Tax Question

[Bobblehead]

Originally Posted by Igster

I'm not sure what all the hubub is. If I end up creating a numbered company and work for my employer as a contractor and get paid as a contractor, there simply is more I can write off, like using my office at home when I work at home, write off some of the dinner and lunch meetings with clients, etc.

My current employer then pays me as a contractor, I assume all the issues with taxes, etc. but can simply write more off. Not sure why this is a problem. Nothing wrong with running my own numbered company and my employer then "contracting" my services as opposed to me being a full time employee.

Because if the CRA determines that you are an employee then they will deny your claims, retroactively assess source deductions and apply penalties.

Are you a contractor with a history of working with various contractors, or have you only worked with one client who sets your hours, pay, etc?

Jumping through the hoops to set yourself up as your own business doesn't guarantee that you aren't in reality an employee, and the CRA is more than happy to point that out to you.

[AR_Six]

Originally Posted by Igster

I'm not sure what all the hubub is. If I end up creating a numbered company and work for my employer as a contractor and get paid as a contractor, there simply is more I can write off, like using my office at home when I work at home, write off some of the dinner and lunch meetings with clients, etc.

My current employer then pays me as a contractor, I assume all the issues with taxes, etc. but can simply write more off. Not sure why this is a problem. Nothing wrong with running my own numbered company and my employer then "contracting" my services as opposed to me being a full time employee.

No. No no no no no.

Originally Posted by subsection 125(7) of the Income Tax Act

“personal services business” carried on by a corporation in a taxation year means a business of providing services where

• (a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an “incorporated employee”), or
• (b) any person related to the incorporated employee

is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless

• (c) the corporation employs in the business throughout the year more than five full-time employees, or
• (d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;

If you own more than 10% of the shares of any class of a company that provides services to Business X, and you would reasonably be regarded as an employee of Business X, then the company is a personal services business. The combined Federal and Provincial corporate tax rates on income from a personal services business is 38%. The income would then be paid out as an eligible dividend, and you would pay tax on that dividend.

As for you being able to deduct things,

Originally Posted by paragraph 18(1)(p) of the Income Tax Act

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of (...)


(p) an outlay or expense to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal services business, other than

• (i) the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation,
• (ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year,
• (iii) any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and
• (iv) any amount paid by the corporation in the year as or on account of legal expenses incurred by it in collecting amounts owing to it on account of services rendered

that would, if the income of the corporation were from a business other than a personal services business, be deductible in computing its income;

Items (i) through (iv) above would be the only deductions you'd be allowed.

[Igster]

Well, obviously I am not an accountant, but will take the advice of one if I plan to setup as my own company going forward. And I'll find an accountant who likes to play in the grey area and not one who works for the government, but works for me.

[Ducay]

Originally Posted by Igster

Well, obviously I am not an accountant, but will take the advice of one if I plan to setup as my own company going forward. And I'll find an accountant who likes to play in the grey area and not one who works for the government, but works for me.

You've got a number of accountants here telling you its a horrific idea, and yet you still want to press on?

Actually no, ignore us qualified people and go for it, I'm excited to see the thread in a couple years when you finally get caught and the CRA comes after you. Enjoy being reassessed for every year that you've been a corp, paying much higher tax rates on all those years and penalties. Oh, and you might want to give your employer a heads up to start socking some money away for his side of the penalties and back payroll deductions he's going to owe.

[calculoso]

Also be careful... some companies have rules that they cannot use a contractor for more than a year. For example, my company (has an American parent) has rules that any contractor can only work for a year straight before they have to not work for us for 6 months. The exception is that they can work for 18 months straight but then never be a contractor again. I don't understand the rules totally, but it is a royal pain.

[AR_Six]

Originally Posted by Ducay

You've got a number of accountants here telling you its a horrific idea, and yet you still want to press on?

I'm actually a lawyer, but it's not NECESSARILY a horrific idea. We don't know all the facts. Maybe he'll set up the company, rent out office space, hire an administrative assistant, advertise and provide services to multiple clients. If so, maybe it all works out.

It doesn't sound like it, I'll grant.

[GP_Matt]

Do you know if it makes a difference if you work for only one company but you are selling them a product or a service where you are paid by the job.
ie. if you are paid for every tech support call, or you bid each project but keep winning work from the same company?

[bizaro86]

The CRA has a guide on how they determine whether someone is a contractor or employee.

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html

[AR_Six]

Originally Posted by GP_Matt

Do you know if it makes a difference if you work for only one company but you are selling them a product or a service where you are paid by the job.
ie. if you are paid for every tech support call, or you bid each project but keep winning work from the same company?

Whether a person is an independent contractor or an employee in a particular circumstance is a question of fact. What that means is yes, it makes a difference - everything makes a difference, and on balance, CRA (or ultimately a court) will decide if they think it falls more on one side or the other. If you want to simplify, a question frequently asked in the jurisprudence is, "whose business is it?" Does what you're doing look like running your own business, or do you appear to be a part of your client's business?

[darklord700]

The key words are "but for the existence of the corporation". To simplify, it means that if there're differences in function between a contractor and an employee, it is possible that a single owner operator contractor could not be carrying on a personal service business. The leading cases are Winnipeg Ballet and Wiebe Door.

The determination is a matter fact so the OP could possibly benefit from setting up a business and provide his service as a contractor.

[squiggs96]

Originally Posted by Igster

Well, obviously I am not an accountant, but will take the advice of one if I plan to setup as my own company going forward. And I'll find an accountant who likes to play in the grey area and not one who works for the government, but works for me.

I'm going to guess that none of us work for the government. When you hire an accountant or lawyer, of course they work for you. There is a big difference between being aggressive with tax planning/filing and being illegal. As with any time I consult or give options to the shareholders, I'll lay out the options for you, but ultimately, it's not my decision which option you proceed with. I'll follow whatever path you want, as long as it's not illegal, is ethical and won't cause me to lose my designation.

[Igster]

Originally Posted by squiggs96

I'm going to guess that none of us work for the government. When you hire an accountant or lawyer, of course they work for you. There is a big difference between being aggressive with tax planning/filing and being illegal. As with any time I consult or give options to the shareholders, I'll lay out the options for you, but ultimately, it's not my decision which option you proceed with. I'll follow whatever path you want, as long as it's not illegal, is ethical and won't cause me to lose my designation.

And the last business I ran, I had an accountant that was always simply concerned with what the government wanted and not with what was best for my company. Unfortunately I saw this too late for it to make much of a difference. I don't expect my accountant to do anything illegal, but I certainly want them to try and find ways around things to help me, more than helping the government simply collect as much money as possible. That's all I am saying. And in the end, regardless of what I decide to do, I'm not going to do anything "illegal", I'm just going to ensure that I do what's best for me and my business and bottom line.

[AR_Six]

Originally Posted by Igster

And the last business I ran, I had an accountant that was always simply concerned with what the government wanted and not with what was best for my company.

Seems to me that an accountant practicing in the owner-managed area will pretty much defer to CRA's assessing practices and assumptions for the simple reason that it's not generally worth the hassle to take a contrary position - even one that may be justified on the law - when you already know you're going to end up getting reassessed. What's the point of that? Even if you contest the reassessment you'll end up spending a bunch of money in court years later in the hopes that you might get a favourable judgment, which is far from certain, and if you fail there are significant penalties and interest. Being concerned with how the government sees things is simply good practice. Analyzing a tax position based on what you think the Supreme Court would ultimately decide is usually pretty impractical.

[GP_Matt]

I think the best way to go is to find 10 other people in a similar situation and setup a corporation that sees all of you owning 9%.
(I am not an accountant, just spit-balling ideas)

[darklord700]

Originally Posted by AR_Six

Analyzing a tax position based on what you think the Supreme Court would ultimately decide is usually pretty impractical.

Agreed but then tax court is only $100 to file an appeal, IIRC. The thing is you have to know the rules to appeal because I see a lot of dumb appeals filed by people with no knowledge on tax rules.

[AR_Six]

I don't know the filing fees or anything, but there's a cap on the amount of dollars at issue if you're going under the informal procedure and if you go general procedure you have to have a lawyer and the process is more complex and expensive. The thing is, either way, it takes a long time and the penalties and interest are adding up. If you lose, it's gonna sting.

Where an issue is worth tens of millions of dollars and you have lawyers saying CRA's position is wrong and a court would not agree with them, you're probably okay filing on a basis contrary to CRA's assessing policy and gearing up for a long, drawn out fight. But in this guy's case, it's probably not cost-effective.