Your business grew past what you can do alone, so you started paying other people to help: a second designer when a project got too big, maybe a labourer for a day, an editor when the work piled up. Those payments are deductible. But pay them wrong and the CRA can reclassify them as employees, and suddenly you owe back CPP, EI, and penalties.
Here’s how paying subcontractors actually works when you’re self-employed in Canada.
Subcontractor payments are deductible
When you hire a true contractor to help deliver your work, what you pay them is a business expense on your T2125. It comes straight off your income. A general contractor paying trades, a marketing freelancer bringing in a copywriter, a cleaner who calls in backup for a big job: all deductible.
Keep proof. Invoices from the subcontractor, e-transfer or cheque records, and ideally a simple written agreement. If the CRA asks and you can’t show who you paid and for what, the deduction is at risk.
The employee-vs-contractor test that decides everything
This is the part that costs people. The CRA doesn’t care what you call the relationship; it looks at the substance. The more “employee-like” it is, the more danger you’re in.
| Factor | Points to contractor | Points to employee |
|---|---|---|
| Control | They decide how/when to do the work | You direct their hours and methods |
| Tools | They use their own | You provide everything |
| Financial risk | They can profit or lose | They just get paid for time |
| Integration | They serve other clients | They work only for you |
| Substitution | They can send someone else | Only they can do it |
If you control someone’s hours, supply all their tools, they work only for you, and they can’t subcontract it out, the CRA may rule they’re your employee, even with an invoice and a handshake deal. The bill: unremitted CPP and EI (both halves), interest, and penalties.
Protect yourself: hire people who run their own businesses, serve other clients, set their own methods, and invoice you. Put it in writing.
Do you have to issue a T4A?
This trips up small businesses. Technically, the CRA’s rules say a business should issue a T4A for fees paid for services over $500 in a year (Box 048, “fees for services”). In practice, the CRA has historically not assessed penalties on small businesses solely for not filing T4As for subcontractors, and the requirement has long sat in a grey zone. That zone is narrowing: CRA lifted the moratorium for the trucking industry at the end of 2025, and it’s expected to keep unwinding sector by sector, so don’t count on the grey zone holding forever.
The safe posture: keep clean records of every subcontractor payment regardless. If you do issue T4As, the deadline is the last day of February for the prior calendar year. If you’re unsure (especially as you grow), issue them or ask an accountant. The records matter more than the slip, but the slip removes all doubt.
Get the subcontractor’s information up front
Before you pay anyone meaningfully, collect:
- Their legal/business name and address
- Their GST/HST number if they charge it (and they must, once they cross $30,000, whether in a single calendar quarter or over four consecutive quarters)
- An invoice for every payment
If a subcontractor charges you GST/HST, you can claim it back as an input tax credit when you’re registered, but only if you have their number and a proper invoice. No invoice, no credit.
GST/HST flows through you
If you’re GST/HST registered, you charge it to your clients and you pay it on your subcontractors’ invoices. You remit the difference. The subcontractor’s GST/HST isn’t a cost to you; you claim it back as an input tax credit, and the invoice with their number is what unlocks it. Our GST/HST registration guide covers the mechanics.
Line 8360 isn’t for every subcontractor
The T2125 does have a Line 8360, subcontracts, but it lives in the cost-of-goods-sold section, not general expenses. That’s for goods-based businesses: a contractor who buys materials and subs out the labour to install them, a business paying someone to help produce the goods it sells. If you’re a contractor who buys $20,000 of materials and pays $15,000 to subs on the same jobs, that $15,000 goes on Line 8360, kept separate from the materials line.
Most subcontracting isn’t that. A marketing freelancer hiring a copywriter, a cleaner calling in backup, a second designer on a project: there’s no goods being produced or sold, so there’s no COGS section for the payment to sit in. That expense belongs in the general business-expenses part of your T2125, typically Line 9270 (Other expenses). Don’t file it under 8360 just because the label says “subcontracts”: that line is reserved for the materials-and-labour side of a goods-based business.
Deadlines that matter when you hire
| Deadline | What’s due |
|---|---|
| Last day of February | T4A slips filed (if you issue them) for the prior year |
| April 30 | Your tax balance owing (payment) |
| June 15 | Your T1 + T2125 filing (self-employed) |
Let Accountly keep the subcontractor trail clean
Accountly logs every subcontractor payment against the right T2125 line, stores their invoices, and tracks the GST/HST you can claim back, so if the CRA ever asks who you paid and why, the answer is one click away.
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Frequently asked questions
Are payments to subcontractors tax deductible?
Yes. Payments to genuine subcontractors are a business expense on your T2125. If you’re a goods-based business subbing out labour tied to materials, that’s Line 8360 (cost of goods sold). Pure-service subcontracting, like hiring another freelancer or a helper, goes under general expenses (Line 9270) instead. Either way, keep their invoices and payment records to support the deduction.
Do I have to issue a T4A to my subcontractors?
The CRA’s rules call for a T4A (Box 048) for service fees over $500, though enforcement on small businesses has been inconsistent. Keep thorough payment records regardless; if you issue T4As, file them by the last day of February.
How does the CRA decide if my subcontractor is really an employee?
It weighs control, who provides tools, financial risk, exclusivity, and whether the worker can substitute someone else. The more control you exert and the more exclusive the relationship, the more likely it’s deemed employment, which makes you liable for CPP and EI.
Can I claim back the GST/HST a subcontractor charges me?
Yes, as an input tax credit, but only if you’re registered and have a proper invoice showing their GST/HST number. No valid invoice, no credit.
What information should I collect before paying a subcontractor?
Their legal/business name and address, their GST/HST number if applicable, and an invoice for each payment. Collect it before you pay, not at tax time.
What happens if the CRA reclassifies my contractor as an employee?
You can be assessed for unremitted CPP and EI (both the employer and employee portions), plus interest and penalties. Structuring the relationship as a genuine contractor arrangement, and documenting it, is the defense.
The information in this guide is for general informational purposes only and is not intended as accounting, tax, business, or legal advice. Accountly does not provide professional services or act as your accountant, tax advisor, or lawyer. No client relationship is created by your use of this material. Always seek advice from qualified professionals who understand your particular circumstances before acting on any information contained herein.
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