Tax Matters for the Incorporated and Self-employed
People who are self-employed can generally take advantage of a wider range of available deductions in computing their taxable income than employees. One of the benefits of being considered an independent contractor is that you are not required to have “payroll taxes” withheld from your income. You are also not required to pay Employment Insurance (EI) premiums if you carry on business for yourself. This could have saved you up to $931 in EI premiums in 2015 ($955 in 2016). However, this means that if your consulting contracts terminate and you are left without work, you cannot benefit from EI.
Canada Pension Plan (CPP) contributions, on the other hand, are still required. As well, if you are self-employed, you will need to pay the “employer’s share” as well as your own share. The total was as high as $4,960 for 2015 ($5,089 for 2016). You will, however, be able to claim a deduction for the “employer’s share” of CPP up to the maximum of $2,480 for 2015 ($2,544 for 2016), and a tax credit for your own share of the CPP.
The distinction between an employee and an independent contractor is not always clear and is a question of fact. The issue of control (who controls what is done and how it is done) must be considered in making this distinction. Accordingly, you will more likely be considered an independent contractor carrying on your own business as a proprietor if you:
- Agree to get the job done, but you don’t always make a commitment for any particular number of hours on any particular day;
- Work on your own with no supervision and simply report back to the company periodically on progress;
- Issue invoices and receive payments with no source deductions for income tax, EI, or CPP/QPP, and receive no employee benefits;
- Use your own equipment and work at home, going to the company for planning meetings only;
- Provide services to more than one client or customer.
If your worldwide taxable supplies of goods and services exceed $30,000 in a single calendar quarter or in four consecutive calendar quarters, you will be required to register for the Goods & Services Tax (GST) and charge GST on your supplies. In addition, if in the ordinary course of business you sell or lease taxable goods, or provide software or taxable services, you may need to register for and collect Provincial Sales Tax.
Each case will depend on its facts. Keep in mind that there are other pros and cons of being employed versus self-employed. Consult the advice of a Chartered Professional Accountant.