Keep your money: a few things to keep in mind during tax season


moneyBy Ron Coleman

We work hard for our money; let’s keep as much as possible by making the most of the current income tax rules.

There are many elements in both our personal and corporate tax returns that tend to be overlooked, specifically as some relate primarily to contractors and their employees.

Let’s focus on elements that get missed a lot. This information is provided for general use; do a review with your accountant to determine how it fits your specific needs.

There are a variety of tax savings, tax deferrals and incentives that the federal and the provincial governments provide. Some are available against federal taxes, some against provincial and some against both.

For the company

Holdback – as a tax deferral can be a significant tax deferral. Your net holdbacks (holdbacks on receivables less holdbacks on payables) is a tax deferral (Schedule13) on your corporate tax return. Apart from helping cash flow by deferring taxes, it makes your financial statements look stronger as it does not reduce the profits on your financial statements. Give the information to your accountants to include in your tax return.

 Apprenticeship Job Creation Tax Credit: (AJCTC) This is for employers who hire apprentices in Red Seal trades. The Apprenticeship Job Creation Tax Credit is a non-refundable tax credit equal to 10 percent of the eligible salaries and wages payable for eligible apprentices in respect of employment after May 1, 2006. The maximum credit is $2,000 per year for each eligible apprentice. and search for this title.

There are also provincial programs available and they often cover non-Red Seal trades. Check with your provincial government website for details.

 Scientific Research and Experimental Development Tax Incentive Program:

Even if you don’t pay corporate income tax you could get a nice chunk of change back under this program. You will need professional assistance to prepare your claim. Ask your accountants. Also, there are numerous firms that do this work on a contingency fee basis, usually charging around 25 percent of whatever they get you back. Do an internet search for SR&ED.

It is administered by the Canada Revenue Agency (CRA). The program gives claimants cash refunds and/or tax credits for their expenditures on eligible R&D work done in Canada. If you are developing any procedures or fabrication processes, you should have your accountants review this with you. It is best to set up the process in your ledgers in advance of doing any work that might be eligible for this claim as the costs need to be tracked very accurately. Virtually every application is audited by the CRA.

 EI Premium Reduction Program: Companies that provide certain short-term illness or benefits to employees can apply to have the employers’ portion of EI premiums reduced from 1.4 times. The reduction rate varies. Do an internet search on the topic.

You need to renew your application each year. Most union benefits programs and many open shop programs would likely comply with the requirement,  but if you are in doubt do make the application.

For the employee

There are a variety of deductions available to employees and their families. Let’s focus on the more obscure ones:

Declaration of Conditions of Employment (T2200)

This is an excellent opportunity for employees to claim business expenses they incur. There are numerous ways of using this process. Review this form in detail to see if there is eligibility for each employee.

Sometimes T4 income can be split between spouses. This would be where the employee is expected to hire additional help to complete his or her duties. This additional helper could be a spouse or a dependent who is capable of doing the work expected. This is also a much more realistic and safer approach for both the employer and the employee than having so-called “subcontractors”.

There is no cost to the company in providing a T2200 to employees provided it is justifiable.

 Independent contractor or employee?

Many companies pay people as subcontractors when in fact the Canada Revenue Agency (CRA) would deem them, employees. If you do this, and if CRA deems that these should have been employees, you could face very serious costs. You could be held liable for the tax they or you failed to remit, plus the CPP and EI, as well as the employer portion of these. In addition, you could be liable for penalties and interest and whatever cost you incurred arguing your case.

Although there is no specific definition of an employee compared to a subcontractor or independent contractor, there is clarity on this topic that will help you make the right decision. The determination of whether one is an employee or “self-employed” becomes important when determining entitlement to EI and CPP benefits, sick leave, vacation pay and statutory holiday pay, or the entitlement to claim expenses earned in business income.

According to the Canada Revenue Agency, you are likely an employee if your employer:

  • decides where, when and how the work is to be done.
  • establishes your working hours.
  • determines your salary amount.
  • supervises your activities; and,
  • assesses the quality of your work.

You are likely self-employed if you:

  • control the time, place, and manner of performing your activities.
  • supply your own equipment and tools and assume the rental and maintenance costs.
  • make a profit or incur a loss, and cover operating costs; and,
  • integrate your client’s activities into your own business activities.

In analyzing a business /employment relationship, Canada Revenue Agency examines four factors:

Control: the most important factor. Does the employer directly control the worker’s activities, or have the right to do so? Can the employer hire, fire, determine wages, hours of work, assessment of the quality of work, training, where or how the work is to be done?

Ownership of tools: who owns the tools and equipment? An employer generally owns the tools and covers repairs, insurance, rental and so forth.

Change of profit/loss: Does the worker have a chance of making a profit, and risk of a loss? Usually, the employer carries financial risk and operating costs.

Integration: Does the worker integrate the activity being paid for into his commercial timetable? Or does the worker integrate his activities into the commercial activity of the employer, indicating an employment relationship?

If, after analyzing all this information, it is still not clear whether a person is employed or not, the local tax services office can be contacted to obtain a formal ruling. Do an internet search for Form RC4110 “Employee or Self-Employed”. It should help clarify this even more.

Remember to file a T5018 annually for each subcontractor who provides construction services as there are penalties for failure to do so.

This article was written in January 2020. Changes may have occurred since that date. We believe this to be accurate as of the date of writing.


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