Converting a Canadian contractor to an employee: a guide for U.S. companies

A U.S. company can convert a Canadian contractor to an employee without opening a Canadian company. An employer of record can employ the person in Canada, or your company can register as an employer with the CRA. Either way, a good conversion changes the paperwork, not the working relationship: same person, same work, now with payroll, benefits and the protection of provincial employment law.

When a contractor should become an employee

Most conversions start for one of two reasons. Either the relationship has drifted into employment, or the company wants to keep someone and the person wants the stability of a job.

The drift is the more urgent case. The CRA decides employee or contractor from how the work is done, not from what the contract says. A contractor who works set hours, takes direction from a manager, uses your laptop and accounts, works only for you and has no end date looks like an employee, whatever the agreement is called. Québec applies a similar test under its Civil Code.

The planned case is simpler: a contractor who has proved themselves, a project that has become a permanent role, or a person who wants benefits and paid vacation. Converting is how you keep them.

Three ways to employ the person in Canada

Route	What you need	Time to the first payroll	Best when
Employer of record	A service agreement with the EOR	24–48 hours of agreeing terms, through InfraDev	One or a few people in Canada, no entity planned
Register as an employer yourself	A CRA business number and payroll account, provincial registrations, workers’ compensation, a payroll provider	Several weeks of setup	A team in Canada large enough to justify running it
Keep a contractor, held by a Canadian party	A role that is genuinely independent	Days	The work really is independent, but you would rather not hold the contract

The EOR vs Canadian entity comparison sets out the costs and the break-even headcount. The third route is not a conversion at all: consulting management suits people who remain genuinely independent. If the role is a job, employ them.

Step 1: Review the history before you change anything

Look at how the work has actually been done, and for how long. If the contractor period was employment in substance, two things follow.

First, CPP and EI contributions that an employer should have deducted were not. If the CRA later decides the person was an employee, it can assess the employer for the missed contributions, including the employee’s share, with penalties and interest. Converting does not trigger that review, but it does not erase the past either.

Second, the time can count as service. Provincial employment standards and the courts look at the real relationship, so years of contracting can count toward notice of termination, severance and vacation entitlements. Ontario’s Employment Standards Act also prohibits treating an employee as if they were not one.

For a short engagement this review takes minutes. For a long one, with set hours and a single client, ask an employment adviser before you sign anything. Either party can also ask the CRA for a ruling on form CPT1.

Step 2: Set a salary rather than copying the rate

A contractor’s rate is not a salary. It has to pay for things an employer covers once the person is on payroll, so the right salary is usually lower than the invoiced total, while your total cost stays about the same.

What the contractor’s rate had to cover	Who pays after conversion
Both the employer and employee halves of CPP	The employer pays its share; the employee’s share comes off the pay stub
No EI, so no parental or sickness benefits	Both contribute; the employee is covered
Unpaid vacation and statutory holidays	Paid by the employer, at least to the provincial minimum
Health and dental cover, bought privately	Group benefits, if you offer them
Their own laptop, software and accountant	The employer supplies equipment; payroll replaces the bookkeeping
Gaps between contracts	A salary that continues

Start from the market salary for the role in that province, then check the total. The Canadian employer cost calculator adds the deductions, contributions and overhead to a salary, and the worked example at the end of this article shows the same $100,000 paid both ways.

Talk the person through their net pay before the offer. Some contractors expect the salary to match the rate, and a side-by-side comparison of take-home pay, benefits and time off usually settles it.

Step 3: Decide the service date in writing

You can recognize the contractor period as service, starting the employment on the date of the first contract, or start fresh on the conversion date. Recognizing it is common when the work continues unchanged, because a court may count that time anyway if the contract was employment in substance. Whichever you choose, say it in the agreement.

Avoid a new probation period for someone who has done the same job for months. It is hard to justify, and in Ontario, where the employer owes no notice in the first three months of employment, it may not hold if the earlier time counts as service.

Step 4: Write the employment agreement for the province

The agreement follows the province where the person works, not where your company is. It should set out:

• Pay and hours: salary, pay frequency, working hours and overtime treatment.
• Vacation and holidays: at least the provincial minimum, which is two weeks a year in most provinces, rising with service.
• Benefits: what is offered and when cover starts. Waiving the waiting period for someone who has already worked with you is a simple goodwill gesture.
• Termination: a clause that meets the province’s minimums. In Ontario, a termination clause that falls below the Employment Standards Act can be void as a whole, which leaves the employer owing common-law reasonable notice instead.
• Confidentiality and non-solicitation: Ontario has prohibited non-compete agreements with most employees since October 25, 2021, so rely on these instead.
• Language: in Québec, a written employment contract is drawn up in French first. Hiring an employee in Québec covers the rules.

Step 5: Close the contractor agreement cleanly

End the contract the day before employment starts, so there is no gap and no overlap.

• Final invoice: for work up to the end date, under the contract’s usual terms.
• Ownership of the work: under Canada’s Copyright Act, an employer owns what an employee creates in the course of employment, but a contractor keeps copyright in their work unless they assign it in writing. Have the person sign an assignment covering everything they created as a contractor, with a waiver of moral rights, which can be waived but not assigned.
• Confidentiality: the contractor agreement’s confidentiality terms should survive its end, and the employment agreement picks them up from there.
• Their business: whether they keep their GST/HST registration or business accounts is their decision and their accountant’s, not yours.

Step 6: Start payroll on the first day

From the first day of employment, the person is paid through Canadian payroll:

• Onboarding: their Social Insurance Number, the federal and provincial TD1 forms (in Québec, the TP-1015.3), direct deposit details and benefits enrolment.
• Each pay: income tax, CPP (QPP in Québec) and EI deducted, the employer’s contributions added, and everything remitted to the CRA on schedule. The CRA requirements guide lists the deadlines.
• Workers’ compensation: cover under the province’s board from the start date.
• Year end: a T4 for the employment income. Their contractor income for the earlier part of the year stays on their own tax return as business income.

Tell the person what changes for them: a regular pay stub with deductions already taken, EI coverage, paid vacation and holidays, and no more quarterly instalments on their employment income.

Converting through InfraDev

When InfraDev is the employer of record, we employ the person in their province, write the agreement to provincial law with the service date you choose, collect the assignment of their earlier work, and run payroll, remittances and the T4. Onboarding takes 24–48 hours once the terms are agreed, and the person keeps working with your team as before. You direct the work; we are the employer in Canada. How it works shows who does what.

If someone on your team is genuinely independent and should stay that way, InfraDev can hold the contract instead through consulting management.

Summary

• A U.S. company can convert a Canadian contractor to an employee through an employer of record, with no Canadian entity, or by registering as an employer itself.
• Review the contractor history first: if it was already employment, earlier CPP and EI may be owed and the time can count as service.
• Set a market salary instead of copying the rate, decide the service date in writing, and skip a new probation period.
• Write the agreement to the province’s law, close the contract the day before employment starts, and have the person assign the work they created as a contractor.
• Run payroll from the first day, with a T4 at year end.

Sources

• CRA: Employment status, employee or self-employed
• CRA: Form CPT1, request for a ruling on employment status
• CRA: TD1 personal tax credits returns
• CRA: Payroll
• Ontario: Your guide to the Employment Standards Act
• Copyright Act (Canada), sections 13 and 14.1