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 (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?

6. 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

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 (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)

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 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.

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 don’t qualify for EI • While returns aren’t 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 (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 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 (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)

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 – 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

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 can’t 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 (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 30th! • No surprises should be the standard!