Employee Versus Self-Employed or Independent Contrator

Sometimes it is difficult to determine if an individual is an independent contractor (i.e. self-employed) or an employee. Many employers find it beneficial to hire contractors rather than employees. The costs of EI, CPP, and benefit packages for employer are reduced.

Issues- Employee vs self-employed

  • The deductible of expenses is more restricted for employees. Self-employed individuals may be allowed to deduct reasonable expenses.
  • Self-employed need to pay double CPP; no EI (can opt into EI system for certain benefits);
  • GST/HST input tax credits are available for self-employed.
  • Employer must withhold source deductions (income tax, EI, and CPP) and remit to CRA;
  • Employer must make match CPP contribution and 1.4 times of EI deductions and remit to CRA;
  • Employer must file T4 summary and supplementary slips by end of February.

There is no single test or factor that is decisive in determining whether an individual is an employee or an independent contractor.

Interrelated tests:

  • Economic reality or entrepreneur test-  control ( hours, location, what and how the job is to be completed), ownership of tools, chance of profit and risk of loss
  • Integration or organization test- whether individual is economically dependent on the organization
  • Specific result test- is the person providing services for a specified period of time or on an ongoing basis?

Case 1:

One client had child care expenses and claimed it in the year of tax return. However, the situation was the babysitter who came to client’s home and took care of child. When CRA audited it, the factors for the economic reality or entrepreneur test involved the employer and employee relationship. So the client as employer must withhold source deductions and also need contribute employer’s portion of CPP and EI and remitted to CRA.  The client fail to compliance with the rules and got the penalties and interest charged.

 

 

Non-Residential Status

Non-residents

You are a non-resident for tax purposes if you:

  • normally, customarily, or routinely live in another country and are not considered a resident of Canada; or
  • do not have significant residential ties in Canada; and
    • you live outside Canada throughout the tax year; or
    • you stay in Canada for less than 183 days in the tax year.

Residential Ties – use province where you resided on December 31

  1. Home (Owned or Leased)
  2. Personal Property (Car, land, building)
  3. Spouse or common-law partner or dependent reside
  4. Other ties-social ties, driver’s licence, bank accounts or credit cards, health card

Notes:

A. If you did not maintain significant residential ties with Canada, and on December 31, you resided outside Canada and were a government employee, a member of the Canadian Forces or their overseas school staff, or working under a Canadian International Development Agency program, you may be considered a deemed resident of Canada (this also applies to your dependent children and other family members).

B. If you stayed in Canada for 183 days or more in the year, you did not establish significant residential ties with Canada, and under tax treaty, you were not considered a resident of another country, you will be considered a deemed resident of Canada. Otherwise, considered a Non-resident of Canada.

Your tax obligations

As a non-resident of Canada, you pay tax on income you receive from sources in Canada. The type of tax you pay and the requirement to file an income tax return depends on the type of income you receive.

Generally, Canadian income received by a non-resident is subject to Part XIII tax or Part I tax.

Filing your income tax return

You must file a Canadian income tax return if you:

  • have to pay tax; or
  • want to claim a refund.

Filing due date

Generally, your tax return has to be filed on or before:

  • April 30 of the year after the tax year; or
  • if you or your spouse or common-law partner carried on a business in Canada (other than a business whose expenditures are mainly in connection with a tax shelter), the return has to be filed on or before June 15 of the year after the tax year

Notes:

A balance of tax owing must be paid on or before April 30 of the year after the tax year, regardless of the due date of the tax return.

Case 1:

One client, ABC, immigrated to Canada in 2008 and a few months later, she went back home and did not set up any residential ties in Canada, and did not have any Canadian sources income from Canada. So accountant recommended that she did not need to file tax return because she was a non-resident for the time. When she came back Canada in 2013, the financial advisor suggested she open a TFSA account and contribute the  total amount of $25,500 from 2009 to 2013 to complete the TFSA contribution room. A CRA audit charged  around $2,000 in penalties because she was non-resident from 2009 to 2012 and had not qualified for contribution TFSA contribution room amounts.

Case 2:

One client, XYZ,  rented a house in Toronto and paid monthly rent by postdate cheques to the owner . The owner of the house is a non-resident and did not have any representative agent who could handle every month rental income withholding 25% tax and remittance to CRA. The owner failed to comply as a non-resident who received rental income in Canada and have to withhold 25% tax to remit to the CRA and did not file election amount. CRA charged tenant penalties and interest as the owner did not have any representative agent to do it.

Liabilities for Tax

All individuals, corporations, and trust residents in Canada have liabilities to report tax.

Non-residents – Report tax from Canadian-sources income if:

  • Employed in Canada
  • Carried on a business in Canada
  • Disposed of taxable Canadian property

Partnerships are not directly liable for the tax on income, and it should be reported by the partner.

Taxation year of individuals – Calendar year (Jan 01 to Dec 31)

Taxation year of corporation – Fiscal year(select own fiscal year as long as it is not longer than 53 weeks)

Income Tax Filing Deadlines 

Individuals:

  • Due on or before April 30 of the next year
  • June 15 if individual or spouse carried on a unincorporated business-if owing tax, tax owing due on or before April 30

Deceased individuals:

Usual filing deadline. Exception: If an individual dies after October in the year and before the filing date (i.e. April 30/June 15), the return must be filed by the later of six months after the date of death; and usual filing date following the particular year.

Corporations-within six months after the end of the taxation year

Penalties

  • Late-filed tax return: Balance of tax owing *5%+1% for each complete month late: Maximum=17%
  • Late-filed tax return (repeat offender): Balance of tax owing *10%+2% for each complete month late: Maximum=50%
  • Failure to report income (repeat offender): Income not reported * 10%
  • Under-reporting income (knowingly or gross negligence): Minimum=$100; Maximum=increased tax liability *50%
  • Late or deficient instalments: [Interest charged-greater of (a) $1,000 and (b) 25% of interest that would have been charged if no instalments were made] *50%

Payments and Interest

  • Individuals- April 30
  • Corporations- 2 months after year-end
  • CCPC claiming Small Business Deduction with taxable income under the business limit in the previous year- 3 months after year-end
  • Trusts- Due date for trust return

Liability of directors-Corporate directors may be held liable for unremitting withholding.

Liability for GST/HST

Under the Excise Tax Act (ETA),  a person who is engaged in a commercial activity in Canada is required to register for GST/HST purposes, which include an individual, partnership, corporation, trust or estate, or a body that is society, union, club, association, commission, or other organizations of any kind. GST/HST is a tax on consumption or value added, and not on income.

Exclusions from commercial activity

Activities involve the making of exempt supplies do not constitute commercial activities. Therefore, you cannot register for the GST/HST if you provide only exempt goods and services. This means that you do not charge the GST/HST on your supplies of your goods and services, and you do not claim input tax credits.

Exempt goods and services include:

  • used residential complexes.
  • long-term residential accommodation (of one month or more), and residential condominium fees.
  • some sales of vacant land or farmland.
  • most health, medical, and dental services performed by licensed physicians or dentists for medical reasons.
  • child care services (daycare services for less than 24 hours a day) for children 14 years old and younger.
  • bridge, road, and ferry tolls (ferry tolls are taxed at 0% if the ferry service is to or from a place outside Canada).
  • legal aid services.
  • most educational services such as:
    • courses from a vocational school that lead to a certificate or a diploma to practise a trade or a vocation; or
    • tutoring services for an individual who takes a course approved for credit by a school authority or the education service follows a curriculum designated by a school authority.
  • music lessons.
  • most food or beverages sold in an elementary or secondary school cafeteria primarily to students of the school and most meal plans provided in a university or public college.
  • most services provided by financial institutions such as arrangements for a loan or mortgage.
  • arranging for and issuing insurance policies by insurance companies, agents, and brokers.
  • most goods and services provided by charities.
  • certain goods and services provided by non-profit organizations, governments, and other public service bodies, such as municipal transit services and standard residential services such as water distribution.

Case 1:

One client who provides the educational services and charged HST to their customers. When we find out their mistakes, we help them to correct the mistakes and doing the properly adjustments in adjusted trial balance, and helped them to file adjusted GST/HST return to avoid CRA penalty.

Case 2:

One client received CRA audit from the previous year and come to our firm to response the CRA audit issues. When we analysis their previous year’s financial statements, we find out the mistakes from previous allocated and charged GST/HST for rental income of residential condominium. We help them to correct it and adjust for GST/HST return and income tax return which relative it. We help the client to get couple thousands of refund of GST/HST.

Case 3: New house GST/HST rebate

One client who purchased new condominium. When the house was closed, she disclosed to lawyer about the new house for principal residence purpose. One year later, CRA audited it and find out the condominium was rent out and charged $27,000 penalty and interest for the GST/HST rebate claimed. We helped the client to correct the GST/HST New Residential Rental Property Rebate Application and solved the problem.

 

 

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