Tax Survival for Canadians. Dale Barrett
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Employment Insurance Act (EIA)
• Canada Pension Plan (CPP)
• Softwood Lumber Products Export Charge Act, 2006 (SLPECA)
• Air Travellers Security Charge Act (ATSCA)
Benefits for maintaining complete and organized records include:
• Helping the taxpayer to determine what taxes are owed.
• Making it easier for a person to identify his or her sources of income.
• Acting as reminders of tax credits to be claimed and expenses to be deducted.
• In case of future audit of returns, allowing the taxpayer to substantiate and prevent disallowances of his or her expenses, and prove his or her income.
Many people are not sure of what kind of records to keep, or how they should be kept. Regardless of how much a taxpayer knows about record keeping, in order to stay on the right side of the CRA, it is best to consult the CRA document RC4409, “Keeping Records,” for guidance. Everything a taxpayer could possibly want to know about record keeping is provided in this guide, and it is an invaluable resource for all businesses and self-employed individuals. It deals with paper and electronic record keeping, as well as record keeping for payroll and GST or HST.
If you keep electronic records, you may be asked to provide documents to support your entries, so it is important to also keep all of your receipts, bank statements, deposit slips, cancelled cheques, and all other important documents. Most importantly, don’t find yourself in the position in which a great number of my clients have found themselves — realize that computers crash, and hard drives are temporary. Back up your business records regularly. A crashed computer without a backup can cost you thousands in extra taxes. Your lack of data gives the auditor free reign to deny all your expenses that relied on the electronic data as proof.
2. Why the CRA Is Not Fond of the Self-Employed
With the economic decline over the last few years, a great number of jobs have been eliminated, which has resulted in an increase in the number of people who are self-employed. Industry Canada’s Small Business Quarterly shows that self-employment has increased 1.5 percent between 2008 and 2009, increasing the number of self-employed workers by 40,000 to a grand total of more than 2.6 million.
Simply put, it is easier for the CRA to keep tabs on the earnings of a taxpayer, and thus more likely for it to collect the appropriate amount of tax, if the taxpayer is not self-employed. The CRA is not fond of self-employed individuals because they are complicated and less likely to pay their fair share of taxes.
When an individual is employed, his or her employer typically makes all the necessary tax deductions at source and remits them to the CRA. Additionally, the employer provides a summary to the CRA indicating how much each employee has earned and how much tax has been withheld. As such, by the end of the year, an employee’s taxes have been paid, and in many circumstances he or she is due a refund. This makes the CRA’s job of administering and enforcing the ITA and collecting the taxes an easy task.
However, with self-employed individuals, the situation is never very easy or clear for the CRA. Self-employed individuals have deductions that are applied against their income, and their returns are far more complicated than simply providing and tabulating information slips provided to them by third parties. When such information slips are the sole source of a taxpayer’s information to the CRA, it is very easy for the CRA to verify that the taxpayer has fully and completely disclosed his or her income. The CRA simply cross-references the information slips provided by all third parties against information provided by a taxpayer. If there is a discrepancy or a missed information slip, the CRA will know right away. In the case of a self-employed individual, the CRA would have to perform an audit in order to determine the accuracy of a return, which in turn makes the job more difficult.
If you are an employer, in order to defend yourself during an audit, and to prevent being found offside during an audit with respect to the status of your workers, it is important to determine their employment status. The employment status directly affects a taxpayer’s entitlement to Employment Insurance (EI) under the Employment Insurance Act. It can also have an impact on how a worker is treated under other legislation such as the Canada Pension Plan (CPP), and the Income Tax Act. Along with income tax withheld from the employees, employers are responsible for deducting CPP contributions and EI premiums which must be remitted along with the employer’s share of CPP contributions and EI premiums. Since a business does not contribute towards CPP or EI for its contractors, it is often less expensive for a company to have contractors perform work rather than employees. Further, when a business engages contractors instead of hiring employees, the employer has more flexibility in terms of terms of work (e.g., sick days, paid vacations), payment, and termination. As such, many businesses attempt to classify workers as contractors instead of employees; however, sometimes the CRA disagrees and will try to reassess the business on that basis.
An employer who fails to deduct the required CPP contributions and EI premiums may be forced to pay both the employer’s share and the employee’s share of any contributions and premiums owing, plus penalties and interest. So, determining the status of a worker is of the utmost importance to an employer.
In order to prevent tax fraud by claiming tax deductions which otherwise would not be available to an employee, the CRA routinely investigates cases to determine employment status.
Determination of status in Quebec is made based on the Civil Code of Quebec, while in the rest of Canada, the CRA uses a test comprised of two factors to examine the “total relationship between the worker and the payer.”
In the first step, the CRA assesses the intent of the parties by examining the language from when the worker/payer relationship was first created. Slight changes in language, for instance parties agreeing to a “contract for services,” signals different intent than a “contract of services.” The first indicating a business relationship, while the latter is indicative of an actual employment relationship.
It is evident that clarity of intent of the type of relationship is paramount when entering into a working or business relationship. When discrepancies of intent exist, the CRA tends to favour resolution towards an employment relationship versus a business relationship. This is why, whenever possible, an agreement in writing should be created, as to help clarify any possible discrepancies of intent.
Following the first step of establishing the parties’ intent, the second step verifies that parties have followed through on their intent. The CRA looks at the facts of the situation to ensure that the parties are not misusing the status of the independent contractor and in doing so it will look at all the factors discussed below.
2.1 Employee versus self-employed
It is important to understand when and in what situations one may be considered a self-employed contractor versus being labelled an employee. The circumstances of the working relationship as a whole determine the employment status. Although none of the factors are individually determinative of one’s status when examining whether or not one is an employee or self-employed individual, the key question is whether or not one was engaged to perform services as a person in business on his or her own account, or as an employee. Some of the factors that help determine whether a worker is an employee or a self-employed contractor are outlined below.
1.2a Level of control the company has over the worker
The degree of control the company has over the worker is important. The more control over the worker, the more likely the worker will be seen as an employee. If the worker is a contractor, such as in the case of an independent corporate financial auditor, it is not likely that the company will be able to control that auditor like it would an employee. The company may not be able to dictate the schedule of the auditor, or how the auditor performs his or her work. Since the auditor is an independent expert, he or she will likely determine how and when to do his or her job, and which hours