CRA (Canada Revenue Agency) will likely enforce T4A regulations during payroll audits in the near future. In part 4 of this series, I'll share some of my research on what you need to know.
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Relax, drink a cup of tea while you take a few minutes to read through my notes on subcontracting in Canada.
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Payroll Tax Deductions
2023 EI & CPP Rates
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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 an independent contractor in Ontario's construction industry, make sure you become familiar with WSIB's requirements.
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. The wording exact wording is "taxpayers will not be penalized for failing to complete Box 048".
So while completing the T4A is still a CRA requirement (and has been since 1998 I believe), it is not currently enforced. Expect this to be enforced sometime in the near future. Make it easy on yourself and implement the following practices:
1. Get their SIN or BN and address so you can actually issue a T4A slip. (See "Background" below for more on this.)
2. NEVER pay a subcontractor if they haven't given you a legitimate invoice / business receipt.
A problem arises when you report subcontractor fees on CRA's T4A slip. IF the small business owner has no payroll, issuing a T4A triggers CRA to open a payroll account for you. Once this happens, you have 2 options:
You can see that CRA is/will be using this information to determine if subcontractors are classified correctly.
If these individuals really are subcontractors, your payments to them do NOT attract ITW, EI or CPP. A subcontractor must pay their own income tax installments and CPP contributions. They are NOT eligible for EI unless they have enrolled in the voluntary EI program for the self-employed.
If CRA determines the individual is really an employee
disguised as subcontractor, the employer now becomes responsible for both the
employee and employer contributions along with any penalties and interest assessed. CYA and get it in writing that the person is self-employed people! (See "Background" below for the information you need to collect BEFORE you hire them.)
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 and misclassification can be extremely costly.
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 additional 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 is Workers 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.
If you are a Personal Service Business (an incorporated employee) ... or you are thinking of hiring a PSB, you have a different set of challenges. Read about them here.
LET'S CHAT ABOUT ...
In a posting at Omni Management Services Ltd. back in February 2011**, they discussed their conversations with CRA on subcontractor payments and issuing T4As. 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".
It is recommended 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 and aren't a GST/HST registrant ... or their BN (business number) if they are incorporated and/or a GST/HST registrant.
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.
In CRA's Video Gallery, there is a webcast on Preparing T4A Slips and Summaries that you may be interested in viewing.
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 said that CRA was "concentrating on individuals who sub contract under their own name and social insurance number. [...] they will also be looking at companies that subcontract under an incorporated business or business and GST number."
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.
**Omni's blog posts on Issuing T4A's (February 1, 2011) and Subcontractor Payments (September 24, 2010) are no longer available online.
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".
Two great articles you will want to read if you hired foreign contractors. They will be bring you up to speed on your Canadian and U.S. reporting and withholding obligations.
Canadian companies using independent contractors in the U.S. by Philippe Brideau, CRA spokesperon.
Canadian and U.S. Reporting Obligations - Independent Contractors by KPMG LLP, Calgary
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 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 on the CRA website at cra-arc.gc.ca . You can see an image of the T4A slip with the new codes at Businesses> Payroll> Completing returns> T4A> T4A slip.
Bookkeeping Essentials > Payroll Deduction Topics - Part 3
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