Ron Cole, Business Development Coordinator FBC, Canada’s Farm & Small Business Tax Specialist

Are you an employee or self-employed contractor?

There’s a big difference, and understanding the differences between the two can have a significant impact on your income tax, especially if you think you’re a self-employed contractor and the Canada Revenue Agency doesn’t.  If you’re working as an independent contractor or thinking of becoming one, there is a lot you need to know.  For starters, there are a lot of benefits and risks to be a self-employed, independent contractor.  On the plus side, self-employed contractors often charge more per hour than what they would get as an employee in a similar position. You might also have a lot more freedom and control of when and how you work.

As a self-employed contractor, you can claim business expenses to reduce your taxable income, including:

  • At-home expenses
  • Vehicle costs
  • Meals
  • Tools and equipment
  • Even entertainment expenses

Being a self-employed contractor can also make it easier for those you work for. Because you are not on their payroll, they do not have to deduct taxes, make EI and CPP contributions, or follow employment standards legislation.

All that freedom comes with risks. When you are a contract employee, there is little to no job security. If you lose a job or are terminated by the company that contracted you, you are going to be left without severance.  Should you become unemployed, you will not be able to collect EI. That’s because you did not pay into it.  Because the work is contracted, you do not receive benefits, sick pay, or holiday pay. Unless this was negotiated into a contract. For the most part though, this is why independent contractor rates are higher than employee rates.

Tax Advantages for Self Employed Contractors

Filing your taxes with the Canada Revenue Agency when you’re a salaried employee is pretty basic. The employer deducts income tax from your paycheck and you get a T4 for your taxes.  As a self-employed contractor, it’s up to you keep track of how much you owe in taxes to the Canada Revenue Agency.  If you are a self-employed contractor, it’s imperative that you understand the tax obligations.  You can’t tell the Canada Revenue Agency you weren’t aware of a specific tax law if you make a mistake. Ignorance isn’t an excuse.

As a sole owner or partnership, you can reduce your taxable income by claiming valid businesses expenses. For example, if you operate a home business, you can deduct a percentage of costs related to the business.

According to the Canada Revenue Agency, if your home office takes up 10% of the total floor space, you can deduce 10% of home maintenance costs, including heating, electricity, and cleaning materials. You can also claim depreciation expenses on fixed assets.

As a self-employed contractor, it’s important to understand that you need to submit an annual tax return that reports the gross income, gross expenses, and net income. If you earn more than $30,000 a year (or four consecutive quarters or a single quarter) you also need to charge and collect GST/HST.  It’s also important to keep accurate, up-to-date records. Currently, that goes back seven years.

T5018 Statement of Contract Payments

It can take a lot of time for self-employed workers and independent contractors to navigate Canada’s complex tax legislation.  It also takes time for businesses to understand the tax essentials of self-employed contractors.

A good example is understanding what needs to get reported on the T5018 information return. If you are an individual, partnership, trust, or corporation and more than 50% of the business’ income comes from construction, and you make payments to subcontractors for construction services, you need to report amount paid or credited.

To report payments to subcontractors for construction work, including any GST/HST and provincial/territorial sales tax, you must:

  • Complete the T5018 slip
  • Complete the Statement of Contract Payments, or
  • Provide a listing of all payments made to subcontractors, on a line by line basis in column format with all the information required on the slip.

The listing needs to have all the summary information, including the total payments to each of the subcontractors, the total number of subcontractors who received these payments, and the signature of an authorized person.

This applies even if you are a Canadian resident paying another Canadian resident for construction services performed outside of Canada.

If all of that sounds like too much work and you’re thinking it might make more sense to just pay the contractor “under the table” to avoid paying tax, think again. If caught, you could face criminal prosecution with fines and penalties of up to 200% of the tax you tried to avoid.

Over the last 65 years, FBC has helped tens of thousands of clients from across the country minimize their tax obligation and maximize their assets.  We also understand that your life can be busy and tax needs are unique. That’s why our tax specialist will come to your office or home. We’re also the only firm in Canada that offers integrated tax services on a year-round Membership basis.

For a fixed fee, Members get access to our tax planning, tax preparation, consultation and bookkeeping.  FBC also provides all new Members with a review of their previous 3 years’ tax returns.

For more information on FBC and the services we offer, call Ron today at 1-902-471-4339.