Many employers are moving away from hiring staff as employees and using fixed duration contracts to hire talent which can have corporate tax consequences for the contractor.
A corporation is considered a person under tax law. This means that the corporation has to be separated from your personal affairs. If you draw funds from the corporate bank account this will constitute a shareholder loan, which if not dealt with properly can have adverse tax implications under Section 15 of the Income Tax Act.
These contracts often require the contractor to provide services through a corporation. If you are a contractor, the tax implications to you could be significant if you are not aware of some basic tax rules.
Things you should also be aware of include the legal responsibility of being a director of your own company. Directors can be held personally liable for the actions of the company. For example, if the corporation becomes insolvent, directors can be held personally liable to pay any unremitted HST and payroll taxes owing to the CRA.
Should I incorporate a company so I can pay less tax?
This is a question that gets asked a lot. The answer is dependent on the circumstances. Contractors in particular need to be cautious that the services they provide could be considered to be services provided by an ‘incorporated employee’.
A Personal Services Business (PSB) is not eligible to claim the small business deduction meaning that income earned from a PSB is taxed at a high rate of tax ~44.5% as opposed to the small business rate of ~12.2% in Ontario.
This is obviously an undesirable classification from a tax perspective. Questions to ask yourself to determine if you are operating a PSB:
1. Do I have the chance to make a profit or the risk of losing money on contracts?
2. Do I have control over how the work is done?
3. Do I have multiple clients that I generate income from?
4. Can I hire other people to perform duties to complete the task? Do I provide all the tools/equipment for me to carry out my job?
If you answered ‘no’ to any of these questions, you may need to consider if you are operating a PSB.
Considering whether you are a personal services business is a crucial step to helping you understand your tax liability and allows you to take steps to mitigate unnecessary taxation.
Should I pay a dividend or a salary from my business? What types of expenses can I deduct? What returns do I need to file? If you are a Personal Services Business then you likely want to ensure your company makes a full salary payment to you in order for the company to obtain a full salary deduction and eliminate the taxation in the corporation.
Avoiding common tax traps can help ensure you don’t receive any undesirable tax assessments when the CRA reviews your company.
**UPDATE Sept 2022 – As CPA Canada notes, the Canada Revenue Agency is increasing audits on Personal Services Businesses. New CRA campaign focuses on personal services businesses: Are you ready? (cpacanada.ca)
If you need assistance issuing T4s/T5s from your company, contact us today for help.
NG Chartered Professional Accountants Professional Corporation is an independent tax accountant operating in London, Ontario.
Contact us today for assistance with your corporate tax.
NG Chartered Professional Accountants Professional Corporation is an independent tax accountant operating in London, Ontario.