Do contractors pay more tax than employees in Canada?

Contractors pay both employer and employee CPP portions (double), plus have no EI (but also no premiums). However, contractors can deduct business expenses. Net tax depends on deductions and incorporation strategy.

What makes someone a contractor vs employee in Canada?

CRA looks at: control (how work is done), tools (who provides), financial risk (profit/loss potential), and integration (part of the organization). Multiple factors determine status—not just what the contract says.

Can you be both an employee and contractor in Canada?

Yes, if they're truly separate work relationships. An employee can do consulting on the side. However, your employer can't simply reclassify you as a contractor for the same work—CRA will look at reality, not labels.

Contractor vs Employee in Canada | Tax Differences

Employee vs Contractor Overview

Key Differences

Factor	Employee	Contractor
Control	Employer directs work	You control how
Tools	Provided	You provide
Risk	None	Profit/loss
Benefits	Usually	None from client
Taxes	Withheld	You remit
Deductions	Limited	Business expenses

Tax Implications

Employee Taxation

Item	Details
Income tax	Withheld by employer
CPP	Employee portion withheld
	Employer pays matching
EI	Employee portion withheld
	Employer pays 1.4×
RRSP room	Based on earnings

Contractor Taxation

Item	Details
Income tax	You remit (instalments)
CPP	You pay BOTH portions
	2× what employees pay
EI	Not required (optional)
GST/HST	May need to collect/remit
Business expenses	Deductible

CPP Comparison

Employee CPP (2024)

Contribution	Rate
Employee portion	5.95%
Employer portion	5.95%
Your cost	5.95%
Maximum	~$3,867

Contractor CPP (Self-Employed)

Contribution	Rate
Both portions	11.90%
Your cost	11.90%
Maximum	~$7,735

Contractors pay double CPP.

CPP2 (Enhanced)

Earnings above	Additional contribution
Additional tier	Extra CPP applies
Self-employed	Pay both portions

GST/HST Obligations

Registration Threshold

Rule
Revenue over $30K/year	Must register
Under $30K	Optional

If Registered

Responsibility
Charge GST/HST	On invoices
Collect	From clients
Remit	To CRA
Can claim	Input Tax Credits

Example

Invoice	$5,000
GST/HST (13%)	$650
Total billed	$5,650
You remit	$650 (minus ITCs)

Business Expense Deductions

Common Contractor Deductions

Expense	Deductible?
Home office	Yes
Vehicle (business use)	Yes
Equipment/tools	Yes
Software	Yes
Professional development	Yes
Phone/internet	Yes (business portion)
Travel	Yes (for work)
Professional fees	Yes
Accounting	Yes

Home Office Deduction

Method	Calculation
Simplified	$2/day (max $500)
Detailed	% of home used + expenses

Detailed Expenses
Rent/mortgage interest	Proportional
Utilities	Proportional
Insurance	Proportional
Maintenance	Proportional

Vehicle Deduction

Track
Business kilometres	vs personal
Expenses	Gas, insurance, maintenance
Deduct	Business % of expenses

Income Comparison Example

$100,000 Gross Income

Factor	Employee	Contractor
Gross income	$100,000	$100,000
Business expenses	-	($15,000)
Net income	$100,000	$85,000
CPP (employee part)	$3,867	-
CPP (self-employed)	-	$7,735
EI	$1,049	$0
Income tax (approx.)	~$22,000	~$18,500
Benefits (from employer)	~$3,000 value	$0

Analysis: Numbers vary significantly based on actual deductions and tax situation.

CRA’s Four-Factor Test

How CRA Determines Status

1. Control

Employee	Contractor
Employer controls how	You control how
Set hours	Flexible schedule
Supervised	Independent
Specific instructions	General goals

2. Tools and Equipment

Employee	Contractor
Employer provides	You provide
Computer	Your own equipment
Office space	Work from anywhere
Software	Your licenses

3. Financial Risk

Employee	Contractor
Fixed pay	Variable income
No profit/loss	Profit/loss possible
Paid for time	Paid for results
No investment	Your capital at risk

4. Integration

Employee	Contractor
Part of organization	Separate business
Exclusive (usually)	Multiple clients
Company email	Your own
On org chart	Not integrated

Incorporation Option

Why Contractors Incorporate

Benefit	Details
Lower corporate tax	Small business rate ~12.2%
Income splitting	Dividends to family (limited)
Tax deferral	Leave money in corporation
Credibility	May appear more professional
Liability	Some protection

Incorporation Costs

Cost	Approximate
Setup	$1,000-$2,000
Annual accounting	$2,000-$5,000
Corporate tax return	$500-$1,500

When Incorporation Makes Sense

Situation	Incorporate?
Income > $100K	Consider it
Don’t need all income	Yes (deferral)
Short-term contract	Probably not
Liability concerns	Maybe
Low income	Usually not

Benefits Comparison

Employee Benefits

Benefit	Value
Health/dental	$2,000-$5,000/year
Pension/RRSP match	% of salary
Life/disability insurance	Varies
Vacation pay	Required by law
Sick days	Often provided
EI eligibility	Yes

Contractor Benefits

Benefit	Value
From client	None
Must purchase	Your own insurance
No EI	Unless opted in
No vacation pay	Build into rate

Negotiating Contractor Rates

Calculate Equivalent Rate

Employee Salary	$100,000
Add: employer CPP/EI	+$7,000
Add: benefits value	+$5,000
Add: overhead costs	+$10,000
Add: vacation (4 weeks)	+$8,000
Add: risk premium	+$10,000
Contractor should earn	~$140,000

As Hourly Rate

Annual target	$140,000
Billable hours	~1,800 (accounting for vacation, admin)
Hourly rate	~$78/hour

Risks of Misclassification

If CRA Reclassifies You as Employee

Consequence	Details
Back taxes	For “employer”
CPP contributions	Owing
EI premiums	Owing
Interest/penalties	On amounts owing

Protect Yourself

Do	Don’t
Have multiple clients	Work for just one
Control your work	Take direction
Use your own tools	Use theirs
Work from anywhere	Sit in their office
Invoice for work	Get a “paycheque”