Self-employed Contractors – both payer and payee beware!
Whether a worker is considered self-employed, or an employee can be a grey area. However, the
distinction is important. A self-employed person is in business for themselves and has a level of
independence from the payer. They have a risk of profit or loss. These are only a few of the facts to be
considered in determining employment or self-employment status. If a business engages a self-employed person to provide services and the CRA determines that the self-employed person is really an
employee of the payer, then the self-employed person is denied certain business expenses they may
have deducted on their personal tax return. This is because the employees are more limited in the types
of expenses they can claim as a deduction in their personal tax return compared to self-employed
persons. In addition, the payer will be liable for CPP and EI contributions that were not withheld from the
payment for employment services. The payer will often protect themselves from this risk by requiring
service providers to incorporate their business. Should the CRA conclude that the workers were, in fact,
not independent contractors, the corporation cannot be considered an employee and the payer is
protected from paying CPP and EI contributions on the payments.
Sometimes the service provider wants to incorporate to benefit from a special lower corporate tax rate on small business income. However, this can be detrimental if the CRA determines the service provider is just an “incorporated employee”, called a “personal services business” in tax jargon. The payer is protected from any negative tax consequences in this situation. It is the incorporated service provider who will bear the negative tax consequences such as a punitive corporate tax rate compared to typical small businesses, and the denial of almost all business expenses. As several years can be reassessed by CRA at one time, with interest charges, this can be very costly.
CRA is in the process of running an “educational campaign” on this issue by sending out letters from
June to December 2022 to taxpayers in certain industries, requesting information about their
payer/payee relationships. Participation is voluntary. If you receive one of these letters, you are not
under audit. However, in the past CRA has conducted audit projects to review payer/payee relationships
in certain industries and issued tax assessments as a result. So, this may be an indication that CRA is
going to undertake an audit project in the future. Or, the information obtained from some self-employed
persons who wish to be considered employees, may be used by CRA to reassess the payer for EI and
CPP withholdings. CRA does evaluate the facts of each case given specific criteria. So, whether you
are the payer or the payee, now is a good time to re-evaluate with your Padgett advisor if
your current working relationships are properly categorized and documented.
New Trust Reporting Requirements
New trust reporting requirements that the government intended to apply last year, will now apply for tax
years ending as of December 31, 2022.
One of the more significant changes is that bare trusts will be subject to the new reporting requirements.
Previously only trusts that had taxes payable, or disposed of an asset, were required to file a tax return.
Now, even if a trust has no income or did not make any distributions to beneficiaries, it may be
required to file a return. So, if you have a trust that previously was not required to file a return, you
should consider whether you now have a filing requirement. There are penalties for filing late. There are
exceptions to these rules, the most common being graduated rate estate returns, qualified disability trusts, or trusts that have been in existence for less than 3 months.
Other significant changes are the new requirements to disclose the following information:
• The names, address, date of birth, jurisdiction of residence, and taxpayer identification number (SIN,
BN, foreign TIN) for each:
o trustee
o beneficiary
o settlor
o any person who can exert influence over trustee decisions
While these new and revised rules have not been finalized into law yet, it is expected to be finalized before year end. Since it may take time to collect information for the additional disclosure
requirements, you should consider these new changes well before the filing deadline of March
31, 2023.
This information was originally posted at http://smallbizpros.ca/