How to pay and manage Canadian contractors: A practical guide

How to Pay and Manage Canadian Contractors: A Practical Guide

If you're paying independent contractors in Canada, you need to handle payment, documentation, and T4A filing. The payment part is straightforward. The compliance part—especially tracking cumulative payments, collecting SIN information, and filing T4A forms—is where most businesses get stuck.

This guide walks through what you actually need to do. Then we'll show you where Kontrable helps organize the work.

The main things you need to do

1. Make payments correctly based on where you and the contractor are located. If you're a Canadian business paying Canadian contractors, use Interac e-Transfer through your bank—it's free and instant. If you're international paying Canadian contractors, use Wise for better exchange rates. The contractor receives the payment in CAD.

2. Collect invoices and verify tax status. Canadian contractors are self-employed and handle their own taxes. You don't withhold tax like in the US. But you need invoices for every payment, and if the contractor is GST/HST-registered, you need to account for the sales tax on their invoices. You also need their Social Insurance Number (SIN) if you're filing a T4A form.

3. File T4A forms if you paid a contractor $500+ CAD in the calendar year. This is Canada's equivalent to the US 1099-NEC. T4A deadline is the last day of February. You file with CRA and provide a copy to the contractor.

4. Keep all records for 6 years. CRA requires you to maintain invoices, payment proof, contracts, and T4A documentation for 6 years. This protects you in an audit.

That's the foundation. Everything else builds on these four things.

Payment methods: What actually works

For Canada-to-Canada payments:

Use Interac e-Transfer through your Canadian bank. It's free, instant, and contractors receive CAD directly in their Canadian bank account. Most Canadian banks include unlimited Interac e-Transfers with no fees.

To set it up: Ask the contractor for their email or phone number. Send the transfer through your bank's Interac system. The contractor receives it immediately or within minutes.

For international payments to Canadian contractors:

Use Wise. You'll get mid-market exchange rates (3-4% better than PayPal or traditional banks) and low fixed fees ($3-7 CAD per transfer). The contractor receives CAD in 1-2 business days.

Why Wise works: If you're paying from USD or another currency, Wise converts at the actual market rate, not the inflated rate PayPal or your bank uses. For regular payments, this saves thousands per year.

To set it up: Create a Wise business account (free). Enter the contractor's Canadian bank details (institution number, transit number, account number). Send money from your currency. Wise converts to CAD at mid-market rates and deposits it in their Canadian bank account.

What about EFT/Direct Deposit?

EFT (Electronic Funds Transfer) is reliable and free through most Canadian banks, but slower than Interac (1-3 days). Use it for regular scheduled payments if speed isn't critical. For one-time payments, Interac is faster.

What about PayPal?

It's convenient if the contractor already uses it. But PayPal charges 2.9% + $0.30 CAD per transaction, and exchange rates are 3-4% worse than Wise. For a $5,000 USD payment, PayPal costs $150-200 USD more than Wise. Avoid it unless the contractor specifically asks for it.

What you need from Canadian contractors

Invoices. Every payment should have an invoice attached. The invoice should include:

• Your company name and address
• Contractor's name/company and address
• Date of invoice
• Description of work
• Amount charged
• Payment terms

If the contractor is GST/HST-registered (annual revenue over $30,000 CAD), they must include GST/HST on the invoice. You pay the GST/HST amount to them, and they remit it to CRA. If you're GST/HST-registered, you can claim input tax credits (ITCs) on the GST/HST they charge. If not, it's an additional cost.

Social Insurance Number (SIN). If you're filing a T4A form, you need the contractor's SIN. Collect this during onboarding before the first payment.

Business information. If the contractor is incorporated, get their business number. If they're GST/HST-registered, get their registration number (it appears on their invoices).

Bank details. For Interac e-Transfer, you need their email or phone number. For EFT or Wise, you need their institution number, transit number, and account number.

Tax and compliance requirements

T4A form (Annual filing)

If you're a Canadian business and paid a contractor $500+ CAD in the calendar year, you must file a T4A slip.

T4A threshold and timeline:

• Threshold: $500+ CAD paid in the calendar year
• Deadline: Last day of February (file with CRA and provide copy to contractor)
• What to report: Total fees paid for services (Box 048)

Who needs to file: Canadian businesses paying Canadian contractors.

Note: If you're an international business paying Canadian contractors, you typically don't need to file T4A. The contractor reports the income on their Canadian tax return.

How to file: Use accounting software (QuickBooks, Xero, etc.) or file with CRA directly. With payment data organized in Kontrable, you can export the information and file through your accounting software or with your accountant.

GST/HST considerations

Canadian contractors must register for GST/HST if their revenue exceeds $30,000 CAD annually. Once registered, they charge GST/HST on their invoices.

How it works: A contractor invoices you $1,000 + $130 HST (13%) = $1,130. You pay them $1,130. They keep the $1,000 and send the $130 HST to CRA.

If you're GST/HST-registered: You can claim the $130 HST as an input tax credit (ITC) on your GST/HST return. Your net cost is $1,000.

If you're not GST/HST-registered: You pay the full $1,130 and can't claim the HST. It's an additional cost.

GST/HST rates by province:

• 15% HST: Nova Scotia, New Brunswick, Newfoundland/Labrador, Prince Edward Island
• 13% HST: Ontario
• 5% GST only: Alberta, Saskatchewan, Manitoba, BC, Quebec (plus provincial sales tax in some provinces)

This is standard—nothing special you need to do. Just understand that GST/HST-registered contractors will add sales tax to their invoices.

Contractor vs Employee: CRA's test

One mistake businesses make is misclassifying employees as contractors. CRA uses several factors to determine the relationship:

Control: Does the contractor decide how, when, and where they work, or do you?

Ownership of tools: Do they use their own equipment, or do you provide everything?

Chance of profit or loss: Do they bear financial risk on the engagement, or are costs covered?

Integration: Are they part of your team like an employee, or working at arm's length?

Other clients: Can they work for other clients, or are they exclusive to you?

If CRA determines a "contractor" is actually an employee, you owe back CPP contributions, employment insurance, and income tax withholding—potentially thousands in penalties.

If you're unsure whether someone is a contractor or employee, document the relationship carefully. A written contract helps demonstrate the contractor nature of the engagement.

Records you must keep

CRA requires 6 years of records. You should maintain:

• All contractor invoices
• Proof of payment (bank statements, Wise receipts, Interac confirmations)
• Signed contracts or statements of work
• T4A slips and filing confirmations
• GST/HST documentation (if claiming ITCs)

Keep these organized so you can find them if CRA audits. If you can't produce records after 6 years, CRA can disallow the expense and assess back taxes.

Common mistakes and how to avoid them

Mistake 1: Missing the T4A deadline. Problem: You paid a contractor $600 CAD throughout the year. Come late February, you realize you need to file T4A but don't have their SIN or payment records organized. You miss the deadline and CRA assesses penalties.

Solution: Collect SIN and business information during contractor onboarding. Track cumulative payments per contractor as you make payments. In January, pull together all T4A information and file before February 28.

Mistake 2: Not claiming GST/HST input tax credits. Problem: You're GST/HST-registered but don't claim input tax credits on contractor invoices. You're overpaying taxes and leaving money on the table.

Solution: Ensure contractors provide proper invoices with GST/HST breakdown. Keep all invoices organized. Claim ITCs on your GST/HST return. If you're unsure how, ask your accountant.

Mistake 3: Using expensive payment methods for international transfers. Problem: You're a US business paying Canadian contractors via PayPal. PayPal's exchange rate is 3-4% worse than the real market rate. For a $5,000 USD payment, you lose $150-200 USD to bad exchange rates.

Solution: Use Wise for international payments. You'll get mid-market rates and save 3-4% on every transfer.

Mistake 4: Misclassifying employees as contractors. Problem: You set the contractor's hours, provide equipment, and require them to work exclusively for you. CRA audits and determines they're actually an employee. You owe back CPP, EI, and income tax withholding—plus penalties.

Solution: Understand CRA's contractor vs employee tests. Contractors should control how they work, use their own tools, bear financial risk, and be able to work for other clients. Document the relationship with a written contract.

Frequently asked questions

Q: Do I deduct tax from Canadian contractor payments? A: No. Canadian contractors are responsible for their own income tax. You pay them the full invoice amount (including GST/HST if applicable) and they handle their own taxes. Exception: If CRA determines they're actually an employee, you must deduct CPP, EI, and income tax.

Q: What if the contractor is GST/HST-registered? A: They'll charge GST/HST on their invoices. You pay the GST/HST amount to them, and they remit it to CRA. If you're GST/HST-registered, you can claim input tax credits on your GST/HST return. If not, it's an additional cost.

Q: Can I use Interac e-Transfer if I'm an international business? A: No, Interac requires a Canadian bank account. Use Wise for international payments to Canadian contractors—it's the most cost-effective option with mid-market exchange rates.

Q: How do I know if someone is a contractor or employee in Canada? A: CRA considers control, ownership of tools, chance of profit or loss, and integration into the business. Contractors should control their work methods, use their own tools, bear financial risk, and be able to work for other clients. If you're unsure, document the relationship and consider getting legal review.

Q: What's the difference between T4 and T4A? A: T4 is for employees and reports employment income, CPP, EI, and tax deductions. T4A is for contractors and self-employed individuals and reports fees for services. If you're paying contractors, you file T4A.

Q: Do I need a written contract with Canadian contractors? A: Not legally required, but highly recommended. A written contract clarifies scope, deliverables, payment terms, and helps demonstrate the contractor relationship for CRA purposes. It protects both you and the contractor.

Getting started

If you're managing Canadian contractors, here's the process:

1. Collect SIN, business information, and bank details during onboarding
2. Set up payment method: Interac e-Transfer for Canada, Wise for international
3. Require invoices for all payments
4. Account for GST/HST if the contractor is registered
5. Track cumulative payments to know when you hit the $500 threshold for T4A
6. File T4A forms by February 28
7. Keep all records for 6 years

Kontrable helps with steps 1, 2, 3, 4, and 5 by organizing contractor information, tracking payments, managing invoices, and storing contracts. You stay in control of your payment method and use whatever works for your business.

If you're managing a few contractors, a spreadsheet works. If you're managing dozens or coordinating across a team, Kontrable saves time and keeps contractor data organized.

Ready to get organized?

[Start a free trial of Kontrable] – Get invoice workflows, payment tracking, and contract storage. Try it free.