Payroll and Subcontractors: How to Avoid T4, T4A, and CRA Issues

The core issue: CRA cares how the work is done, not what you call it

Many contractor businesses use the word “subcontractor” to mean “not on payroll.” CRA does not see it that way. Ifsomeone looks like an employee in practice, you can be on the hook for payroll deductions, interest, and penalties, even if you paid them by invoice.

Your goal is simple: classify correctly, document cleanly, and report consistently.

Step 1: Classify the relationship before the first payment

A quick rule of thumb: employees are integrated into your business. Sub contractors run their own business.

Use this checklist as a reality check.

More like an employee

●     You control hours, schedule, and methods, not just the outcome

●     They work mainly for you and can’t send a replacement

●     You provide key tools, truck, materials, or equipment

●     They appear like staff to clients(company email, uniforms, representing your brand)

●     You pay hourly or regularly, and the relationship is ongoing

More like a subcontractor

●     They control how and when the work gets done

●     They can hire help or send a qualified replacement

●     They provide their own tools and take on costs and risk

●     They work for multiple clients and market themselves

●     They invoice per job, per unit, or per agreed scope

If it’s mixed, tighten the structure. The messiest files are the ones where the working relationship is informal and undocumented.

Step 2: Know what triggers a T4 vs a T4A

This is where most contractor shops get tripped up.

T4: Employment income Used when you have an employee and you are responsible for payroll deductions (CPP, EI, income tax where applicable). T4s typically go with a payroll account and remittances.

T4A: Certain non employment payments
Commonly used for payments to self employed individuals for services (depending on the payment type and CRA requirements). Many businesses use T4A for independent contractors, but you still need to confirm when it applies to your situation.

Incorporated subcontractors
If your subcontractor is a corporation and invoices you through their company, the reporting treatment can differ. The key is to keep the file clean and consistent with the actual relationship and documentation.

If you’re unsure, don’t guess at yearend. Build the file correctly from day one so the slip decision is straight forward.

Step 3: Build a clean subcontractor onboarding file

Before anyone starts, collect the basics once. This prevents missing info in February when everyone is scrambling.

Subcontractor setup checklist

●     Legal name and operating name

●     Address, phone, and email

●     Business number if registered (and GST number if applicable)

●     Proof of business registration or incorporation if applicable

●     Insurance certificate (and WCB clearance if relevant to your industry and province)

●     Signed subcontractor agreement that covers:

• Scope and deliverables
• Rate structure (per job, per hour, per unit)
• Who supplies materials and tools
• Change order process
• Invoicing requirements
• Payment terms
• Responsibility for taxes and deductions

Invoice standards you should require

●     Invoice number and date

●     Description of work performed

●     Job or project reference

●     GST line if they charge GST

●     Total due and payment terms

This is not red tape. This is what makes your file defensible if questions come up later.

Step 4: Use a payment workflow that matches CRA expectations

Where businesses get exposed is when payment behavior looks like payroll, even if invoices exist.

Cleaner subcontractor payment habits

●     Pay against invoices tied to a job or scope

●     Avoid weekly identical payments that look like wages

●     Avoid paying personal expenses directly (fuel, phone, groceries, “advances”)

●     If you reimburse something, document what it was and why

●     Keep communication outcome focused: deliverables, deadlines, quality standards

If you need someone full time, five days a week, under your direction, it may be payroll. It is better to structure it correctly than to fix it after the fact.

Step 5: The five CRA risk triggers contractors should avoid

These are patterns that tend to create problems in real contractor files.

1. No written agreement
   Verbal arrangements create inconsistent records and inconsistent treatment.
2. No proof they operate a business
   No registration, no insurance, no other clients, no marketing presence, no invoices.
   
3. Payments look like wages
   Same amount, same day, every week, for months, with heavy direction from you.
   
4. Poor support for GST and invoicing
   GST charged without a valid registration, invoices missing key details, or GST not tracked consistently.    
5. Year end scramble
   Trying to collect addresses, tax numbers, and totals in February is where mistakes happen.
   

If you fix these five areas, most payroll and subcontractor issues stop showing up.

Step 6: Keep yearend reporting predictable

Treat year end like a process, not an event.

What to do monthly

●     Reconcile subcontractor payments by vendor

●     Confirm invoices are complete and consistent

●     Track GST correctly

●     Keep job references attached to payments

What to do quarterly

●     Review who is effectively operating like payroll

●     Tighten agreements and scope language where needed

●     Clean up missing documents before it becomes a year end problem

Year end
T slips have firm deadlines, and late filing creates avoidable issues. Build the file so your year end is a final step, not a rescue mission.

Quick scenarios contractors ask about

“They invoice me, so they’re a subcontractor, right?”
Not automatically. The working relationship matters more than the invoice format.

“They asked to be paid cash or e transfer with no invoice.”
That is a risk. Require invoices and keep records. Clean books depend on clean inputs.

“They are a friend helping out during busy season.”
Busy season arrangements are exactly where misclassification and missing records happen. Document it like any other relationship.

A simple standard that prevents most problems

If you can answer these three questions with supporting documents, your position is strong:

1. Who did we pay, and why?
2. Were they an employee or a subcontractor based on how the work was done?
3. Do our invoices, agreements, and reporting match the reality?