Misclassifying a Worker as a Contractor in Ontario: What the CRA Can Assess

When a business treats a worker as an independent contractor, it skips payroll withholding entirely — no income tax, CPP, or EI comes off that person's pay. If the CRA later decides the worker was actually an employee, the consequences don't land on the worker. They land on the business that should have been withholding and remitting all along. Worker misclassification is one of the more expensive mistakes an Ontario employer can make, because the CRA doesn't just ask for the missing amounts going forward — it can reach back into past years.

This article explains what a misclassification reassessment can actually cost an employer, how far back the CRA can go, and what to do once a reassessment lands.

How These Reassessments Typically Start

A misclassification finding rarely comes out of nowhere. It's often triggered by a CRA audit or review of the business's own filings, a request from the worker for a CPP/EI ruling on their own status, or information already on file that suggests the working relationship looks more like employment than a genuine contractor arrangement. Being selected for a review isn't an accusation of wrongdoing on its own — but if the reviewer concludes the worker was really an employee, what follows can be substantial.

What the CRA Can Assess Against the Employer

Because the employer never withheld anything in the first place, the CRA can look to the employer to make up both the employer and employee portions of CPP and EI. Whether the employer can later recover any of that from the worker is a separate, often difficult, question — not something the CRA involves itself in.

How Far Back the CRA Can Go

For income tax purposes generally, the CRA's normal reassessment window is three years from the date of the original assessment for individuals and Canadian-controlled private corporations, and four years for other corporations — as of mid-2026, that's the standing rule, though it's worth confirming since these periods are set by statute and interact differently with payroll and remittance issues than with an ordinary income tax return. Outside that normal window, the CRA can still reassess where it can show misrepresentation attributable to neglect, carelessness, wilful default, or fraud, or where a waiver was signed. A pattern of treating employees as contractors across several years is exactly the kind of issue that invites a longer look back.

Penalties and Interest Add Up Fast

Failing to withhold and remit source deductions can trigger penalties on top of the amounts owing, and interest accrues on the whole balance until it's paid. As of mid-2026, the CRA's prescribed interest rate on overdue amounts sits at 7% for the quarter — a rate set every three months that changes, so confirm the current figure rather than relying on this one. Because interest keeps accruing on a growing balance across multiple years and, often, multiple workers, a misclassification issue that touches several years can turn into a large number quickly.

Directors Can Be Personally on the Hook

If the business is a corporation and it doesn't pay what the CRA assesses, directors can become personally liable for the corporation's unremitted source deductions — commonly called director's liability. This exists because source deductions are treated as amounts that belong to the government the moment they should have been withheld, not as an ordinary business debt. A misclassification reassessment a corporation can't cover doesn't necessarily stop at the corporate level.

Responding to a Misclassification Reassessment

1. Don't assume the reassessment is final. Review the basis for it — how the CRA concluded the worker was an employee — before deciding how to respond.
2. Check the objection deadline immediately. You generally have a limited window to file a Notice of Objection after a reassessment is issued, and the exact deadline depends on the type of taxpayer and notice involved.
3. Gather your own documentation. Contracts, invoices, correspondence, and records of how the work actually happened can support your position, whichever direction it points.
4. Get advice before you pay or dispute. Whether to pay and seek relief later, or object first, depends on the specific facts and the amounts involved.

Frequently asked questions