The Dangerous Myth of the Independent Contractor: CRA Compliance

Why Dental Clinics Are Walking Into a CRA Audit

By the Fairly Team Reading Time: 5 Minutes

If you own or manage a dental clinic in Canada, you have likely heard this advice before: "Just hire the temp RDH or RDA as an independent contractor. It saves time, effort, and paperwork."

It sounds like a smart hack. You get the coverage you need for a sick leave or vacation, and you avoid the administrative headache of T4s, CPP, and EI.

But here is the hard truth: If you are hiring a temporary Hygienist or Assistant to work on your patients, using your chair and instruments, during clinic hours you set, they are almost certainly not independent contractors in the eyes of the Canada Revenue Agency (CRA).

They are employees. And treating them like contractors isn't a "hack"—it's a liability ticking time bomb that puts your practice, and potentially your personal assets, at risk.

The "Duck Test" of Dental Employment

The CRA doesn't care what your contract says. You can write "Independent Contractor" at the top of an invoice, but if the working relationship looks like employment, the CRA will tax it like employment.

This is often referred to as the "Duck Test", based on the old adage: "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." The same logic applies here: if a worker looks like an employee and acts like an employee, the CRA treats them as an employee.

In legal terms, this means the CRA looks at the substance of the relationship rather than the label you put on it. Even if you call them a contractor, if you treat them like an employee, the law says they are an employee.

The CRA looks at key factors to determine this, most notably Control and Independence. Ask yourself these four questions about your temp RDHs:

1. Do you provide the tools? (Do they bring their own cavitron, x-ray machine, and dental chair? Or do they use yours?)

2. Do you determine their hours? (Must they see patients during your clinic's set operating hours, e.g., 8 AM - 5 PM?)

3. Can they subcontract the work? (This is an important test. If your temp is sick, can they simply send a replacement of their choosing without asking you? Or is the contract for their specific personal service? If they can't subcontract, they are likely an employee.)

4. Do you bear the risk? (If a patient doesn't pay, does the temp still get paid for their time? If yes, they aren't running their own business.)

If you answered "No" to subcontracting and "Yes" to the others, you are the employer.

Busting the "Three Shift" Myth

There is a persistent myth in the dental community that a worker only becomes an employee after they have worked a certain number of shifts (often cited as 3 shifts).

This is completely false.

Employment status is determined by the nature of the relationship, not the duration. Whether a temp works for you for 3 years, 3 days, or 3 hours, if you control their work and provide the tools, they are an employee from minute one. There is no "probationary period" for tax compliance.

"But My Temp is Incorporated!"

Some clinics believe they are shielded from liability if the temp has an incorporated company. While this adds a layer of paperwork, it is not a magic shield.

If the CRA looks at the relationship and sees that the incorporated worker is essentially acting as an employee (a "Personal Services Business"), they can pierce the corporate veil. If they determine the corporation is a sham designed to avoid taxes, the clinic can still be held liable for failing to remit source deductions.

The High Cost of Getting It Wrong: Do The Math

So, what happens if the CRA decides you have misclassified your temps? The financial consequences are retroactive, severe, and expensive.

The CRA currently charges prescribed interest rates on overdue taxes that have hovered around 9% to 10% recently. This interest compounds daily.

A Real-World Penalty Scenario

Let’s say you paid various "contractor" temps $50,000 per year for 3 years (Total wages: $150,000). You are audited in Year 4. Because the debt from Year 1 has been compounding for 4 years, the numbers get ugly fast.

For this example, we apply the 20% Gross Negligence Penalty (common in multi-year misclassification cases) and the current 10% Interest Rate.

1. Unremitted CPP & EI (Both Portions): You owe the employer portion plus the employee portion you failed to deduct for all 3 years.

   • Approx Cost: $15,900

2. Unremitted Income Tax: You are liable for the tax you didn't deduct from their cheques for 3 years.

   • Approx Cost: $33,000

3. The Penalty: Because this occurred over multiple years, the CRA may apply the 20% Gross Negligence Penalty on the unremitted amount.

   • Cost: ~$9,800

4. The Interest: Calculated at 10% compounded daily.

   • Year 1 debt has accrued interest for 4 years (~$8,000).

   • Year 2 debt has accrued interest for 3 years (~$5,700).

   • Year 3 debt has accrued interest for 2 years (~$3,600).

   • Total Interest Cost: ~$17,300+

Total Unexpected Bill: ~$76,000+

You paid $150k in wages, but now owe an additional $76k to the CRA. That is 50% of the value of the wages paid, gone instantly.

Feel free to try our penalty calculator (scroll down the page).

The Nightmare Scenario: Director’s Liability

The financial penalties above are bad, but this is the risk that keeps business owners awake at night.

Under Canadian law (specifically Section 227.1 of the Income Tax Act), directors of a corporation are jointly and severally liable for unremitted source deductions.

This means if your dental practice cannot pay the bill—perhaps because the audit is massive and drains your cash flow—the CRA pierces the corporate veil. They do not stop at the business assets.

They can legally seize your personal assets to settle the debt.

• Your personal bank accounts.

• Your car.

• Your family home.

You cannot hide behind your corporation for unpaid payroll taxes. If you get this wrong, you are betting your personal livelihood on a technicality.

The Solution: Compliance Without the Headache

You shouldn't have to choose between agility and safety. You need the flexibility of temporary help, but you cannot afford the risk of non-compliance.

That is why we built Fairly Payroll for Temps.

Fairly creates a frictionless bridge between your clinic and your temporary workforce.

• Instant Onboarding: We handle the digital paperwork instantly.

• Automatic Deductions: We calculate, deduct, and remit all necessary taxes (CPP, EI, Income Tax) automatically.

• Zero Risk: Because the workers are paid through a compliant payroll system, you eliminate the risk of misclassification penalties.

You get the speed of a contractor relationship with the safety of a T4 employee.

Protect Your Practice (and Your Home) Today

Don't bet your house on a payroll error. If you are using temps, treat them right and protect yourself.

Try Fairly Payroll Today – It takes one click to turn a liability into an asset.

Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute legal, financial, or tax advice. Tax laws and CRA regulations are complex and subject to change. We strongly recommend consulting with a qualified Chartered Professional Accountant (CPA) or tax lawyer to discuss your clinic's specific situation and compliance requirements.