From an accounting and tax standpoint, the treatment of an employee versus a contractor is handled quite differently.
When your company hires an employee, the firm is responsible for withholding CPP, EI, and income taxes for the employee to remit to the Receiver General. The company also has to contribute its portion of the CPP and EI also.
With a subcontractor, there is no payroll remittances required. The contractor will invoice the company for it services and include HST. The contractor in turn will remit the HST collected to the receiver general net of any HST that the contractor paid to its suppliers, etc. The company that paid HST to the contractor can reduce the amount to remit to the Receiver General since their input tax credit has increased.
The incorrect treatment of an individual hired as a contractor over an employee opens both parties to risks. If the contractor is later deemed an employee by the CRA, both parties will have to pay unpaid taxes, penalties, interest, CPP and EI premiums. Read more here on whether you are an employee or contractor.
To learn more about the issues around hiring employees and contractors and how to distinguish between the two, feel free to contact MP Group.