Title: CCRA Boot Camp for Self-Employed Consultants
1CCRA Boot Camp for Self-Employed Consultants
- Leslie Slater, C.A., M.B.A.
- Entrepreneurial Business Advisor
2Are 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
3Why 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
4Guidelines 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
5Guidelines (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?
6Commissioned 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
7What 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
8Should 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
9Other 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
10Other 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)
11GST 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
12GST 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
13What 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
14How 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)
15How 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
16Quick 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
17How 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
18Am 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.
19Income 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
20Income 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
21Income 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
22Income 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)
23Should 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
24The 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
25What 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
26More 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)
27Conclusion
- 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
28Conclusion (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!