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Contractor guide
Contract jobs in Canada are paid either through payroll (T4), to your own corporation (Inc.) or, less often, to you as a sole proprietor. The choice changes who deducts tax, CPP and EI, what you can charge and which risks you carry. Here is what each one means.
| T4 contract | Incorporated (Inc.) | Sole proprietor | |
|---|---|---|---|
| Who pays you | The agency or client, through payroll | The agency pays your corporation | The agency or client pays you directly |
| Deductions at source | Income tax, CPP and EI | None, your corporation pays you | None, you pay by instalments |
| Employer share of CPP and EI | Paid by the agency | Paid by your corporation if it pays you a salary | You pay both shares of CPP |
| Tax slip | T4 | T2 return for the corporation | Business income on your T1 return |
| Typical hourly rate | Lowest | Highest | Close to Inc., when accepted |
| Main risk | Fewer deductions | Personal services business (PSB) rules | Many agencies do not accept it |
On a T4 contract you are on the payroll of the agency or of the client for the length of the assignment. Income tax, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) and Employment Insurance (EI) contributions are deducted from each pay, and the employer pays its own share. Provincial employment standards apply, such as vacation pay. Benefits are rare. It is the simplest option and the T4 rate is lower for that reason.
Most senior IT contractors in Canada work through their own corporation. The agency pays your corporation the full hourly rate with no deductions at source, and you decide how to pay yourself, through salary or dividends. You keep your books, file a corporate tax return and buy your own benefits. Recruiters often write "Inc." or "corp to corp" for this setup.
The main tax risk of working incorporated is being treated as a personal services business, the Canadian equivalent of what other countries call disguised employment. If you work like an employee of a single client, under their control, with their equipment and no financial risk, the CRA can treat your corporation as a PSB. The corporation then loses the small business deduction, its income from that work is taxed at a higher rate and most expenses are no longer deductible. Working for several clients, controlling how you deliver the work, using your own equipment and carrying real business risk all reduce that risk.
You can also contract in your own name as a sole proprietor and report business income on your personal return. You pay both the employee and employer shares of CPP and you are not covered by regular EI. Many agencies and large clients only accept incorporated or T4 contractors, so check with the recruiter before you apply.
As an incorporated contractor or sole proprietor, you must register for GST/HST once your taxable sales go over $30,000 in a calendar quarter or over four consecutive calendar quarters, and then charge it to your clients. In Quebec, the QST works the same way. Agencies usually add the GST/HST you charge on top of your hourly rate.
Incorporated contractors are often asked for professional liability (errors and omissions) insurance, and sometimes commercial general liability. On a T4 contract, the agency or client is your employer and this is rarely asked.
This guide gives general information, not tax or legal advice. Rules differ by province: check your situation with an accountant.
Compare a salary and an Inc. rateWhat does Inc. mean in a Canadian contract job post?
It means the rate is paid to your own corporation, which invoices the agency or client. "$95/hr Inc." is the rate before any tax, CPP or EI, which your corporation handles. Some recruiters call it corp to corp.
What does T4 mean in a contract job post?
It means you are paid through the payroll of the agency or the client, like an employee, for the length of the contract. Income tax, CPP and EI are deducted from each pay and you receive a T4 slip at the end of the year.
What is a personal services business (PSB)?
It is how the Canada Revenue Agency (CRA) treats a corporation whose owner would reasonably be considered an employee of the client if the corporation did not exist. A corporation found to be a PSB loses the small business deduction, pays a higher rate of tax on that income and can deduct very few expenses. Control over your work, owning your tools, taking financial risk and having several clients all help show you run a real business.
When do I have to register for GST/HST?
Once your taxable sales go over $30,000 in a single calendar quarter or over four consecutive calendar quarters, you are no longer a small supplier and must register and charge GST or HST. In Quebec, the QST follows the same $30,000 threshold. You can also register voluntarily before that.
Do I need insurance as an incorporated contractor?
Agencies and clients often ask incorporated contractors for professional liability (errors and omissions) insurance and sometimes commercial general liability insurance. Check the contract, which usually states the minimum coverage.
How do I compare a T4 salary with an Inc. rate?
Add the value of the benefits, vacation and employer CPP and EI you give up, then divide by the hours you will actually bill. Our salary to contract rate calculator does the math for you.
