Incorporating your self to become a contractor

[First Lady]

Originally Posted by albertGQ

Can a server at a restaurant incorporate themselves? Since they are kind of contracting their services out to the restaurant

This link will help you understand the difference.

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

[First Lady]

Originally Posted by V

I have a couple questions:

How do you get paid, and how do you get taxed on that income? If I finish a project and receive payment from my customer (say $5,000) I'll get taxed on that money at a corporate tax rate, and then when I transfer money from the business to my personal account (or however that works) do I not have to pay personal income tax on that as well?

There are 3 ways you can "get paid".

Cash draws: You are assessed taxes and pay when you file your personal return.
Dividends: Again, assessed and pay when you file, but taxes are at a lower rate.
Salary/wage: Pay taxes throughout the year.

Remember as an employee/employer, you also pay the employers' portion of CPP, but no EI.

The business is only taxed on profit. Regardless of how you take money out of the business, it is an expense for the company.
Corporate tax (in Alberta at least) is a lot lower than personal tax (especially for small businesses) so the more money you can leave in the business, generally the better.

Now, these are just "lay" answers from a bookkeeper. Each case is different and an accountant or financial advisor is in a better position to evaluate your personal situation.

If I'm not planning on keeping more than a couple grand within the company at all times, is there any point in professional liability insurance? It's not like the company has any assets that I need to worry about losing.

Liability insurance is not just about assets, it also encompasses risks associated with your business. Again each business is unique.

Just a side note: CGA's and financial advisors can help "assess" your situation. Bookkeepers can help keep it all in order, so there is accurate information on which the advisors will be basing their advice on.

[guzzy]

If it is just a contract position she can probably start as a sole proprietor and then decide if she wants to set up an incorporated company. The write-offs aren't quite as good but it is a good start to see if she likes being on her own.

[Mccree]

I have only seen it a few times but there is a rule that states that EVEN thou you are a corporation. IF you only have ONE OR TWO customers then you can be considered to be a personal services corporation and you get no access to the small business deduction and you get taxed at the highest corporate rate which is about 35%. The effect is that you do not get any tax savings as you play corp tax at 35% (vs 14% with the small business deduction) and then you play personal tax at on your draws (wages/div's). It can make you effective tax higher than the 39% you would play as an unincorpated business.

[temple5]

Hello, I am new the incorporation game.

Has anyone recently incorporated and where is the best place in the city to go? I called AMA and they charge $395 which includes the NUANS report.

Thanks.

[nik-]

That's about the price. It'll be in the same ballpark at any registry.

[19Yzerman19]

FYI, if anyone is doing this now (incorporating and acting as a contractor in circumstances where you are for all intents and purposes behaving as an employee), don't. There is now a massively punitive tax penalty associated with this.

[psyang]

Originally Posted by 19Yzerman19

FYI, if anyone is doing this now (incorporating and acting as a contractor in circumstances where you are for all intents and purposes behaving as an employee), don't. There is now a massively punitive tax penalty associated with this.

This has always been the case - my understanding is that the CRA is simply becoming much more hardline on how they determine whether someone is really a contractor or an employee.

For instance, in my case, I work mainly (90%) from home in my own office, use my own hardware/software, and resist efforts from my clients to add me to their corporate directory and/or give me an email address.

But because I typically have one main client, with a couple very small clients throughout the year, my lawyer still determined I was at medium risk at being classified a Personal Service Business (PSB), which is the death knell from a tax perspective.

It's worth looking into. If you are labelled a PSB, you will pay tax at the highest rate (for almost gross income since writeoffs don't count anymore) plus be asked to catch up your payments for things like CPP that are normally ignored as a consultant. It's a double-whammy.

The rumor my accountant told me was that the CRA hosted a large "training camp" for auditors last summer in preparation for the crackdowns coming this year. Another rumor I heard was that the CRA contacted all of the O&G companies in Calgary and simply asked for a list of all their contractors.

I'm very interested to see if there is a real crackdown this year or not.

[temple5]

I have read on this and am aware of the possible issues that I could encounter. I an going to cross my fingers and hope everything is ok

Its a limited time Jul 2014->end June 2015 with possibility for conversion.

I went through a recruiter and the position required incorporation.

The recruiter told me that different registries charge different amounts, ranging anywhere from 200-500.

[darklord700]

Originally Posted by guzzy

If it is just a contract position she can probably start as a sole proprietor and then decide if she wants to set up an incorporated company. The write-offs aren't quite as good but it is a good start to see if she likes being on her own.

That has always be the case but the rule change 2 years ago made it very punitive to get caught.

To safe guard this, the contractor who might be considered PSB by CRA must take out all profits as salary and writes themselves a T4 for those amount. Meaning, no profits are left in the corp and no dividend possible.

[19Yzerman19]

Originally Posted by psyang

This has always been the case - my understanding is that the CRA is simply becoming much more hardline on how they determine whether someone is really a contractor or an employee.

Not quite... Previously, people would do this and attempt to take the small business deduction so they'd have a marginal rate of ~13% until dividend payout. If it was determined you were really an employee hiding behind a corporation, you were a PSB (as discussed), but the practical impact of that was that you didn't get the small business deduction and instead paid tax at the regular corporate rate.

It wasn't a death knell, really. In fact you were still in a pretty good spot, receiving a 13% tax deferral on any reinvested net income for basically no tradeoff. Since 2006 or so, the corporate rate has been pretty well integrated so the ultimate tax disadvantage is negligible and more than offset by the deferral advantage. You paid about 26% at the corporate level, and once dividends were paid out the combined rate ended up being about the same as what you would have paid had you earned the income directly.

No more. Now if you're a personal services business, your corporation doesn't get the general rate reduction. So once you've taken dividends out, you end up paying well in excess of 50% income tax, which is absurd.

The way to deal with this if you're stuck in this situation is to ensure that the corporation itself earns no income - to the extent it has taxable income for the year that amount should be paid out as salary / bonus. Which provides no tax advantage because it's the same as if you were drawing salary directly. (EDIT: Beaten to it by Darklord.)

The problem is, usually you're getting reassessed for multiple years at a time and you can't retroactively un-pay a dividend. So if you're operating under this structure you are risking a very large penalty, and as a result of the change it would not be surprising if this became an audit priority in AB at some point.

The change was I believe a 2011 change. This thread's from 2007 so I brought it up in case people were relying on the old information and didn't realize this.

[mrkajz44]

Opened thread to warm about PSB issues; lots of great advise already.

[Calgary14]

Originally Posted by MaDMaN_26

A friend has to Incorporating herself in order to take a contract position and is getting confused about it all...

Does anyone know any good resources or FAQ's on how to do this... e.g. she was told she has to have stocks and she doesn't really want to deal with that but maybe she has to...

This forum always seems to have some experts hangin around so thought I'd see what came of it.

For tax purposes there are certain criteria CRA uses to determine whether there is an employee/employer relationship or a contractor relationship.

Here is a good starting point: http://www.taxtips.ca/personaltax/em...contractor.htm

And FYI, she doesn't need to incorporate to take a contract position, and in some cases it may not make any sense to incorporate at all

[T@T]

Originally Posted by Calgary14

For tax purposes there are certain criteria CRA uses to determine whether there is an employee/employer relationship or a contractor relationship.

Here is a good starting point: http://www.taxtips.ca/personaltax/em...contractor.htm

And FYI, she doesn't need to incorporate to take a contract position, and in some cases it may not make any sense to incorporate at all

This, you can be a contractor under your own name as long as your the only employee.(you can still claim casual labor though) you still need your own GST number but the rest is hogwash.

Not sure why someone would incorporate a company just to be a contractor for another...serious waste of $$.