CCRA Boot Camp for Self-Employed Consultants

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CCRA Boot Camp for Self-Employed Consultants

• Leslie Slater, C.A., M.B.A.
• Entrepreneurial Business Advisor

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Are you self-employed?

• Not a choice you make with a client/employer
• Based on the facts of the relationship
• Used to be referred to as master/servant
  relationship
• Now there are a number of guidelines CCRA refers
  to when reviewing your status

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Why you might want to be an employee?

• Employer pays their portion of CPP
• Employer pays their portion of EI and you are
  eligible for EI if let go
• Employer may have medical/dental plan, pension
  plan or other benefits
• Employers responsible for severance/reasonable
  notice

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Guidelines for Self-Employed

• CCRA must judge from the person offering the
  services
• They try to determine the total relationship
• First test has 4 parts
• Control of time and way services performed
• Provided own tools
• Opportunity for profit
• Risk of loss

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Guidelines (contd)

• Second test is the organization test
• Is the person offering services in the context of
  a coherent business enterprise rather than merely
  putting himself/herself in the service of a
  particular payor
• See the CCRA Guide RC4110 Employee or
  Self-Employed?

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Commissioned Salespeople

• Self-employed sales agents are usually
• Not restricted to the suppliers products
• Not required to perform the services personally
• Not given instructions about what territory,
  which customers to approach, or when or how to
  carry out the services
• However, commissioned sales employees can have
  many of the same write-offs as self-employed

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What can you do to satisfy CCRA and the payor?

• You can incorporate!
• CCRA generally will accept that a corporate
  supplier is not an employee
• However, corporation may be found to be a
  personal service business (incorporated employee)
• Then deductions in computing income restricted to
  salary, costs of benefits or allowances, costs
  for negotiating contracts which would have been
  deductible, and legal expenses
• Also potential for double taxation on salary/bonus

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Should You Incorporate?

• Reasons to incorporate
• You will be making more money than you need or
  want to live on
• You will be negotiating for rights/agreements
  that are non-transferable
• There are legal liability issues IP protection
• Image to marketplace or regulatory requirement
• Potentially some income splitting opportunities

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Other Forms of Organization

• Sole Proprietorship
• Register your name with Ontario government
• All liability flows through to you personally
• Similar expenses to corporation
• Net Income on your personal tax return for the
  calendar year Net loss offsets other sources of
  income
• Not as much of an issue of risk of profit or loss
  now with recent CCRA tax cases

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Other Forms (contd)

• Partnership
• Income flows through to partners (on their
  personal tax returns)
• Partners can have their own expenses
• Limited Partnership for certain professions
  (although liability may not be limited)

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GST Do I have to Register

• You have to register within 31 days of the
  quarter end you hit 30,000 in taxable supplies
  (looking back 4 quarters)
• But you may want to register earlier so your
  customers do not know you are so small
• You may also want to get back ITC (GST paid on
  items purchased) only for registrants

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GST But do I have to Register?

• Over 30,000 in taxable supplies, then yes, and
  must stay registered for 4 quarters
• Taxable supplies include zero rated revenue (0
  tax) such as exports, medical devices,
  prescription drugs, basic groceries
• Does not include exempt supplies such as
  financial services, most licensed medical
  services and, most educational services

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What if my Clients are Not in Canada?

• Is your client a non-registrant?
• Doing business in Canada
• Where are the services provided
• Most services provided to a non-resident person
  (including corporations) are zero-rated
• However, services provided to them while in
  Canada are taxed at 7 GST

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How Does HST Affect Me?

• HST (Harmonized Sales Tax) replaces GST in the
  participating provinces
• No separate requirement to register
• If you sell taxable supplies into a
  participating province, then charge it and remit
  it
• if you buy these supplies in a participating
  province you will be charged it (and get ITC)

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How do I Calculate My Remittance?

• Normal method Collected less paid less
  installments Remittance
• Subject to a few restrictions on car and meals
  and entertainment
• Simplified method on ITC if supplies 500,000 or
  less 7/107 or 15/115 on taxable purchases
  rather than detailed accounting

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Quick Method

• Available if supplies 200,000 or less
• Not available to accountants, or financial
  consultants
• For service businesses, 4 of the first 30,000 of
  supplies, and 5 of the remainder (incl. the GST)
• 50,000 x 1.07 53,500 (3,500 collected)
• 2,375 (4 x 30,000 5 x 23,500) vs. 3,500
• 2.5 instead of 5 for retailers and wholesalers
  as long as resale 40 of annual taxable supplies

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How Often do I Pay?

• If taxable supplies 500,000 or less, then report
  annually
• First year, pay annually
• Then, based on prorated year, if over threshold
  of 1,500, then pay quarterly
• Quarterly installments are prorated prior year
  divided by 4
• If 9 months 2,250, then 12 would be 3,000/4
  750 quarterly they can be late with the forms

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Am I Affected by PST?

• While this is usually thought of as a tax on
  goods, it does affect some IT services
• If you change a clients software at their
  premises, then you could be caught
• Also, if you are PST exempt, be careful to keep
  equipment/software purchased for internal use
  separate from those for re-sale
• If you develop software, then the PST on some
  supplies may be exempt as part of the re-sale of
  packaged software i.e. cds, binders, etc.

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Income Tax

• Net business or partnership income flows directly
  onto your personal tax returns
• Self-employed people pay both sides of CPP (9.9
  in 2003) and dont qualify for EI
• While returns arent due until June 15th, CCRA
  wants their money April 30th or sooner
• Quarterly installments may be due after the first
  business year based on a number of factors

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Income tax (contd)

• Installments - Mar 15, June 15, Sept 15, and Dec
  15
• March and June based on the second prior year
  Sept and Dec based on the last year (and catch
  you up to the taxes payable for the complete
  year)
• Final payment April 30th
• May not have to make installments even in second
  year of business but you need to manage your
  cash-flow

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Income Tax for The Incorporated

• You are separate from your company for tax
  purposes
• You should receive salary or dividends from your
  company, not draws
• Watch draws being deemed a series of loans and
  repayments
• As soon as you have any regular cash-flow, put
  yourself on salary

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Income Tax for The Incorporated (contd)

• Salary (and bonuses) are deductible expenses to
  the company when incurred
• Dividends are paid after corporate tax
• Active businesses in Canada paid 18.6 on taxable
  income under 225,000 (limit going up over the
  next few years to 300,000 in 2006)

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Should I pay Salary or Dividends

• Salary is earned income for RRSP purposes
• Salary has the company pay the employer portion
  of CPP (and if you own 40 or more of the company
  then there is no EI)
• Banks understand salary for financing
• Below 225k in taxable income, dividends are taxed
  in Ontario at top combined rate of 44.1 vs.
  46.4 for salary

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The Salary and Dividend Decision contd

• Above 225k in taxable income, salary has lower
  tax rate than dividends, but significant tax
  deferral with dividends if pay later
• Also, Ontario has signaled that corporate rates
  will go up, eliminating the advantage of
  dividends over salary
• Recommend paying 2004 salary up to max RRSP
  contribution limits in 2005 16,500/.18 91,700

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What Can I Write Off?

• Whether sole proprietorship, partnership or
  incorporated, write-offs similar
• Can pay spouses and children a high reasonable
  amount for work done
• Can write-off home office if it is the principal
  place of business OR workspace exclusive to
  business and you regularly and continuously see
  clients/patients there
• Home office expenses cant drive self-employed
  income further into a loss but carry-forward

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More Write-offs?

• If you are incorporated, you can rent some of
  your home office to the company
• Car is different
• For self-employed, you write off the percentage
  business use of all car expenses
• For corporation, you can be paid for mileage
  (.42/.36) or an allowance for your own car, or
  use a company car (tax benefit)

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Conclusion

• Make sure you are self-employed look at the
  facts of the relationship
• The decision to incorporate is based on a number
  of factors
• Keep your records by category cash, chequing,
  credit cards all separate
• Set up a simple system that works for you at the
  beginning and keep to it
• Ask you bookkeeper/accountant for ideas on
  improving/simplifying what you do

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Conclusion (contd)

• Register for GST, PST, Payroll, EHT, Corp Tax,
  whatever is required, and file on time
• Even if you cant pay the remittances, file on
  time significant penalties if you dont
• If your business changes (i.e. new type of
  business, international clients, move to a home
  office, take on staff or other people, your
  spouse starts to contribute) talk to your
  accountant
• You should know what to expect April 30th!
• No surprises should be the standard!