CRA Payroll Trust Examination Exposure and Response Guide
The letter has arrived. Work out what the auditor will ask for, what you should and should not hand over, whether a ruling helps, where the due diligence defence applies, and the personal exposure sitting behind the corporate one.
classification risk
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What the Auditor Will Ask For
| Document | Why They Want It | Provide |
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How the Four Factors Read on Your Facts
| Factor | Your Position | Points To |
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The Due Diligence Defence
| Element | What It Requires | You |
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What Happens Next, and When
| Stage | What It Means |
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Points That Decide This
What to Do Next
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Disclaimer: This page addresses the conduct of a CRA trust account examination and the response to it. For the dollar assessment on reclassified workers, including CPP and EI on both the employer and employee sides, the failure to deduct and failure to remit penalties, and Ontario employer health tax and WSIB exposure, use the worker misclassification calculator linked below. Whether a worker is an employee or an independent contractor is determined on the total relationship between the parties, considering the intent of the parties and the factors of control, ownership of tools and equipment, chance of profit and risk of loss, and integration, as applied in the case law including Wiebe Door Services and Sagaz Industries and as summarised in CRA guide RC4110. No single factor is determinative and the written contract, while relevant to intent, does not override the conduct of the parties. Either a worker or a payer may request a ruling from the CRA on Form CPT1, and a ruling may be appealed. The due diligence defence available to a director under subsection 227.1(3) of the Income Tax Act requires the director to have exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances, and the courts have applied an objective standard. Directors’ liability under section 227.1 does not apply where an action is commenced more than two years after the person last ceased to be a director. Amounts withheld from employees are held in trust for the Crown. Nothing on this page is legal advice, and where an assessment is significant or an appeal is contemplated, legal representation should be considered. This page is general information, not tax or legal advice.
A Trust Examination Is Not a Regular Audit
A trust account examination looks at whether you withheld and remitted what you should have on people you paid. It is narrower than an income tax audit and it moves faster, but the money at stake is treated more seriously because it is trust money.
The examiner is not primarily interested in your deductions or your revenue. They want to know who you paid, how, and whether any of those people were employees.
Construction, trucking, cleaning, IT consulting and creative agencies are selected far more often than other sectors. That is not bad luck. Those industries pay benches of workers on invoices, and the CRA knows the reclassification rate is high. If you are in one of them, being selected says less about your file than you might fear.
The Contract Does Not Decide It
Owners often believe a signed independent contractor agreement settles the question. It does not. The written contract is evidence of what the parties intended, and intent is one consideration among several.
What decides it is the conduct of the relationship, assessed across the established factors: control, ownership of tools, chance of profit and risk of loss, and integration into the business. No single factor is determinative.
| Factor | Points to Contractor | Points to Employee |
|---|---|---|
| Control | Sets own hours and methods | Told when and how to work |
| Tools | Supplies significant own equipment | Uses yours |
| Profit and loss | Can profit or lose on a job | Paid regardless of outcome |
| Integration | Works for several clients | Works only for you |
Exclusivity is what usually decides these files. A worker who has served only you for three years, uses your equipment and cannot subcontract is going to be reclassified regardless of what the paperwork says. Conversely a genuine subcontractor with several clients and their own tools is defensible even without a written agreement.
What to Hand Over, and What Not To
Cooperate, and cooperate within the scope of what is actually requested. Volunteering documents outside the request rarely helps and frequently opens ground the examiner had not been looking at.
- Provide what is requested, completely and on time
- Do not volunteer other years or other issues not raised
- Route questions through one person, so answers stay consistent
- Do not let staff answer informally, since offhand remarks become notes in the file
- Keep a record of everything provided and every question asked
- Get representation involved early, before positions harden
The most damaging moments in these files are casual conversations. An examiner asking a foreman whether workers can turn down jobs, and getting an honest “not really”, carries more weight than any document you provide. Everyone who might be asked should know to direct questions to one place.
A Ruling Cuts Both Ways
Either you or a worker can request a CPP and EI ruling on Form CPT1. Where a worker has already filed one, the process is under way whether you like it or not.
Requesting one yourself is worth considering where your facts are genuinely strong and you want certainty going forward. Where your facts are weak, asking for a ruling invites a formal determination against you, and a ruling on one worker tends to be applied to everyone in the same arrangement.
| Situation | Ruling |
|---|---|
| Strong facts, want certainty going forward | Worth considering |
| Weak facts, hoping to delay | Do not |
| A worker has already filed one | Engage properly with it, you cannot stop it |
The Due Diligence Defence Protects the Director, Not the Company
Where the corporation cannot pay, directors can be assessed personally under section 227.1. The defence in subsection 227.1(3) is available to a director who exercised the care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised.
The standard is objective, and it is about prevention rather than remedy. What supports it looks like this:
- Systems in place to ensure remittances were made on time
- Actually monitoring that they happened, not merely delegating
- Acting on problems when they surfaced
- Not preferring other creditors over the Crown when cash was tight
- Contemporaneous records, since a defence assembled after the assessment reads as exactly that
Two years after you cease to be a director, section 227.1 liability generally cannot be commenced. That is a real limitation, and it is one of the few genuinely favourable rules in this area. It matters for anyone who has resigned or is considering it, though resigning to escape a known liability is its own set of problems.
Cash Wages Change the File Entirely
Everything above assumes a genuine disagreement about classification. Cash wages are different. They move the file from a technical dispute toward unreported payroll, and the CRA’s posture changes accordingly.
If cash was paid, that needs to be dealt with honestly and early with proper representation. It is not something to manage informally with an examiner, and it is the one situation on this page where legal advice matters more than accounting advice.
Filing Slips Helps You
Businesses that filed T5018 or T4A slips for their subcontractors are in a materially better position than those that filed nothing. It demonstrates a good faith belief in the contractor characterisation rather than an attempt to keep payments invisible.
It does not decide classification. It does affect how an examiner reads the file, and on a marginal case that matters.
Get representation in before the proposal letter, not after. Our audit representation service handles the correspondence, the document scope and the classification argument.
What This Page Does Not Cover
- The dollar assessment, which is on the misclassification calculator linked below
- Whether any specific worker is an employee, which needs the full facts
- Appeals and litigation, where legal representation is appropriate
- Employment standards and WSIB, which have their own tests
- GST/HST charged by subcontractors who were reclassified
- Provinces other than Ontario
Frequently Asked Questions
Common questions on CRA trust account examinations.
Related Calculators and Guides
The numbers behind the examination.
Get Representation in Before the Proposal Letter
Send us the CRA letter and the worker arrangements. We will manage the document scope, put the classification argument properly, and deal with the examiner so nobody in your business is answering questions informally.