How to Determine if You Are Self-Employed (Sole Proprietor) or an Employee in Canada

Written by Camilo Toro | Mar 12, 2025 4:11:23 AM

Key Differences Between an Employee and a Self-Employed Individual

Criteria	Employee	Self-Employed (Sole Proprietor)
Control	Employer dictates schedule, tasks, and work conditions.	You control your work, schedule, and how tasks are completed.
Ownership of Tools	Employer provides tools, equipment, and office space.	You own or rent your own tools, equipment, and workspace.
Risk and Profit	Stable income with no financial risk.	Potential for profit but also bears business risks and expenses.
Independence	Works exclusively for one employer.	Can work with multiple clients and set own rates.
Deductions	Employer deducts CPP, EI, and taxes from your paycheck.	You are responsible for paying your own taxes, CPP, and business expenses.

How to Determine Your Status

The CRA uses the following four key factors to decide if you are an employee or self-employed:

1. Control

Employee: The employer decides how, when, and where you work.
Self-Employed: You have full control over how you complete your work.

2. Ownership of Tools & Equipment

Employee: The company provides necessary tools and covers maintenance.
Self-Employed: You own your own equipment, software, or workspace.

3. Financial Risk & Business Relationship

Employee: You receive a fixed salary or hourly wage, with minimal financial risk.
Self-Employed: You take on business risks, pay expenses, and earn based on contracts or projects.

4. Integration with the Business

Employee: You are an essential part of the company’s operations and work under direct supervision.
Self-Employed: You operate independently and provide services to different clients.

Tax Implications

Employees have taxes, CPP (Canada Pension Plan), and EI (Employment Insurance) deducted automatically from their paychecks.
Self-Employed Individuals must file their own business income (T2125 form) and pay taxes and CPP contributions independently.

Why Does It Matter?

Misclassifying yourself can lead to penalties, audits, or missed tax deductions. If you’re unsure about your status, consult a tax professional or use the CRA’s decision tool: CRA Employee vs. Self-Employed Guide.

📞 Need Help? Book a Free Consultation!

Understanding whether you are self-employed or an employee can have significant tax and legal implications. Let Toro Financial guide you through your classification, tax obligations, and bookkeeping strategies.

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