Entrepreneurship & Small Business

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

  • Last Updated:
  • Dec 13th, 2018 1:57 pm
Jr. Member
Mar 6, 2010
146 posts
34 upvotes
Brampton
crossborderguy wrote:
Nov 16th, 2018 9:52 am
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.
The multiple contracts was mentioned clearly in several newspaper articles.
Newbie
Feb 7, 2018
24 posts
4 upvotes
crossborderguy wrote:
Nov 16th, 2018 9:52 am
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.
You are some-what correct. If you keep reading down the list, you see that there are 4/5 factors in determining whether you are an employee or contractor:

1. Control
2. Tools and Equipment
3. Financial Risk
4. Responsibility for Investment and Management
5. Opportunity for Profit

Multiple contracts would fall under point 4 or 5. If you solely rely on 1 company for 95% of your income, you are deemed a Personal Service Business which means you do not qualify for the small business deduction. According to the Tax Court of Canada (there is a recent 2018 case which involves this exact situation), there are three points in determining whether someone is an employee vs contractor:
1. Control
2. Ownership of Tools
3. Chance of Profit and/or risk
Under number 3, section 24, it states:
[24] Mr. Salendran could increase his daily income by simply accepting any special delivery jobs offered to him, though he had no control over whether any such deliveries would be offered. He could also increase his profit by driving for others in his downtime. There was no opportunity for more profit by simply operating the Appellant’s van more efficiently, other than to free up time to take on other jobs. There was, though, the option of using his own vehicle more often, though recognizing there was a limited capacity in doing so. On balance there was some opportunity but it was not substantial.
What does this mean? There were multiple opportunities for Mr. Salendran to work other contracts but he refused. As long as the opportunity to take on multiple contracts is there, then there is a chance of profit/risk and it meets CRA's criteria as well because they state:
Self-employed individuals normally have the chance of profit or risk of loss, because they have the ability to pursue and accept contracts as they see fit. They can negotiate the price (or unilaterally set their prices) for their services and have the right to offer those services to more than one payer. Self-employed individuals will normally incur expenses to carry out the terms and conditions of their contracts, and to manage those expenses to maximize net earnings. Self-employed individuals can increase their proceeds and/or decrease their expenses in an effort to increase profit.
Therefore, multiple contracts would be the easiest way to determine if you are an employee or contractor.

Links cited:
Tax Court of Canada: https://decision.tcc-cci.gc.ca/tcc-cci/ ... 8/index.do
CRA: https://www.canada.ca/en/revenue-agency ... _mpld_wrkr
Xen Accounting: https://blog.xenaccounting.com/employee ... -determine
Tax Tips: https://www.taxtips.ca/personaltax/empl ... ractor.htm
Newbie
Jan 18, 2017
90 posts
60 upvotes
Newspaper articles aren't quite the same as Tax Court of Canada rulings and other case law references. I've also sat across the CRA when they were auditing clients.

CRA takes the entire picture into consideration. Read RC-4110. It's not a matter of "if you fail one item, you're screwed." The list of questions CRA asks is something like 50+ items.
luking wrote:
Nov 16th, 2018 10:22 am
The multiple contracts was mentioned clearly in several newspaper articles.
______
Canadian & US tax guy
Jr. Member
Mar 6, 2010
146 posts
34 upvotes
Brampton
OK, how about any tax deductions in a simple case?
Lets say I am working as an IT contractor and am incorporated. I don't care much about most tax write offs so I am fine with being considered an employee. BUT I work exclusively from home, using my furniture, gas heating, electricity, internet etc. Lets say I can prove that at east 25% of all these are used solely by the incorporated entity for working.
Will I be able to claim 25% of bills as legitimate business expenses? After all these are legit business expenses.
Can someone please clarify?
Newbie
Jan 18, 2017
90 posts
60 upvotes
No, I know I'm correct. Every PSB/Contractor review audit I've been involved with I've won, because I make sure my clients draft their contractor agreements properly. Bottom line is you don't need to have multiple clients. It's a myth. Having multiple clients certainly provides a strong filing position, but it doesn't mean you're screwed without it. (If I sound frustrated, it's because I have to deal with this stuff daily, and it gets tiring explaining the same things over and over.)

Like I said, if you want to be a "contractor", review the RC-4110. Draft your contractor agreement between you and the client using the guidelines set out there to make sure you meet the criteria. And if you don't meet the criteria, then don't try it, because it's not going to end well.

Also, as an aside, you do realise that the tax court case you referenced (Salendran) was won by the Appellant? Ie. The judge agreed with the position that Salendran was an independent contractor of 1065438 AB, even though Salendran didn't have multiple clients...
AccountableValueFS wrote:
Nov 16th, 2018 10:48 am
You are some-what correct. If you keep reading down the list, you see that there are 4/5 factors in determining whether you are an employee or contractor:

1. Control
2. Tools and Equipment
3. Financial Risk
4. Responsibility for Investment and Management
5. Opportunity for Profit

Multiple contracts would fall under point 4 or 5. If you solely rely on 1 company for 95% of your income, you are deemed a Personal Service Business which means you do not qualify for the small business deduction. According to the Tax Court of Canada (there is a recent 2018 case which involves this exact situation), there are three points in determining whether someone is an employee vs contractor:
1. Control
2. Ownership of Tools
3. Chance of Profit and/or risk
Under number 3, section 24, it states:

What does this mean? There were multiple opportunities for Mr. Salendran to work other contracts but he refused. As long as the opportunity to take on multiple contracts is there, then there is a chance of profit/risk and it meets CRA's criteria as well because they state:



Therefore, multiple contracts would be the easiest way to determine if you are an employee or contractor.

Links cited:
Tax Court of Canada: https://decision.tcc-cci.gc.ca/tcc-cci/ ... 8/index.do
CRA: https://www.canada.ca/en/revenue-agency ... _mpld_wrkr
Xen Accounting: https://blog.xenaccounting.com/employee ... -determine
Tax Tips: https://www.taxtips.ca/personaltax/empl ... ractor.htm
Last edited by crossborderguy on Nov 16th, 2018 2:54 pm, edited 2 times in total.
______
Canadian & US tax guy
Newbie
Jan 18, 2017
90 posts
60 upvotes
If you're an incorporated business working from home:

--- You'll get a full deduction for all work-related stuff;
--- You're able to deduct a percentage of your home expenses (interest on mortgage, heating, water, etc);
--- You'll be able to deduct mileage for trips to client location, job sites, etc;

luking wrote:
Nov 16th, 2018 1:57 pm
OK, how about any tax deductions in a simple case?
Lets say I am working as an IT contractor and am incorporated. I don't care much about most tax write offs so I am fine with being considered an employee. BUT I work exclusively from home, using my furniture, gas heating, electricity, internet etc. Lets say I can prove that at east 25% of all these are used solely by the incorporated entity for working.
Will I be able to claim 25% of bills as legitimate business expenses? After all these are legit business expenses.
Can someone please clarify?
______
Canadian & US tax guy
Deal Addict
Feb 25, 2007
1126 posts
541 upvotes
Ottawa
You don't absolutely need to have more than one client to be a contractor (see for instance http://www.moodysgartner.com/a-rare-exa ... -business/ ) though it certainly helps, and is generally the case.

An example of a questionnaire apparently sent by the CRA to investigate whether someone is a contractor or employee is available at http://ontariotaxmen.ca/quest.htm , though who knows if there may be other more recent versions not publicly available. As others have said, it is a gestalt kind of thing, what is the preponderance of the factors, rather than can you answer Yes (or No) to all of the Qs.

[I'm not an expert in this, just as an incorporated contractor - btw serving multiple clients and clearly meeting the contractor criteria - I have researched this.]
[OP]
Deal Fanatic
User avatar
Aug 15, 2003
8037 posts
78 upvotes
How do they prove who drafted the contractor agreement, especially if I am working with recruiters/hiring agencies?
Jr. Member
Mar 6, 2010
146 posts
34 upvotes
Brampton
crossborderguy wrote:
Nov 16th, 2018 2:42 pm
If you're an incorporated business working from home:

--- You'll get a full deduction for all work-related stuff;
--- You're able to deduct a percentage of your home expenses (interest on mortgage, heating, water, etc);
--- You'll be able to deduct mileage for trips to client location, job sites, etc;
Thank you, makes sense.
Deal Addict
User avatar
Feb 14, 2009
1257 posts
480 upvotes
crossborderguy wrote:
Nov 16th, 2018 2:42 pm
If you're an incorporated business working from home:

--- You'll get a full deduction for all work-related stuff;
--- You're able to deduct a percentage of your home expenses (interest on mortgage, heating, water, etc);
--- You'll be able to deduct mileage for trips to client location, job sites, etc;
Note that claiming part of primary residence as business expenses
may cause some taxes upon sale of the house:
https://www.canada.ca/en/revenue-agency ... dence.html

Simple calculation with semi-random numbers:
A house was purchased for 200K and sold 10 year later for 300K
A house-owner pays 20K house expenses and claims 20% of it to business.
total business expenses 40K in 10 years.
Capital gain is 300-200=100K and 20% or 20K of it not eligible for tax-free.
Looks like here is it still ok to do business claim.

But let say house expenses are only 4K for heating/electricity with mortgage is paid off.
And house is in such a great area that sold price is 400K.
Now business expenses would be only 4K * 20% * 10 y = 8K
While not tax-free capital gain would be (400-200) * 20% = 40K

Above is pure math, in fact, I have no idea how (and if at all) these rules are applied in real practice.

Cheers!
Newbie
Jan 18, 2017
90 posts
60 upvotes
Only applies if you're taking CCA against the house (which I always advise people not to do.) Otherwise there are no issues. The t2125 has a nice little section pre-drafted for filling out the home office details, and for a corporation the deduction is typically taken as a tax-free hareholder reimbursement.
tequilla wrote:
Nov 17th, 2018 1:58 pm
Note that claiming part of primary residence as business expenses
may cause some taxes upon sale of the house:
https://www.canada.ca/en/revenue-agency ... dence.html

Simple calculation with semi-random numbers:
A house was purchased for 200K and sold 10 year later for 300K
A house-owner pays 20K house expenses and claims 20% of it to business.
total business expenses 40K in 10 years.
Capital gain is 300-200=100K and 20% or 20K of it not eligible for tax-free.
Looks like here is it still ok to do business claim.

But let say house expenses are only 4K for heating/electricity with mortgage is paid off.
And house is in such a great area that sold price is 400K.
Now business expenses would be only 4K * 20% * 10 y = 8K
While not tax-free capital gain would be (400-200) * 20% = 40K

Above is pure math, in fact, I have no idea how (and if at all) these rules are applied in real practice.

Cheers!
______
Canadian & US tax guy
Deal Addict
User avatar
Feb 14, 2009
1257 posts
480 upvotes
crossborderguy wrote:
Nov 18th, 2018 11:05 am
Only applies if you're taking CCA against the house (which I always advise people not to do.) Otherwise there are no issues. The t2125 has a nice little section pre-drafted for filling out the home office details, and for a corporation the deduction is typically taken as a tax-free hareholder reimbursement.
Thanks. Just for clarification:

it is ok to claim business expenses for part of : electricity/heating, furniture, renovation, phone, security...right?

It is not advisable to assign home to CCA class and claim amortization/allowance....right?

What about mortgage?
What about property tax?
What about school tax?

Cheers!
Sr. Member
Aug 17, 2003
832 posts
159 upvotes
Toronto
There is a lot of misinformation on this thread.

if anyone has an issue with this topic PM me and I will try to help.
Newbie
Jan 18, 2017
90 posts
60 upvotes
Claiming a portion of utilities (electric, gas, etc), home phone, security system is all fine. Same with property taxes. A renovation is a bit more complicated but can be done in the right circumstances. Furniture only if it's 100% used for business.

Correct, no CCA on home office ever. Huge headache and not worth it.

For a mortgage, you have to remember that only a percentage of the actual interest-portion of the mortgage is deductable, not the entire payment. (In the US they have different rules.)

School tax is a grey area. The conservative accountant in me wants to say leave that out. (But as with everything in tax, if you have a filing position with support, then you can always try.)

Lastly, here is the T2125 form that details the home office claim (Scroll down to Page 4, Part 7). That will give you a general idea of what you can claim and how the math works. https://www.canada.ca/content/dam/cra-a ... 25-17e.pdf
tequilla wrote:
Nov 18th, 2018 11:24 am
Thanks. Just for clarification:

it is ok to claim business expenses for part of : electricity/heating, furniture, renovation, phone, security...right?

It is not advisable to assign home to CCA class and claim amortization/allowance....right?

What about mortgage?
What about property tax?
What about school tax?

Cheers!
______
Canadian & US tax guy

Top