Clarifying Your Status as a Self-Employed Consultant - How to ensure CRA does not consider you a Personal Service Business.
Our industry is constantly evolving. Over the past few decades, the IT workforce has adapted to meet changing market needs and economic trends. As organizations required more flexibility from IT professionals, the demand for private consultants began to increase. Contract work is now more common than ever, with a growing number of people becoming self-employed.
As an IT consultant, you are likely aware of the many benefits of self-employment. But you should know about some of the risks facing you today – and learn how to protect yourself against them.
Personal Service Business
There is growing concern among small business owners about the issue of Personal Service Business Risk. The Canada Revenue Agency (CRA) identifies corporations as a Personal Service Business (PSB) if they provide services to another organization that an employee would normally perform. This could include working onsite or using tools and equipment provided by the organization.
If your relationship with a client could be seen as an employee-employer relationship, your corporation might be considered a PSB. In this case, you would be seen as an “incorporated employee” rather than a self-employed consultant. You would therefore be ineligible to claim the federal small business tax credit or deduct ordinary business expenses. In addition, CRA could reassess your taxes for the past few years and disallow some of the expenses you claimed.
CRA small business audit
Between September 2009 and October 2010, CRA conducted a pilot audit that involved assessing 300 small businesses across Canada to determine whether they were in fact PSBs. Of the 300 businesses, 112 were found to be PSBs. Of those 112, 61 were in the IT sector. All 112 were reassessed relating to the Small Business Deduction and the expenses they had claimed.
Some of the 112 small business owners are currently challenging CRA’s decision in the courts. The outcome could have a significant impact on how small businesses operate in Canada. In the meantime, there are several steps you can take to make it clear that you are self-employed and to reduce your Personal Service Business Risk.
What determines a PSB
From a CRA perspective, the PSB rules are designed to ensure that “incorporated employees” pay the same tax rate as other employees. But the question of what constitutes an employee-employer arrangement can be unclear, especially in the IT sector. Independent contractors are often required to work alongside their clients’ employees to upgrade computer networks and write software. Some also work for only one client, which can create the appearance of an employee-employer relationship.
There is no one factor that leads CRA to determine that a consultant is a PSB. But there are several key factors the agency considers, including whether the business owner:
How to protect your business
The fact is, most IT consultants are self-employed. Many provide technical services to multiple clients, using their own tools and equipment. All Veritaaq consultants are intended to have a business relationship with their clients, rather than an employee-employer relationship.
Still, the best way to ensure that CRA does not see you as a PSB is to clearly define your relationship with each client as a business relationship.
Tips on establishing a clear business relationship
How Veritaaq can help
One of Canada’s leading IT consultant suppliers, Veritaaq has 28 years of experience providing IT consulting services to public and private sector organizations. Since 2001, we have been chosen seven times as one of Canada’s 50 Best Managed Companies. We know our business, and we make a point of helping protect yours.
If you are an incorporated consultant and unsure as to whether you could be considered a PSB, we recommend you consult a chartered accountant or tax lawyer. Veritaaq is pleased to offer any guidance we can, but we are not an authority on CRA policy. If you would like to contact us, we are happy to point you in the right direction for advice about clarifying your role as a self-employed IT professional.
As an IT consultant, you are likely aware of the many benefits of self-employment. But you should know about some of the risks facing you today – and learn how to protect yourself against them.
Personal Service Business
There is growing concern among small business owners about the issue of Personal Service Business Risk. The Canada Revenue Agency (CRA) identifies corporations as a Personal Service Business (PSB) if they provide services to another organization that an employee would normally perform. This could include working onsite or using tools and equipment provided by the organization.
If your relationship with a client could be seen as an employee-employer relationship, your corporation might be considered a PSB. In this case, you would be seen as an “incorporated employee” rather than a self-employed consultant. You would therefore be ineligible to claim the federal small business tax credit or deduct ordinary business expenses. In addition, CRA could reassess your taxes for the past few years and disallow some of the expenses you claimed.
CRA small business audit
Between September 2009 and October 2010, CRA conducted a pilot audit that involved assessing 300 small businesses across Canada to determine whether they were in fact PSBs. Of the 300 businesses, 112 were found to be PSBs. Of those 112, 61 were in the IT sector. All 112 were reassessed relating to the Small Business Deduction and the expenses they had claimed.
Some of the 112 small business owners are currently challenging CRA’s decision in the courts. The outcome could have a significant impact on how small businesses operate in Canada. In the meantime, there are several steps you can take to make it clear that you are self-employed and to reduce your Personal Service Business Risk.
What determines a PSB
From a CRA perspective, the PSB rules are designed to ensure that “incorporated employees” pay the same tax rate as other employees. But the question of what constitutes an employee-employer arrangement can be unclear, especially in the IT sector. Independent contractors are often required to work alongside their clients’ employees to upgrade computer networks and write software. Some also work for only one client, which can create the appearance of an employee-employer relationship.
There is no one factor that leads CRA to determine that a consultant is a PSB. But there are several key factors the agency considers, including whether the business owner:
- Has only one client or many clients
- Has control over their work process
- Assumes financial risk by taking on a contract for services (rather than a contract of service)
- Owns the tools and equipment necessary to provide services
- Operates independent of the business to which they are providing services
- Has the right to hire workers and assistants
How to protect your business
The fact is, most IT consultants are self-employed. Many provide technical services to multiple clients, using their own tools and equipment. All Veritaaq consultants are intended to have a business relationship with their clients, rather than an employee-employer relationship.
Still, the best way to ensure that CRA does not see you as a PSB is to clearly define your relationship with each client as a business relationship.
Tips on establishing a clear business relationship
- Set your own work schedule
- Have control over your work methodology
- Own the tools you use to provide services to clients
- Do not act like an employee or attend employee functions, unless you have been paid to attend
- When possible, hire employees or other contractors
- Have professional advisors help you set up your company, do your books and records, and file your taxes
- Get appropriate insurance to cover the services you provide
How Veritaaq can help
One of Canada’s leading IT consultant suppliers, Veritaaq has 28 years of experience providing IT consulting services to public and private sector organizations. Since 2001, we have been chosen seven times as one of Canada’s 50 Best Managed Companies. We know our business, and we make a point of helping protect yours.
If you are an incorporated consultant and unsure as to whether you could be considered a PSB, we recommend you consult a chartered accountant or tax lawyer. Veritaaq is pleased to offer any guidance we can, but we are not an authority on CRA policy. If you would like to contact us, we are happy to point you in the right direction for advice about clarifying your role as a self-employed IT professional.
| Head Office (Ottawa) 2327 St. Laurent Blvd.
Suite 100
Ottawa, ON, Canada K1G 4J8 Phone: (613) 736-6120 Fax: (613) 736-6123 | Toronto Office 60 Adelaide Street East
Suite 1201
Toronto, Ontario M5C 3E4 Phone: (416) 360-6120 Fax: (416) 360-8639 | Montreal Office 1250 René Lévesque Blvd. West,
Suite 2200
Montreal, Quebec H3B 4W8 Phone: (514) 989-2475 Fax: (514) 934-4640 |
No comments:
Post a Comment