35 vs 37.5 vs 40 Hours: What Your Contract Hours Signal to CRA Under the Control Test

In the contract hours control test, a 35, 37.5 or 40 hour week reads like a standard employee workweek, so CRA treats it as a control fact. Hours never decide PSB status on their own. CRA tests the whole relationship, year by year. In Ontario, the stakes are 11.2% corporate tax if not a PSB, and 44.5% if it is.

Key takeaways

What is the contract hours control test, and where do hours fit?

A PSB exists under section 125(7) of the Income Tax Act when two things are true. First, the person doing the work for the corporation, or a person related to them, owns 10% or more of any class of its shares, directly or indirectly. Second, that person would reasonably be regarded as an officer or employee of the client if the corporation did not exist. The tax law calls that person the incorporated employee.

To answer the second question, CRA uses the tests from Wiebe Door Services Ltd. v. M.N.R. and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. The central question is whose business it is. The factors are control, ownership of tools and equipment, chance of profit and risk of loss, and integration into the client’s business. Hiring helpers, investment and management also count. I explain each factor in my post on the Wiebe Door test.

Hours sit inside the control factor. Control asks who decides what work gets done, how, when and where. A contract that fixes your weekly hours answers part of the “when” question before you start. That is why CRA pays attention to it. CRA guide RC4110 “Employee or Self-Employed?” sets out the same approach in plain terms.

This post stays on that narrow point: what each hours pattern tells CRA about control. For the wider question of what a 40 hour contract means for your corporation, please read our page on 40 hour contract PSB risk.

Why do 35, 37.5 and 40 hour weeks read as control facts?

Because they are the shapes of a standard full-time job.

• 35 hours is seven hours a day over five days.
• 37.5 hours is seven and a half hours a day over five days. It is the shape of a 9AM start and a 5PM finish with an unpaid half-hour lunch.
• 40 hours is eight hours a day over five days.

Each one mirrors a schedule many employers use for their own full-time staff. When a contractor’s week matches the end client’s own staff week, minute for minute, it suggests the contractor was slotted into the client’s workforce. It does not look like a business selling a result.

Contrast that with how a business usually prices work. A firm quoting a project sets a price for a deliverable, or an estimate of hours it controls. It decides how many hours to spend. If it finishes early, it keeps the margin. If it runs late, it absorbs the cost. A fixed weekly hours term removes that choice.

Is “up to 40 hours” different from “40 hours required”?

Yes, and the wording matters. A cap such as “not to exceed 40 hours a week without written approval” is often a budget limit. Clients control spend with every supplier, from software vendors to consulting firms. A requirement such as “the consultant will work 40 hours per week, Monday to Friday” reads as a direction about when you work.

In practice, CRA looks at what actually happens, not only the clause. If the contract says “up to 40 hours” but your manager expects you online from 9AM every weekday, the real facts carry more weight. Contract wording is for your lawyer. My role is to look at how the facts read for tax.

Which schedule terms add to the control picture?

The weekly number is only the start. These are the hours-related facts I look at when I review a contractor’s file as part of tax planning.

Set schedules

A set schedule tells you which days and which hours to work. Fixed start and end times, a required Monday to Friday pattern, and rules about when you can take time off all point toward control. A contractor who chooses their own working hours, within the delivery dates in the contract, is in a stronger position.

Core hours

Many teams use core hours: a window each day when everyone must be available for meetings and questions. Some availability is normal for any supplier on a team project. A required daily window that matches the employee rule, enforced by the same manager, reads more like employment.

Overtime approval

Employees often need a manager’s approval to work extra hours, and many are paid a premium when they do. For a contractor, two facts matter. Does someone at the client tell you when to work extra hours? And are the extra hours paid at an overtime premium, like an employee, or billed at your normal rate under the contract? Approving extra spend is normal commercial practice. Directing your time looks like supervision.

Timesheet approval

Almost every agency placement uses timesheets approved by a manager at the end client. That alone is not fatal. Any business billing by the hour needs the client to confirm the hours before it gets paid. The question is what the approval does. If it only confirms the billable hours, it reads as billing. If the manager uses it to review your daily attendance, your tasks and your performance, it reads as supervision.

On-call and after-hours rotations

Production support, cloud and cybersecurity contractors often join on-call rotations. Being placed on the client’s own rotation, with standby pay set by the client’s policy, looks like what an employee would do. A support commitment written into your corporation’s contract as a service, priced by your corporation, reads more like a business.

What does the hours pattern cost in tax at 35, 37.5 and 40 hours?

Here is the worked example. Same contractor, same $95 hourly rate, 48 billable weeks, three different weekly hours. My assumptions: $9,000 of business expenses, no salary paid to the contractor, and a full taxation year at the current 11.2% combined Ontario small business rate.

One note on rates. The 11.2% rate applies to income earned from July 1, 2026 (9% federal plus 2.2% Ontario). Income earned before that date was taxed at 12.2%, so a December 31, 2026 year-end gets a blended 11.70%. I use 11.2% here because it is the current rate. The PSB rate is 44.5%: 33% federal, including the additional 5% under section 123.5, plus the 11.5% Ontario general rate. If CRA finds a PSB, section 18(1)(p) denies the $9,000 of expenses. I assume they are ordinary costs such as software, equipment and phone, not salary or benefits for the incorporated employee.

35 hours a week

• Revenue: $95 x 35 x 48 = $159,600
• Not a PSB: ($159,600 minus $9,000) = $150,600 x 11.2% = $16,867.20
• PSB: $159,600 x 44.5% = $71,022
• Extra tax: $71,022 minus $16,867.20 = $54,154.80

37.5 hours a week

• Revenue: $95 x 37.5 x 48 = $171,000
• Not a PSB: ($171,000 minus $9,000) = $162,000 x 11.2% = $18,144
• PSB: $171,000 x 44.5% = $76,095
• Extra tax: $76,095 minus $18,144 = $57,951

40 hours a week

• Revenue: $95 x 40 x 48 = $182,400
• Not a PSB: ($182,400 minus $9,000) = $173,400 x 11.2% = $19,420.80
• PSB: $182,400 x 44.5% = $81,168
• Extra tax: $81,168 minus $19,420.80 = $61,747.20

Read this table carefully. The gap between 35 and 40 hours is $7,592.40 a year. That difference comes from revenue, not from a different PSB answer. A 35 hour week does not make you safer by $7,592.40. It only means there is less income exposed if the facts go against you.

That is the point of this post. Hours change the size of the exposure. The rest of the relationship decides whether the exposure becomes real. These figures are corporate tax only. They leave out personal tax on what you later take out of the corporation.

What might CRA read into each hours pattern, and what should you document?

Documentation does not change the facts. It records them. If your real working pattern looks like employment, a file note will not fix that. If your pattern has real independence, a clean record supports your position when CRA asks.

Do hours ever decide PSB status on their own?

No. A contractor on a fixed 40 hour week who owns their tools, carries real financial risk, serves more than one client and controls how the work is done can have a strong position. A contractor on a loose 35 hour week who is directed daily, uses a client laptop and sits inside a client team can have a weak one. CRA weighs all of it, and it looks again each year.

Two other facts also sit outside the hours question. Your corporation is not a PSB if it employs more than five full-time employees in the business throughout the year, or if the amount it receives comes from a corporation associated with it. The first means at least six full-time employees all year, and whether owners or family members count depends on their real roles, so it needs a review. Few contractor corporations meet either exception, and a one-person corporation cannot meet the first.

For the full set of PSB risks beyond hours, please read our page on PSB risk for incorporated contractors.

What can you do about the hours facts in your contract?

Start with what is true. Then look at what you can honestly change at the next renewal or the next contract.

1. Read the hours clause. Is it a requirement or a cap? Does it name days and times?
2. Compare it with how you really work. If the contract and your week do not match, CRA will look at your week.
3. Keep your own records. Note the hours you chose, the work you did on your own time and the results you delivered.
4. Talk to your lawyer about wording. We are accountants, not lawyers. Contract wording is for your lawyer.
5. Review the tax side with us. We review your contract and working facts as part of tax planning, and we look at your pay mix at the same time.

Our firm works only with incorporated Canadian businesses, on a fixed flat-fee model. For contractors, that covers corporate tax returns (T2), bookkeeping, payroll, GST/HST filings, tax planning and CRA audit support and representation. If CRA sends your corporation a questionnaire about your working relationship, we act as its authorized representative, organize the documents and communicate with the auditor. If you work in development, DevOps, data, cloud, cybersecurity or QA, our page for an accountant for IT contractors explains how we work with you.

If your contract says 35, 37.5 or 40 hours and you are not sure how it reads, please book a consultation. Please bring your contract, your statement of work and a typical week’s timesheet. You can also call 647-212-9559 or email info@gondaliyacpa.ca.

Frequently asked questions

Does a 40 hour week decide the control test?

No. A fixed 40 hour week is a control indicator because it matches a standard employee schedule, but it does not decide the control test or PSB status alone. CRA weighs control with ownership of tools, chance of profit and risk of loss, and integration, year by year.

Is a 35 hour contract safer than a 40 hour contract?

Not in itself. Both read as standard full-time schedules. A 35 hour week produces less revenue, so less income is exposed if CRA finds a PSB. At $95 an hour over 48 weeks, the extra tax is $54,154.80 at 35 hours and $61,747.20 at 40 hours in my example.

Does timesheet approval by the end client decide the control question?

No. Any business billing by the hour needs the client to confirm hours before it is paid. What matters is what the approval is used for. Confirming billable hours reads as billing. Reviewing your attendance, tasks and performance reads as supervision.

How does CRA view core hours and on-call rotations?

Core hours and on-call duties are control facts when the client sets them the same way it does for its own staff. They read more like a business service when they are written into your corporation’s contract, priced by your corporation and limited to what the project needs.

What tax rate applies if CRA decides my corporation is a PSB?

The combined Ontario PSB rate is 44.5%: 33% federal, including the additional 5% under section 123.5, plus the 11.5% Ontario general rate. If the corporation is not a PSB, the current combined small business rate is 11.2%. Section 18(1)(p) also denies most expenses for a PSB.

Can you change my contract hours clause for me?

No. We are accountants, not lawyers, and contract wording is for your lawyer. We review your contract and working facts as part of tax planning, explain how the hours terms read for tax, and help you keep records that support your position.