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

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

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

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

Guidelines (cont ’ d) 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?

Commissioned Salespeople Self-employed sales agents are usually –Not restricted to the supplier ’ s 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

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

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

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

Other Forms (cont ’ d) 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)

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

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

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

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)

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

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, % x 23,500) vs. 3, % instead of 5% for retailers and wholesalers as long as resale 40% of annual taxable supplies

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

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 client ’ s 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. cd ’ s, binders, etc.

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 don ’ t qualify for EI While returns aren ’ t due until June 15 th, CCRA wants their money April 30 th or sooner Quarterly installments may be due after the first business year based on a number of factors

Income tax (cont ’ d) 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 30 th May not have to make installments even in second year of business – but you need to manage your cash-flow

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

Income Tax for The Incorporated (cont ’ d) 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)

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

The Salary and Dividend Decision – cont ’ d 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

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 can ’ t drive self-employed income further into a loss; but carry-forward

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)

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

Conclusion (cont ’ d) Register for GST, PST, Payroll, EHT, Corp Tax, whatever is required, and file on time Even if you can ’ t pay the remittances, file on time – significant penalties if you don ’ t 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 30 th ! No surprises should be the standard!