Employee vs. Subcontractor in Trades
A 2019 Tax Court case involving a drywall subcontractor shows exactly what CRA looks for when determining employee vs. contractor status. Learn the four-factor test and how to protect your trades business.
A Drywaller Asked for a Straight Cheque. It Cost His Employer.
In 2019, the Tax Court of Canada heard an appeal from a construction subcontracting company specializing in drywall and acoustics. The company had hired a drywaller who asked to be paid without payroll deductions - a request common in the trades industry, often called a "straight cheque." The owner agreed, treating the worker as an independent contractor.
CRA disagreed. The court dismissed both appeals - under the Employment Insurance Act and the Canada Pension Plan - ruling that the drywaller was an employee. The company was on the hook for back CPP and EI contributions, both the employer and employee portions, plus a 10% penalty on everything owing.
The lesson isn't that you can't use subcontractors. It's that what a worker asks for doesn't determine their status. CRA looks at the actual working relationship - and they have a very specific framework for doing so.
The Four-Factor Test CRA Uses to Determine Status
The Supreme Court of Canada established the framework for determining employee vs. contractor status in a 2001 case called Sagaz Industries. The central question is straightforward: is this person performing services as someone running their own business, or as someone working for yours?
To answer that question, CRA and the courts look at four factors.
Control
Who controls how, when, and where the work gets done? In the drywall case, the owner visited job sites daily to inspect work quality and enforced company policies including an Employee Code of Conduct that applied to all workers. The court said this factor strongly favoured employment. A true subcontractor controls their own methods and schedule. If you're directing the work, that points toward employment.Ownership of Tools
Does the worker bring their own tools, or do you supply them? In trades, this one is nuanced. The drywaller brought his own hand tools and tool belt - standard in the industry. However, the company provided the more expensive fastening equipment. The court viewed this factor as roughly balanced. Owning your own hand tools alone doesn't make someone a subcontractor.
Financial Risk
Does the worker have any real financial risk or opportunity for profit? In the drywall case, the answer was clear: the worker had zero financial risk, zero investment in the business, and no opportunity to profit beyond his hourly rate. He was simply paid until he was discharged. A genuine subcontractor takes on financial risk - they can profit from efficiency or lose money on a job.
Ability to Hire Helpers
Can the worker hire their own replacement or subcontract the work out? In the drywall case, the worker could not bring in a replacement without the owner's approval. A true independent contractor runs their own operation and can send someone else to do the work. If the worker can't make that call independently, it points toward employment.
Two additional Red Flags CRA Looks For
Beyond the four-factor test, the court noted two additional details that sealed the ruling in the drywall case.
The worker never invoiced for his work. He simply reported hours like any other worker. A genuine subcontractor issues invoices for services rendered.
The worker never charged GST. Once a subcontractor earns more than $30,000 in a 12-month period, they are required to register for GST and charge it on their services. The fact that he never did so was another signal to the court that he wasn't operating as an independent business.
T4 vs. T5018 - Getting the Right Slip to the Right Worker
One of the practical consequences of misclassification is issuing the wrong information slip. In the trades and construction industry, subcontractors receive a T5018 - the Statement of Contract Payments. Employees receive a T4.
When a worker is misclassified as a subcontractor, the employer issues a T5018 when they should have issued a T4. CRA cross-references both. When the slips don't match the actual working relationship, it raises a flag that can trigger an audit, a ruling request, or a formal reassessment.
Common Mistakes Trades Businesses Make
Based on what we see working with trades and construction businesses across the Okanagan, the most common misclassification mistakes are:
Relying on what the worker asks for. As the drywall case makes clear, a worker requesting a straight cheque does not make them a subcontractor. CRA doesn't ask what either party preferred - they look at how the relationship actually worked.
No written agreement. The drywall company had no written contract with the worker. A well-drafted independent contractor agreement that reflects the actual working relationship is one of your best protections.
Assuming industry norms override the rules. In trades, paying workers without deductions is common. Common doesn't mean compliant. CRA applies the same four-factor test regardless of what's standard in your industry.
Not collecting GST registration numbers from subcontractors. If a subcontractor isn't registered for GST and isn't charging it on invoices, that's a signal worth paying attention to before CRA does.
How to Protect Your Business
Staying on the right side of CRA's classification rules comes down to documentation and structure. Before engaging a subcontractor, run them through the four-factor test. Do they control their own work? Do they bring their own tools? Do they have financial risk? Can they send someone else?
If the answers point toward employment, treat them as an employee - set up payroll, issue a T4, and remit the required deductions. If the answers point toward independent contractor, document the relationship properly. Get a signed agreement, collect their business number, confirm they are charging GST, and make sure they are invoicing you for their services.
If you're unsure, CRA offers a voluntary ruling process where you can request a formal determination of a worker's status before an audit forces the question. Coming forward proactively is always the better path.
How Murtagh & Co. Can Help
At Murtagh & Co. Financial Services, we review subcontractor arrangements for trades and construction businesses across the Okanagan to make sure the classification is defensible before CRA asks the question. We handle T5018 filings, payroll setup, and year-end slip preparation so the right slip goes to the right worker every time.
If you're not confident your worker arrangements would hold up under CRA's four-factor test, that's exactly the conversation to have before an audit starts it for you. Reach out for a free initial consultation at info@murtaghco.ca.
Murtagh & Co. Financial Services serves trades and construction businesses in Kelowna, West Kelowna, Lake Country, Vernon, Penticton, and across BC remotely.