Many individuals in the computer industry work as computer consultants. If you are in this group, are you aware of the various tax issues that affect your work?
Here are some points to keep in mind:
1. If you are an employee rather than an independent contractor, you cannot deduct most expenses, and your employer is required to withhold income tax at source, as well as Employment Insurance premiums and Canada Pension Plan (or Quebec Pension Plan) contributions.
If you have incorporated your business but your relationship with your company’s client is really that of employee to employer, your company will be considered to be carrying on a “personal services business” and there will be a very high tax cost.
If you are working entirely for one company or are under the control of one company, you may well be an employee. The dividing line between employee and self-employed is not always clear. The rest of this article will assume that you are an independent contractor (self-employed), and are not incorporated.
2. If you are an independent contractor carrying on business, the income you earn is business income. No income tax will be withheld at source, but you need to set aside enough money to be able to pay your quarterly instalments (after your first year of carrying on business) as well as your April 30 income tax balance.
3. If you are an independent contractor, you can deduct the expenses of earning your self-employment income. This can include: office supplies; Internet access; advertising; liability insurance; capital cost allowance (depreciation) on capital assets such as computer equipment and furniture; travel from your home office to a client site; office telephone and cell phone charges; people you hire to work for you on the project; and, in most cases, a portion of your home expenses (such as mortgage interest or rent, insurance, utilities and maintenance) if you have a home office.
4. If you are an independent contractor, then your income tax filing deadline is June 15 rather than April 30. However, if you owe a balance at year-end, interest (currently at 5% per year, compounded daily) accrues after April 30.
5. If you are self-employed as an independent contractor, you are normally not eligible for Employment Insurance (EI) benefits. (However, if you are working through a placement agency, a CRA administrative policy may consider you self-employed for tax purposes but still treated as an employee for EI and CPP deductions.) You can opt into the EI system so as to be eligible for certain benefits such as parental benefits on the birth of a new child. However, once you opt into the system you cannot leave, so you will have to pay EI premiums on your self-employment income forever.
6. Assuming you are self-employed, if your annual gross revenues (i.e., billings for your services) exceed $30,000 (when combined with any corporations you control), you must register for GST/HST with the CRA and charge either GST or HST on your services. The rate you charge (5% GST, or 13% or 15% HST) will normally depend on your client’s address (there are some exceptions, such as where you provide services for a location-specific event, or for court litigation). Thus, for example, if you are billing a Calgary client you must charge 5% GST, while if you are billing a Toronto client you must charge 13% HST. (The Ontario HST rate is 13%; the four Atlantic provinces are 15%; and the rest of Canada is 5% GST.)
Of course, you must collect and remit to the government the tax that you charge; but you can normally deduct all GST/HST that is charged to you for business expenses, as an “input tax credit” (ITC) on your GST/HST return. You may also be able to choose to use the “Quick Method” whereby you do not claim ITCs but remit less GST/HST than you collected, at a flat rate. (For example, for 5% GST, you may be able to remit 3.6% of your GST-included sales minus $300 instead of 5% minus ITCs. In Ontario, for 13% HST, you remit 8.8% of your HST-included sales minus $300.)
If you and your client are both in Quebec, you normally must charge Quebec Sales Tax, which generally follows the same rules as the GST, though unlike HST it must be accounted for separately.
The company that is paying you will usually not mind being charged GST, HST or QST, since they will receive an ITC (full refund) for all the tax that you charge them.
7. If you are in a province that has a retail sales tax (BC, Saskatchewan or Manitoba), you may have to charge that tax. The details vary by province. These taxes are not recoverable by your clients.
8. Once you have been registered for GST/HST for your first year, if you are filing annually then you are required to pay quarterly instalments of GST/HST, unless your total GST/HST “net tax” remittance for the year or the previous year (prorated to 365 days if it was a short first year) will be less than $3,000.
9. If you have not been charging and collecting all of the sales taxes you should have, you may want to consider making a “voluntary disclosure”, to inform the tax authorities and get penalties waived. You may still be able to collect the tax from your clients, even for work done years ago, so that you can remit the tax to the government. The availability and details of voluntary disclosures vary between the federal authority (CRA) and the various provincial authorities that administer provincial sales taxes.