctly. Set up payroll. Run source deductions. Register them with WSIB if they aren't already covered. Stop the bleeding. (And if setting up payroll is the part holding you back, we can help with that.)
Look back where it's fair. If the relationship is recent, go back and fix prior periods. The worker is owed the CPP and EI contributions they should have had. It's the right thing to do, and it puts you on much better footing if the CRA ever asks.
Document the change. Keep notes on why the classification changed, when the new arrangement started, and what's now in place. If you're ever questioned, you want a clear record showing you corrected course voluntarily.
This is a place where talking to a bookkeeper or accountant before you act pays for itself. Cleaning up classification mistakes is doable. Doing it without creating new problems takes some care.
What documentation to keep
Whether you're hiring an employee or a true sub, you need a paper trail.
For employees, the basics are a signed employment contract, a completed personal information form, federal and provincial TD1 forms, banking details for direct deposit, and if they drive for you, a copy of their licence and insurance.
For subs, you should have a written contract that defines the scope, deliverables, and terms, copies of invoices supporting every payment, their HST/GST number if they're registered, their business name and address, a WSIB clearance certificate and proof of insurance before they step on your site.
Don't pay subs without invoices. The invoice is the document that proves they're operating as a business, not a worker showing up for hours.
The bottom line
You don't get to choose whether the person you're hiring is an employee or a sub. The relationship decides, and the CRA, WSIB, and Ontario's labour rules each look at it differently.
If you're running a construction business in Ontario and you have any doubt about how a worker is classified, don't guess. The cost of getting it wrong is much higher than the cost of getting it right from the start.
If you want a clearer view of where your construction business stands financially, our free guide — 5 Numbers Every Construction Business Owner Needs to Know — is a good place to start.