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CCRA Boot Camp for Self-Employed Consultants

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Taxable supplies include zero rated revenue (0% tax) such as exports, medical ... Active businesses in Canada paid 18.6% on taxable income under 225,000 (limit ... – PowerPoint PPT presentation

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Title: CCRA Boot Camp for Self-Employed Consultants


1
CCRA Boot Camp for Self-Employed Consultants
  • Leslie Slater, C.A., M.B.A.
  • Entrepreneurial Business Advisor

2
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

3
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

4
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

5
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?

6
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

7
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

8
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

9
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

10
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)

11
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

12
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

13
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

14
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)

15
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

16
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

17
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

18
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.

19
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

20
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

21
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

22
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)

23
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

24
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

25
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

26
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)

27
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

28
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!
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