Entrepreneurship & Small Business

CRA cracking down on "Independent Contractors" who have Incorporated - what can be done??

  • Last Updated:
  • Dec 13th, 2018 1:57 pm
[OP]
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Aug 15, 2003
8037 posts
78 upvotes

CRA cracking down on "Independent Contractors" who have Incorporated - what can be done??

I'm sure this is not new for the guys who have been Incorporated forever but coming from somebody who has worked FT my entire life it was quite surprising. I was recently debating between working as a security consultant for contract jobs (more money) with the incentive of Incorporating and being able to write off expenses, etc. but came across this article https://www.thebalancesmb.com/are-you-a ... ee-2948639 which really deterred me. Without the added benefit of tax deductions, what is the point?
32 replies
Newbie
Feb 7, 2018
24 posts
4 upvotes
Just make sure you pass all 4 of those points listed:

Control: You set your price, hours, etc (some companies require you to work certain hours in a day, that's fine as long as you meet all other checkboxes).
Ownership of Tools: Make sure you supply your own tools to do whatever it is you do. If you need to use computers, supply your own computers (unless your contract states you have to use their supplied tools). As long as you are responsible for your own maintenance and replacement of said tools, your fine.
Financial Involvement: Make sure it is up to you to cover your own costs. You can bill for your costs, but the company contracting you should not pay for your bills/expenses.
Integration: Make sure you have multiple contracts with multiple companies.

The benefit is the potential to lower your taxes, increase your earnings, and be your own boss. Incorporating over not incorporating... That's another story. If you don't incorporate, your personal assets could be on the chopping block should something happen to your company; if you are incorporated, your personal assets are your own and are not tied directly to the company (there may be some instances where this is not the case, but if you structure you Inc. properly, then this is the case).

if you can answer truthfully to the above:

Cotnrol: Me
Ownership of tools: Me/My Inc company
Financial Involvement: Me
Integration: Multiple contracts

Then you are golden.

Justyn
Bookkeeping Specialist
Sr. Member
Nov 12, 2014
577 posts
354 upvotes
Kingston, ON
LOL bookkeeping specialist.
Deal Addict
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Jun 24, 2015
2004 posts
374 upvotes
Woodbridge, ON
The problem is, many jobs out there will not hire you directly to their company's payroll and FORCE you to work as an independent contractor. The fact that they do that they save money on payroll, they can write more stuff off at the end of the year, and usually any meals you eat or travel you take with a rental car and such you give the receipts to the company and their AP will re-imburse your business those expenses, plus tools, hotel says, parking, etc. trust me, my brother did that for how many years I know how it works. the CRA should be cracking down on such companies instead of the individuals, cus the indivuals are pawns they do not make the rules they just want a job and want to get paid
Hi
Deal Guru
Aug 2, 2010
13192 posts
3409 upvotes
Here 'n There
MtX wrote:
Nov 14th, 2018 5:30 pm
I'm sure this is not new for the guys who have been Incorporated forever but coming from somebody who has worked FT my entire life it was quite surprising. I was recently debating between working as a security consultant for contract jobs (more money) with the incentive of Incorporating and being able to write off expenses, etc. but came across this article https://www.thebalancesmb.com/are-you-a ... ee-2948639 which really deterred me. Without the added benefit of tax deductions, what is the point?
Again, the CRA test for writing off expenses does not depend on whether you are incorporated or not. It is exactly the same for sole proprietor, partnership or corporation. There is nothing magical about incorporating that suddenly allows expenses that you could not write off because they did not meet the CRA test be suddenly allowed. Vice versa if you are incorporated and your expenses meet the test it does not suddenly mean that they are not allowed if you are not incorporated. People have to stop propagating that myth.
Last edited by eonibm on Nov 14th, 2018 7:50 pm, edited 2 times in total.
Member
Oct 17, 2015
254 posts
42 upvotes
Toronto, ON
So aSecurity consultant who is incorporated because he is a contract employee can not write off any expenses? Gas, electricity, home office heating, telephone, internet .... nothing
Deal Fanatic
Jan 25, 2007
5361 posts
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Paris
eonibm wrote:
Nov 14th, 2018 7:48 pm
Again, the CRA test for writing off expenses does not depend on whether you are incorporated or not. It is exactly the same for a sole proprietor, partnership or corporation. There is nothing magical about incorporating that suddenly allows expenses that you could not write off because they did not meet the CRA test suddenly allowed. People have to stop propagating that myth.
Isn't the incorporation advantage kick in as corporate profits are taxed at a different rate than personal taxes so you can write off a higher percentage and pay yourself a salary which is then offset somewhat by having to file 2 sets of taxes (one for corp, one for you)? At least that's how it was ELIA5 to me once. Accountant recommended to have income of at least $85-100k to make it worth while.

And actually, aren't cars treated different under sole prop vs corp? Mileage under corp vs the % crap under sole prop?
Gbill2004: Thanks but I'll just smell the couch before/if I buy it.

jonnyb: I go in there like PICASSO and toss the glue everywhere, I don't care what house I'm on.
Deal Guru
Aug 2, 2010
13192 posts
3409 upvotes
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Jerico wrote:
Nov 14th, 2018 11:27 pm
Isn't the incorporation advantage kick in as corporate profits are taxed at a different rate than personal taxes so you can write off a higher percentage and pay yourself a salary which is then offset somewhat by having to file 2 sets of taxes (one for corp, one for you)? At least that's how it was ELIA5 to me once. Accountant recommended to have income of at least $85-100k to make it worth while.

And actually, aren't cars treated different under sole prop vs corp? Mileage under corp vs the % crap under sole prop?
You're conflating the issues. Taxation rates are a mutually exclusive from what expenses you can write off. Mileage is treated the same regardless of the legal structure. Corporate profits are taxed at a different rate depending on whether they are active or passive. However the concept of integration ensures that income earned through a corp and then paid out as dividends is taxed the same in the end (within a percentage point or two depending). Mileage is treated the same whether corp or not.
Deal Addict
User avatar
Aug 15, 2015
1328 posts
169 upvotes
Markham, ON
Wish CRA would just post a list of approved accountants to deal with common errors and assumptions business owners have about pros and cons of having a corporation.

I am so confused whenever I visit the CPA or CA or CMA website. There is no search for the public to find an accountant.

Don't people usually contact some sort of professional in a panic when they are being audited.

Anyways, I apologize if such golden list already exist somewhere and I did not do my research.
Deal Fanatic
Jan 25, 2007
5361 posts
2202 upvotes
Paris
eonibm wrote:
Nov 15th, 2018 12:06 am
). Mileage is treated the same whether corp or not.
This I know is incorrect. As a sole prop I can’t claim 55 cents per kilometre. I need to calc my business and personal use as a percentage and the cost of maintenance, gas and depreciation (with a max on depreciation) and multiply the two for my business use portion.

As a Corp I can pull money out per km before it’s taxed as an expense. A distinct difference.
Gbill2004: Thanks but I'll just smell the couch before/if I buy it.

jonnyb: I go in there like PICASSO and toss the glue everywhere, I don't care what house I'm on.
Deal Guru
Aug 2, 2010
13192 posts
3409 upvotes
Here 'n There
Jerico wrote:
Nov 15th, 2018 3:18 am
This I know is incorrect. As a sole prop I can’t claim 55 cents per kilometre. I need to calc my business and personal use as a percentage and the cost of maintenance, gas and depreciation (with a max on depreciation) and multiply the two for my business use portion.

As a Corp I can pull money out per km before it’s taxed as an expense. A distinct difference.
Source?
[OP]
Deal Fanatic
User avatar
Aug 15, 2003
8037 posts
78 upvotes
AccountableValueFS wrote:
Nov 14th, 2018 6:00 pm
Just make sure you pass all 4 of those points listed:

Control: You set your price, hours, etc (some companies require you to work certain hours in a day, that's fine as long as you meet all other checkboxes).
Ownership of Tools: Make sure you supply your own tools to do whatever it is you do. If you need to use computers, supply your own computers (unless your contract states you have to use their supplied tools). As long as you are responsible for your own maintenance and replacement of said tools, your fine.
Financial Involvement: Make sure it is up to you to cover your own costs. You can bill for your costs, but the company contracting you should not pay for your bills/expenses.
Integration: Make sure you have multiple contracts with multiple companies.

The benefit is the potential to lower your taxes, increase your earnings, and be your own boss. Incorporating over not incorporating... That's another story. If you don't incorporate, your personal assets could be on the chopping block should something happen to your company; if you are incorporated, your personal assets are your own and are not tied directly to the company (there may be some instances where this is not the case, but if you structure you Inc. properly, then this is the case).

if you can answer truthfully to the above:

Cotnrol: Me
Ownership of tools: Me/My Inc company
Financial Involvement: Me
Integration: Multiple contracts

Then you are golden.

Justyn
Bookkeeping Specialist
Multiple contracts seem to be an issue. But what does that even mean?? As a beginner entering the contract industry, I can only spend X amount of hours a day to finish one job. And if the job or "contract" requires me to spend 8 to 12 months until completion before I can start on another contract, what argument can the CRA use? For example as a contractor renovating House 1, I am not going to suddenly look for 3 more contracts (or 3 more houses) to work on when my primary goal is to spend as much time as I can to finish House 1.
Deal Fanatic
Jan 25, 2007
5361 posts
2202 upvotes
Paris
eonibm wrote:
Nov 15th, 2018 10:34 pm
Source?
CRA website and a CPA. What’s your source?
Gbill2004: Thanks but I'll just smell the couch before/if I buy it.

jonnyb: I go in there like PICASSO and toss the glue everywhere, I don't care what house I'm on.
Newbie
Jan 18, 2017
90 posts
60 upvotes
It's a myth that just won't die. My guess was that it morphed from CRA's "control" criteria (ie. not limited to working for just the employer) to somehow being "You need to always have multiple clients." It's simply not true, and like most things with CRA, the rulings are determined on the basis of the facts as a whole, not a single point.

Here's the literature direct from CRA. https://www.canada.ca/en/revenue-agency ... loyed.html Pro tip: Read everything in there that CRA says constitutes a "contractor", and then draft a contractor agreement containing those points (in addition to all of the other legal fluff needed.) To save you some reading, here's CRA's comments on "Control":

Indicators showing that the worker is a self-employed individual

--- A self-employed individual usually works independently.
--- The worker does not have anyone overseeing his or her activities.
--- The worker is usually free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time.
--- The worker can accept or refuse work from the payer.
--- The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.


Nothing about "Must have multiple clients" etc.

MtX wrote:
Nov 16th, 2018 1:00 am
Multiple contracts seem to be an issue. But what does that even mean?? As a beginner entering the contract industry, I can only spend X amount of hours a day to finish one job. And if the job or "contract" requires me to spend 8 to 12 months until completion before I can start on another contract, what argument can the CRA use? For example as a contractor renovating House 1, I am not going to suddenly look for 3 more contracts (or 3 more houses) to work on when my primary goal is to spend as much time as I can to finish House 1.
______
Canadian & US tax guy

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