Construction Contractor Tax Compliance: WCB, HST, and Payroll

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

Construction contractors operating in Ontario, Mississauga, and across the GTA face a uniquely complex tax compliance landscape. Between Workplace Safety and Insurance Board (WSIB) reporting, HST invoice requirements, payroll remittances, subcontractor payments, and CRA’s heightened scrutiny of the construction industry, the margin for error is razor-thin.

One missed payroll remittance. One incorrect HST invoice. One unreported cash payment to a subcontractor. Any of these can trigger a CRA audit that derails your operations for months and costs tens of thousands in penalties, interest, and back taxes.

This comprehensive guide walks construction contractors, project managers, and builders through the essential tax compliance requirements specific to the construction industry in Ontario. You’ll learn how to structure compliant HST invoices, navigate WCB clearance certificates, manage subcontractor payments without triggering red flags, and defend your business if CRA comes knocking.

Why Construction Tax Compliance Is Different

Construction contractors face compliance challenges that most other industries don’t encounter:

1. Cash-Heavy Transactions

The construction industry still operates heavily on cash and cheques, which automatically raises red flags with CRA. Every cash paymentwhether to a supplier, subcontractor, or for materialsrequires meticulous documentation.

2. Complex Subcontractor Relationships

Are your subcontractors employees or independent contractors? The distinction matters enormously for payroll tax, HST, WSIB, and CRA audit risk. Misclassification is one of the top triggers for construction audits.

3. Project-Based Accounting

Unlike businesses with steady revenue streams, construction contractors must track income and expenses project-by-project. This creates challenges for percentage-of-completion accounting, work-in-progress reporting, and matching revenues to the correct tax year.

4. Multi-Jurisdictional Projects

If you work on projects in Mississauga, Toronto, Hamilton, and beyond across the GTA, you’re dealing with multiple municipal tax requirements, varying building permit processes, and complex HST place-of-supply rules.

5. CRA’s Industry-Specific Audits

CRA runs targeted audit campaigns on construction contractors. They know the common schemes: unreported cash income, personal expenses run through the business, fake subcontractor invoices, and dividend-stripping through related companies.

WCB (WSIB) Compliance for Construction Contractors

The Workplace Safety and Insurance Board (WSIB) isn’t a tax authority, but compliance failures here can derail your entire business. Here’s what every Ontario contractor needs to know:

Mandatory WSIB Coverage

If you have even one employee in Ontario’s construction industry, WSIB coverage is mandatory. This includes:

Full-time employees
Part-time employees
Seasonal workers
Family members on payroll

Independent contractors and sole proprietors can apply for optional coverage, but if you hire them and they’re not covered, you may be liable for their WSIB costs if they’re injured on your site.

Classification Units and Premium Rates

WSIB classifies construction work into specific rate groups:

Residential construction: Lower rates (~$3-5 per $100 of insurable payroll)
High-rise construction: Higher rates (~$8-12 per $100)
Roofing, demolition, concrete work: Highest rates (~$15+ per $100)

Pro tip: If you do multiple types of work, ensure your payroll is allocated correctly across classification units. Overpaying on misclassified work costs you thousands annually.

Clearance Certificates

General contractors hiring subcontractors must obtain WSIB Clearance Certificates from every sub before making final payment. If you pay a subcontractor who doesn’t have valid WSIB coverage, you become liable for their unpaid premiums.

How to verify:

Request the Clearance Certificate before signing contracts
Verify online at wsib.ca using the certificate number
Keep copies in project files for CRA audit defense

Common WSIB Mistakes Contractors Make

Treating all workers as independent contractors to avoid WSIB premiums

Correct approach: Classify based on control, tools, and risk. If you direct their work, provide tools, and they work only for you, they’re likely employees.

Not reporting full payroll (paying workers partly off-books)

Correct approach: Report every dollar of payroll. WSIB audits compare your reported payroll to CRA T4s and bank deposits.

Ignoring WSIB audit requests

Correct approach: Respond immediately. WSIB can assess retroactive premiums for 3 years if you don’t cooperate.

HST Compliance for Construction Contractors

HST in construction is complex because of the distinction between commercial and residential work, place of supply rules, and the CRA’s builder rebate schemes.

When to Charge HST

You must register for HST if:

Your taxable revenues exceed $30,000 over any four consecutive quarters
You’re a builder (constructing or substantially renovating housing)

Commercial construction: Always charge 13% HST in Ontario
Residential construction: Charge 13% HST, but homeowners may qualify for the new housing rebate (you can assign the rebate and reduce the HST charged)

Construction Invoice HST Requirements

Every HST invoice you issue must include:

Your business name and GST/HST number
Customer name and address
Invoice date and unique invoice number
Description of work performed (be specific: “Framing services for 123 Main St, Unit 2” not “Construction work”)
Total amount before HST
HST amount (13% in Ontario)
Total amount including HST

Pro tip for Mississauga contractors: If you’re working on projects in multiple provinces (e.g., a client has sites in Ontario and Quebec), the HST rate depends on place of supplywhere the work is performed, not where your office is.

Input Tax Credits (ITCs)

You can claim HST paid on:

Materials and supplies
Subcontractor invoices (if they’re GST/HST registered)
Equipment purchases and leases
Vehicle expenses (subject to restrictions)

What you CAN’T claim:

HST on meals and entertainment (only 50% of the expense itself is deductible, and you can claim ITC on that 50%)
Personal use portion of vehicles
HST on goods/services used for exempt supplies

Common HST Mistakes

Not charging HST because the client is “a friend”

Correct: Charge HST on every taxable supply. Personal relationships don’t exempt transactions.

Claiming ITCs on personal expenses run through the business

Correct: Only claim ITCs on legitimate business expenses. CRA audits construction companies specifically for personal vehicle claims, tool purchases used at home, and “business meals” with no business purpose.

Missing the HST filing deadline

Correct: File monthly, quarterly, or annually depending on your revenue. Late filing = 1% penalty + 0.25% interest per month.

Payroll Tax Compliance for Construction Contractors

Payroll compliance is where most construction contractors get into serious trouble with CRA. The stakes are high: penalties for late remittances, personal director liability, and criminal charges for repeated non-compliance.

Employee vs. Contractor Classification

This is the #1 audit trigger for construction companies in Ontario.

CRA’s test for employee vs. contractor:

| Factor | Employee | Independent Contractor |

|————|————–|—————————-|

| Control | You dictate how, when, where they work | They control their own methods and schedule |

| Tools & Equipment | You provide tools, vehicle, safety equipment | They provide their own tools and equipment |

| Financial Risk | Paid hourly/salary regardless of profit | Paid per project; they bear risk of cost overruns |

| Exclusivity | Work only for you | Work for multiple clients |

| Integration | Integral part of your business | Running their own business |

If a worker is an employee, you must:

Deduct CPP, EI, and income tax at source
Remit to CRA by the 15th of the following month
Issue T4 slips by the last day of February
Pay employer portions of CPP (matching employee) and EI (1.4 employee rate)

If a worker is a contractor, you must:

Issue T4A if you paid them over $500 in the year
Verify they have their own GST/HST number (if applicable)
Keep copies of their invoices for CRA audit defense

Payroll Remittance Deadlines

Monthly remitters: Due the 15th of the following month
Quarterly remitters: Due the 15th of the month following the quarter (if you’re a small remitter with perfect compliance history)
Accelerated remitters: Due within days of paying employees (if your average monthly withholding is over $25,000)
Late remittance penalties:

3% if 1-3 days late
5% if 4-5 days late
7% if 6-7 days late
10% if over 7 days late

Repeated failures: CRA can assess 10% penalty on the gross payroll and make directors personally liable for unpaid remittances.

T4 and T4A Filing Requirements

T4 slips (employees):

Must be issued by February 28 following the tax year
Include: CPP, EI, income tax withheld, employment income
Filed electronically if you have over 50 slips

T4A slips (contractors/subcontractors):

Required if you paid over $500 in fees, commissions, or other amounts
Due February 28
Does NOT include amounts paid to corporations (unless it’s fees for professional services)

Pro tip for GTA contractors: If you work with the same subcontractors year after year, verify their business structure. If they incorporated, you likely don’t need to issue T4Asbut keep incorporation documents in your file as proof.

Subcontractor Payments: Avoiding CRA Red Flags

Subcontractor payments are heavily scrutinized by CRA. Here’s how to structure payments to stay compliant:

1. Always Get a Written Contract

What to include:

Scope of work (specific to the project)
Payment terms (per project, per square foot, hourlybe clear)
Who provides tools and materials
WSIB Clearance Certificate requirement
GST/HST number (if registered)

2. Never Pay Cash Without Documentation

If you must pay cash:

Get a signed receipt with date, amount, project description, and subcontractor signature
Photocopy their ID
Note the reason for cash payment in your records (“Sub requested cash, no bank account”)

Better option: Pay by cheque or e-transfer. It creates an automatic paper trail.

3. Verify Their Business Registration

Check:

GST/HST registration (if they’re supposed to charge you HST)
WSIB Clearance Certificate
Business name registration (if they operate as a sole proprietor under a business name)

4. Don’t Collude on False Invoices

CRA audits specifically look for:

Invoices for work never performed (fake subs to inflate expenses)
Kickback schemes (you pay a subcontractor, they give you half back in cash)
Related-party invoices (paying your spouse’s company inflated amounts)

What happens if caught: Reassessment of all expenses, gross negligence penalties (50% of the tax evaded), and potential criminal prosecution.

CRA Audit Defense for Construction Contractors

If CRA selects your construction company for audit, here’s how to defend yourself:

What CRA Auditors Look For

Bank deposits that don’t match reported income

Payroll amounts that don’t match T4s or WSIB reports

Subcontractor payments with no invoices, contracts, or WSIB clearances

Personal expenses claimed as business expenses (new truck claimed 100% business use but only used on-site twice a month)

Cash payments with no supporting documentation

Documents to Have Ready

All bank statements (business and personalCRA will demand both)
Copies of all subcontractor invoices and contracts
WSIB Clearance Certificates for every subcontractor
General ledger with every transaction categorized
Project files with contracts, change orders, progress billings
Vehicle logs (if claiming vehicle expenses)
Receipt files (organized by expense type and month)

Your Rights During a CRA Audit

You have the right to:

Representation by a CPA or tax lawyer
Reasonable time to gather documents
Know the scope of the audit (what years, what issues)
Appeal any assessment within 90 days

You do NOT have the right to:

Refuse to provide documents
Lie or obstruct the auditor
Delay indefinitely

Pro tip: Never meet with a CRA auditor alone. Have your CPA present for every meeting. What you say can and will be used to expand the audit scope.

How Insight Accounting CPA Helps Construction Contractors Stay Compliant

At Insight Accounting CPA, we specialize in construction accounting and tax compliance for contractors operating in Mississauga, Toronto, Brampton, and across the GTA. Here’s how we help:

1. Payroll Setup and Remittance Management

We set up your payroll system, classify your workers correctly (employee vs. contractor), calculate remittances, and ensure you never miss a deadline.

2. HST Return Preparation and ITC Maximization

We review every invoice, verify eligibility for Input Tax Credits, and prepare your HST returns to minimize what you owe while staying fully compliant.

3. WSIB Compliance and Premium Reduction

We help you classify your work correctly, verify subcontractor WSIB coverage, and audit your WSIB account to ensure you’re not overpaying premiums.

4. Subcontractor Payment Structuring

We’ll review your subcontractor agreements, payment terms, and documentation to ensure you’re protected if CRA audits those relationships.

5. CRA Audit Representation

If CRA selects your construction company for audit, we represent you through every step: document gathering, auditor meetings, objections, and appeals.

6. Project-Based Financial Reporting

We implement job costing systems that track income and expenses per project, making it easy to see which jobs are profitable and ensuring accurate tax reporting.

Frequently Asked Questions (FAQ)

1. Do I need to charge HST on residential construction projects?

Yes, you must charge 13% HST on residential construction in Ontario. However, the homeowner may qualify for the new housing rebate if the project qualifies as a substantial renovation or new build. You can assign the rebate and reduce the HST you collect upfront.

2. Can I claim HST on materials purchased at Home Depot?

Yes, as long as the materials are used for taxable supplies (commercial or residential construction projects where you charge HST). Keep your receipts. The HST you paid is claimable as an Input Tax Credit.

3. What happens if I pay a subcontractor who doesn’t have WSIB coverage?

You become liable for their WSIB premiums if they’re injured on your site. Always verify WSIB Clearance Certificates before making final payment.

4. How long do I need to keep construction project records?

Minimum 6 years from the end of the tax year. CRA can audit you for 3 years (or 6 if they suspect fraud), so keeping records for 6+ years protects you.

5. Can I pay my employees cash?

Technically yes, but you still must deduct CPP, EI, and income tax at source and remit it to CRA. Paying cash doesn’t exempt you from payroll tax obligations. Most contractors who “pay cash” are actually evading taxeswhich is illegal and heavily penalized.

6. What’s the penalty for late payroll remittances?

3% to 10% depending on how late, plus interest at prescribed rates (currently ~10% annually). Repeated failures can result in personal director liability and criminal prosecution.

Take Control of Your Construction Tax Compliance Today

Tax compliance doesn’t have to be overwhelming. With the right CPA partner, you can focus on building great projects while we handle WCB reporting, HST filings, payroll remittances, and CRA audit defense.

Ready to get your construction company’s taxes under control?

Call Insight Accounting CPA at (905) 270-1873 to book your consultation.

Visit us: insightscpa.ca/services/tax-planning

Serving contractors in Mississauga, Toronto, Brampton, Oakville, Vaughan, and across the GTA.

Insight Accounting CPA Your partner in construction tax compliance, payroll management, and CRA audit defense. We help contractors across Ontario stay compliant, reduce tax risk, and maximize profitability.

*Bader A. Chowdry, CPA, CA, LPA, is the founder of Insight Accounting CPA and a recognized expert in construction accounting and tax compliance. His patent-pending AI governance framework has been featured in Yahoo Finance and serves clients across the GTA.*