My_question_is: Canadian-specific
Subject: Working More Than 2 Years With Same Company And
At The Same Position
Expert: taxman at centa.com
Date: Friday November 25, 2005
Time: 06:06 PM -0800
QUESTION:
I am providing a consulting services to a client through a third
party/headhunter, means my client where I actually work doesn't
directly pay me, she pays to the Headhunter/personal resources
company, then they pay to my Company and my Company pays me …. I
have been working for the same client almost 2 years, and my
client wants to renew my contract to another 6-12 months, but
they are saying per Canada Revenue, "A contract worker can't work
on the same position more than 2 years", so the only way that I
can renew my contract is, if I just work till end the end of my
current contract and then work some where else for 4-5 months,
and then I can come back and can work on the same position as a
contractor
My questions: First, is there such a rule per CRA, second would
that rule apply to my situation, where all payment transactions
are made between the Incorporated companies; no one directly pays
to me but my own Incorporated company..
Thanks
----------------------------------------------------------
david ingram replies:
You are caught in the Personal Service Business rules. These
apply at "any" one time - I do not know of a two year rule but I
may have missed it. In my opinion, based upon your question, a
corporation does you no good anyway "IF" your returns have been
done properly. In fact, if you have a corporation, you can not
make your mortgage interest deductible as easily.
What is a PSB?
A business carried on by a corporation will generally be a PSB if
the following two tests are met:
1. The individual performing the services (or someone related
to the person) owns 10% or more of any class of shares of the
corporation, and
2. Without the use of the corporation, the individual would
reasonably be regarded as an employee of the person or
partnership paying a fee to the corporation.
The key test is really - are "you" an "incorporated employee"?
The CRA will look at in determining whether an individual is an
incorporated employee using the following criteria:
Who is an Incorporated Employee?
The issue of whether someone is an incorporated employee is a
question of fact dealt with on a case-by-case basis.
Answering yes to the following questions would be indicative of
an "incorporated employee" relationship with a client:
* Are there very few clients, or worse, only one client?
* If you only have one or two clients, do you carry on the
duties at the client's offices on a regular and continuous basis?
* Does your client provide an office and tools of the trade
such as a computer or service truck?
* Does your business card have your company name or the
client's name on it?
* Do customers of the client think of you as an employee of
the client or are you an obvious business on your own?
* Does the client pay you on a regular basis, without the
submission of an invoice?
* Is your name on the client phone directory?
* Would you appear to be an officer or employee of the client
to a third party?
* Are you remunerated on an hourly fees basis irrespective of
the time needed to accomplish the task?
* Were you hired to perform ongoing services as opposed to
completing specific projects?
* Are there expected hours of work that are to be put in each
day?
* Are you allowed to send someone else to do your duties or
must all services be performed by you (that is, would the client
not allow you to provide a substitute or not allow you to
subcontract your duties)?
* If supplies or equipment are needed to complete a task, are
they provided by the client?
* Will the client absorb any risk should a project go over
budget or do you take the risk of completion?
There is an exception for corporations having more than 5
full-time employees, and for services provided to an associated
corporation (since these two corporations must share one small
business deduction regardless).
How is PSB Income Taxed?
When a corporation is carried on by a PSB, there are two main tax
consequences:
* The corporation will be prevented from claiming the small
business deduction, both federally and provincially.
* When calculating income from the PSB, the eligible
deductions will be restricted to:
1. Remuneration and benefits for the incorporated employee;
2. If the incorporated employee is a salesperson receiving
commissions, expenses paid by the corporation that would have
been allowed as a deduction to the individual personally as a
commissioned salesperson had he/she incurred the expense; and
3. Legal expenses incurred by the corporation in collecting
amounts owing to it on account of services rendered.
The PSB is NOT eligible for the small business deduction.
Therefore tax can end ip being higher using a PSB one person
corporation working for one entity than if you just worked as an
employee with no benefits - i.e. no EI, etc.
Worse yet, is that the CRA can come along three years later and
re-assess several years at once leaving you with massive tax and
interest bills.
I do not know of any two year rule about hiring a one person
corporation.
However, they have likely done you a favour in pointing this out.
At a $100,000 year profit, the tax is about $10,000 "higher" if
you pay the profit to yourself as a dividend and the CRA reverses
it as a one person corporation with one client than it is as a
straight salary "IF" the corporate tax return is done correctly.
In BC, the difference is $10,000 a year.
The US is no better by the way. A one or two person corporation
is usually an "S" Corporation where all profits flow through to
the shareholder at their personal tax rates.
If you offer your services to a small number of businesses, you
need to decide with each one if you are an employee or
self-employed.
If you incorporate, the stakes are very high - if you are a true
self-employed contractor, you might be able to benefit from a
lower tax rate provided by the small business deduction. However,
if it turns out that you are an incorporated employee, the tax
cost will also multiply,
Remember that the reason for the small business tax rate is so
that the small business can buy machinery, a new truck, etc. It
is not so that "George" will pay less tax. If the CRA
reclassifies you, the tax penalty is HUGE! From your
description, you would be reclassified.
As I said at the start, the other problem is that with a
corporation it is hard to make your mortgage interest deductible.
Go to www.centa.com and read the November 2001 Newsletter in the
top left box.
This is a great question for the Sunday Morning Radio Show.
Now I am going to bed.
Answers to this and other similar questions can be obtained free
on Air every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am
a regular guest on Fred Snyder of Dundee Wealth Managers' LIVE
talk show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com
Call (604) 280-0600 to have your question answered. BC listeners
can also call 1-866-778-0600.
Callers to the show and questioners on this board can also attend
the Thursday Night seminars on finance and making your Canadian
Mortgage Interest deductible.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
Home office at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week (please do not
fax or phone outside of those hours as this is a home office)
email to taxman at centa.com
www.centa.com www.david-ingram.com
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