T4A Information Slips
Subcontracting Reporting Requirements

Subcontracting Payments and Fees For Service
Employees versus Independent Contractor / Self-Employed
US Treaty Rules - Do's and Don'ts - Retiring Allowances

CRA (Canada Revenue Agency) were enforcing T4A regulations during payroll audits in 2011. In part 3 of this series, I'll share some of my research on what you need to know.

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Canadian Payroll 4 Part Series Click on an image to go to the chat. 2013 CPP and EI rates are in Chat 2.

Table of Contents for Series Payroll Q&A

Part 1 Payroll Tax Deductions Employee Taxable Benefits

Part 2 Current EI & CPP Rates Paying Employees With Cash

Part 3 Subcontracting Reporting Requirements

Part 4 Minimum Wage Rates Provincial Labor Standards

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What CRA is Auditing?

CRA were enforcing subcontractor reporting in 2011. However, in 2012, the fees for services box 048 reporting became optional as CRA performs a review to clarify the types of fees for services that should be reported.

In CRA's Video Gallery, there is a webcast on Preparing T4A Slips and Summaries that you may be interested in viewing.

BACKGROUND

In a posting at Omni Management Services Ltd., they discussed their conversations with CRA in February 2011. The blog explained that "the way the rule is written in the tax act, a T4A should be issued for any individual or company that you pay for any fee or service". This excludes the buying of physical goods and supplies. We are only talking about services here.

In a previous blog, it was noted that CRA wanted "any payments to sub contractors outside the construction industry reported on T4a slips".

I had been referring people to their blog to read about Omni's conversations on Issuing T4A's (February 1, 2011) and Subcontractor Payments (September 24, 2010) . Omni did recommend that you receive an invoice from your subcontractor which contains the following information to keep an auditor happy:

• their personal name and/or their business name if applicable ... this means the invoice should state the legal name they are doing business under
  
• their address ... of course
  
• their GST/HST number if applicable ... if there is no GST/HST number, don't pay any sales tax charged
  

If you are paying over $500, make sure you get the subcontractor's SIN (social insurance number) if they are operating as a sole proprietor ... or their BN (business number) if they are incorporated.

Better yet, create a form to capture the information you need to gather for subcontractors for CRA ... enabling you to prepare the information slip properly. Have each subcontractor complete your form prior to hiring them.

I did some searching on the CRA website. Under, Fees or other amounts for services, it says to report the income from fees for services in Box 048 of the T4A slip. This income was previously reported in Box 28 Other Income of the T4 slip.

You can find some frequently asked questions about the T4A Slip - Box 048 on CRA's website at About the CRA> Federal Government Budgets> 2011> T4A Slip - Box 048.

One of the answers points out that "this requirement primarily affects businesses.. It [box 48] is not intended to include individuals who make payments for personal services such as dental work or hair salon services".

Omni Management Services Ltd.'s post above says that CRA is "concentrating on individuals who sub contract under their own name and social insurance number. [...] they will be looking at companies that subcontract under an incorporated business or business and GST number."

As of December 16, 2011, the CRA website states that "until such time as the CRA undertakes a review for the purposes of clarifying the types of fees for services that are to be reported on the T4A slip, taxpayers will not be penalized for failing to complete Box 048."

I'm guessing CRA is interested in looking at businesses who claim tax deductions for fees for services ... not personal expenses ... from sole proprietors or incorporated employees.

The tax filing deadline for these slips is the same as for T4s. If you are self employed and receive any these information slips, they should be included in your income on Schedule T2125 ... be careful not to report this income twice.

The 2011 federal budget included a review of the graduated penalty structure that kicks in when a tax filing deadline for information returns is missed. You can find the current table of graduated penalties on The Compliance page.

LET'S CHAT ABOUT ...

Employee vs Self Employed?
Employee vs Independent Contractor?

Make sure you are familiar with what constitutes an employee vs a self-employed independent contractor ... because the payroll tax rates are different.

Employee payroll tax rates and benefits are more costly to the employer, so it can be advantageous to hire an independent contractor instead of an employee ... that's why it is a frequently audited area.

Over the years the courts have determined that four tests need to be met to determine employment status - (1) The Control Test, (2) The Integration Test, (3) The Economic Reality Test, and (4) The Specific Results Test.

CRA has taken these tests and now monitors the following areas in making their determinations:

1. Is it a contract of service (employee) or a contract for services (business relationship)? Is there a written contract? Do you have multiple clients / customers?
2. Degree of control between parties is an important criteria. Who exercises control over (a) what work is done, (b) who does it, (c) how it is done, and (d) where it is done?
3. Who provides/owns the tools and equipment?
4. Can the work be subcontracted out? Can assistants be hired to help?
5. Who is at financial risk? Who makes the investment?
6. Is there an opportunity for profit?

For more in-depth information and specific questions to ask, refer to the CRA publication RC4110 Employee or Self-Employed? If you are working in the U.S., refer to chapter two of the IRS Publication 15-A Employer's Supplemental Tax Guide.

Tracy MacKinnon in Deloitte's September 2010 newsletter Privately Speaking writes,

"whether an individual is an employee or a contractor is not a question of choice but a question of fact. And yet, making such a determination is not perfectly clear, as represented by a series of court cases on this issue. In a relatively recent case, the court concluded that the intent of the individual and the company must be one of the factors that is considered in determining the status of the individual."

She explains that the CRA guide does not mention intent.

Before you decide to misclassify an employee to avoid the numerous payroll tax rates, consider the severity of the penalties. Ms. MacKinnon explains the consequences if the CRA deems a subcontractor to be an employee:

"Penalties of 10% on income tax, CPP and EI which are not withheld on the first failure to withhold, with the penalty potentially increasing to 20% for repeated offences, as well as non-deductible interest on the amounts owing

Both the employee and the employer’s portion of CPP and EI plus penalties and interest

Late filing penalties on the failure to file T4 Statement of EI forms"

Ms. MacKinnon recommends that all support documentation supporting your decision that the person is an independent contractor should be available before CRA comes knocking.

Another CRA article that may be useful if you own and operate heavy equipment isWorkers who own and operate heavy machinery-employees or self-employed workers?. Look for it under the A to Z index> Businesses> Topics for Payroll> Letter C> CPP Rulings> CPP Explained ... then click on "explained" near the top. There is also an article for construction and fishing.

OnPayroll.ca has a short article titled "Just because they are incorporated doesn't mean they are independent". It highlights a court case where CRA won when an employer who had hired an individual through his Incorporated Company. See the September 5, 2012 newsletter at bizactions.com.

Canadian Subcontracting in The Bookkeeping Forum

I have selected a few posts on Canadian subcontracting payments from The Bookkeeping Forum to highlight as they are commonly asked questions.

• T4A Box 48 and T2125 discusses the redesign for the 2010 tax season
• T4As and Subcontracting - discusses reporting for those not in construction

THE BOOKKEEPER'S NOTES ON

Canadian Subcontracting Arrangements ...
Canada - US Treaty Rulings

A September 14th, 2011 article at the Canadian Tax Law Blog (www.canadiantaxlawblog.com) discusses CRA's technical interpretation of Article V(9)(b) where CRA confirmed " that multiple non-resident parties to a subcontracting agreement may be deemed to have permanent establishments in Canada".

Canadian Subcontracting Do's and Don'ts

You may interested in an article by Ann Douglas published in the Periodical Writers' Association of Canadian examining the do's and don'ts of Canadian subcontracting.

She does say that, "If you're months behind in your filing and you can't remember the last time you keyed a cheque into your accounting program, it's probably time to think about bringing someone in to help you stay on top of your office chores."

Retiring Allowances ... Now Reported on T4

Deloitte's September 3, 2010 Weekly Tax Highlights newsletter mentioned that retiring allowances must be reported on an employee's T4 slip. Prior to this CRA announcement, the practice was to report retiring allowances on a T4A slip. This change was effective January 1, 2011 for the 2010 tax year.

The retiring allowance is now reported in the "other information" area and the codes to use will be:

Code 66, Eligible retiring allowances;
Code 67, Non-eligible retiring allowances;
Code 68, Status Indian (exempt income) - eligible retiring allowances; and
Code 69, Status Indian (exempt income) - non-eligible retiring allowances.

Retiring allowances are not considered to be pensionable or insurable earnings and are NOT to be included in Box 14.

You will still report amounts pertaining to 2009 and earlier on T4A slips.

This change was done in conjunction with the 2010 redesign of the T4A slip.

The "back" of the new T4A slip has a list of all the applicable categories by box number that are taxable along with what line of the tax return the information tax slip / box should be reported on.

For more information go to Businesses> Payroll> Completing returns> T4A redesign on the CRA website at cra-arc.gc.ca . the new codes for 2011 are located at Businesses> Payroll> Completing returns> T4A> T4A slip redesign> New T4A codes for 2011.