CRA (Canada Revenue Agency) were enforcing T4A regulations during payroll audits in 2011. In part 4 of this series, I'll share some of my research on what you need to know.
Table of Contents for Series
Payroll Tax Deductions Employee Taxable Benefits
Current EI & CPP Rates Paying Employees With Cash
Subcontracting Reporting Requirements
Minimum Wages Provincial Labor Standards
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.
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:
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.
Canadian subcontracting payments are NOT pensionable or insurable. They do NOT attract CPP contributions or EI premiums.
Independent contractors are responsible for calculating and remitting their self-employment taxes. This is why they are frequently audited by CRA.
If you are a independent contractor in Ontario's construction industry, make sure you become familiar with WSIB's requirements.
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 ...
Make sure you are familiar with what constitutes an employee vs a self-employed independent contractor ... because the payroll tax rates are different.
A September 30, 2013 news note from taxinterpretations.com is important to note when putting pen to paper. This is a direct quote from the tax note authored by Neal Armstrong.
"The extent to which CRA can contradict the written terms of a non-sham agreement is still uncertain.
A significant number of decisions suggest that the “parol evidence rule” (that “when the parties to an agreement have apparently set down all its terms in a document, extrinsic evidence is not admissible to add to, subtract from, vary or contradict those terms") does not apply to CRA, as (per Urichuk) “the Minister, not being a party to that agreement, is entitled to rely on any available evidence to support his characterization [thereof].” However, recent decisions (e.g., General Motors) may suggest a tendency to find that the terms of written agreements, in the absence of a finding of sham, should not be contradicted by extrinsic evidence.
There also is a U.S. dichotomy. The U.S. Tax Court has stated that it is “is well settled that the parol evidence rule has no application in Federal tax cases where the Government is not a party or privy to a party to the instrument.” However, the US Court of Appeals for the Third Circuit established the “Danielson rule,” that “a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.”"
*My note - It is my understanding that the parole evidence rule refers to a third party, such as the CRA, trying to establish that the written agreement does not reflect the true agreement when submission of oral testimony or additonal source documents presented contradicts the terms of the written agreement.
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:
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:
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.
I have selected a few posts on Canadian subcontracting payments from The Bookkeeping Forum to highlight as they are commonly asked questions.
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".
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."
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.
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