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Employee vs. Contractor

In most cases you hire someone to work for you and you put them on payroll. You pay their taxes, CPP, EI and it is a fairly straight forward process. But what if someone comes to you only part of the time, or they are hired for a specific purpose only, how do you handle those individuals?  Many of these part-timers or “occasional” workers are being treated as contractors which means they are not going on your payroll, you are not deducting CPP/EI/Income Taxes. Instead, they are invoicing you for their time, maybe even charging you HST (which you get to claim back!), and you treat them like an operating expense vs. salaries and payroll.

So what is the big deal? In the eyes of the CRA it is a huge deal. They lose out on CPP & EI contributions and receive less income taxes too!

So how can employers help make the right choices? Ask the following questions:

  • How much control does this individual have on their own activities? If you’re dictating what they have to do (i.e. giving them tasks and deliverables and reviewing their work)
  • Do you provide the tools and equipment (computer, phone, equipment)
  • Can that individual subcontract the work or hire their own assistants?
  • How much financial risk is the person taking?
  • How responsible is the worker for their deliverables?
  • Is there an opportunity for the worker to profit?
  • Other factors such as the written contract

All of these individually and combined, as well as the stated intention, is considered in the choice of employee vs contractor.

Let’s take a look at an example:

I need help with my marketing. Person X is great for the job.

Employee à Person X is going to work from my office 2 days a week from 9-3, on my computer, I am purchasing the marketing software, there is no fixed amount of work but they will be told on an on-going basis what we need (e.g. I am telling Person X to write me 5 blogs, 2 Facebook posts with content relating to ABC), I am reviewing that content. Person X is more likely than not an employee and I should put Person X on my payroll.

Contractor à If Person X can choose to work from home OR my office until the work is done, have their own laptop and software, and I am paying them for a package of 5 blogs and 2 Facebook posts, and I approve the final content. Person X could be considered a contractor.

Each scenario needs to be evaluated accordingly. If you are unsure take a look at how similar positions are being treated.

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

Best Practice record keeping

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  1. What documents and information should a business provide to its accountant in order to file its business taxes, specifically payroll, HST and income tax?

 

  1. If you do your bookkeeping yourself, provide a softcopy of your records (eg., Quickbooks or Simply Accounting file)
  2. A copy of all your Bank statements for the year. Note: if you do your own bookkeeping, then ensure you provide a copy of your year-end bank reconciliation
  3. A copy of all your business credit card statements for the year. Note: if you do your own bookkeeping, then ensure you provide a copy of your year-end credit card statement bank reconciliation
  4. Cancelled cheques, cheque stubs and bank deposit book for the year
  5. Copies of all invoices issued
  6. List of Accounts Receivables
  7. List of Bad debts
  8. List of year-end inventory (including the cost)
  9. Invoices for capital assets purchased during the year (eg computers, furniture etc)
  10. Details of assets disposed of during the year (even if you got no money when the asset was disposed of)
  11. Copies of all expense receipts
  12. List of Accounts Payable
  13. Details of all bank loans
  14. List of all payroll payments during the year showing gross amount, withholdings and net amount paid. You should also indicate how paid (cheque, cash or direct deposit)
  15. Your accountant should have access to your CRA account data , so it will n ot be necessary to provide CRA correspondence, unless it is of a non-routine nature, and one which your accountant would not have access to
  16. Mileage log detailing business kilometers driven
  17. Record of any expenses you paid for the business (out of your personal funds)
  1. Tips on recordkeeping
  • It is very important to have a record keeping system in place from the first day of business operations. It is best practice to consult with your accountant on what records to maintain. The accountant should have readily available, a checklist of record required. This makes the first year of filing much easier, and you are less likely to make mistakes which have to be fixed in later years due to lack of knowledge
  • After your tax filing deadline, consider filing your income and expense receipts in “tax” folders, as opposed to putting them in categories. If you are audited, then all the data used in the tax return is in one place. You simply pick up the folder, and hand it to the auditor. You can use tabs to separate the docs in the categories on the tax return
  • Manual record keeping – this can be as simple as an accordion folder where you drop all invoices, expenses, bank statements and other required documents, in the separate sections. Then give this folder to the accountant to summarise and use to prepare taxes.
  • To reduce accounting bill, you can summarize the receipts for your accountant. This is most applicable to a Sole Proprietor, where the basis of the tax return is your income and expenses, as a full financial statement is not required. However, for a corporation, expense summarization doesn’t help too much, as the basis of your corporate tax return is your Bank statement.
  • Electronic recordkeeping is strongly suggested for a corporation. Simply because of the details required to be reported, as well, CRA requires a full financial statement – Income Statement and Balance Sheet (which is not required for Sole Proprietors)
  • Stay on top of your recordkeeping

Green Meikle & Smith Chartered Professional Accountants

Authorized to practice public accounting by the Chartered Professional Accountants of Ontario

1020 Matheson Blvd. E. Unit 10

Mississauga, ON L4W 4J9

905-919-3543 Ext 101

647-338-5306 (cell)

greenmeiklesmith.com

WHAT DOES STATED INCOME MEAN AND HOW DO YOU QUALIFY?

Amina

So recently I had a client come to me – he is self-employed and is also incorporated, and works as a self-employed contractor.  He was turned down by the banks, and in addition he was getting divorced and needed to find a home for himself and his child, when she would come to stay on weekends.

We sat down together and I explained that I could proceed one of two ways; because he was incorporated, I could “fully qualify” him IF I could prove his income through his NOA’s and T1 Generals as well as other supporting documentation.

If I could not qualify him as such, I would have to qualify him as a “stated income” applicant, which is more difficult to prove, as different lenders have different requirements.

When it comes to the self-employed, lenders have made it difficult to qualify for various reasons; as an entrepreneur and business owner they benefit from income tax credits and great reductions and write-offs on their personal tax returns.  This is a great advantage when it comes to the actual amount of taxable income they have to pay tax on at the end of the year, but the disadvantage is that their net income is incredible low.  This unfortunately impacts a self-employed client’s ability to FULLY qualify.

A stated income mortgage is where the lender fully understands the self-employed income dilemma and will accept a client simply “stating” an income on their application without having to show net taxable income on your tax return to prove it.

What’s important to note is that the interest rates and/or fees/default insurance premiums are based on the credit rating and available down payment and are sometimes a little higher than a more traditional mortgage and depending on the client can be worth it if home ownership is a more affordable solution than renting.

There are basically three ways to qualify under “stated income”

Type 1: Fully Insured

In this instance, I can look at “A” lenders based on beacon score and debt ratios – rates will be lower than 3% -this is stating income that makes sense compared to the T1 Gross income for the last two years; if an applicant has provable income either on their T2125 (part of the T1 General) or corporate financials and the gross can reflect adequate income to qualify, we can go fully insured with the following documents to prove this:

  1. Proof of self employment such as a business license, Article of Incorporation, invoices etc
  2. Last two years full Income Tax Return including your T1 General and all the attachments
  3. Last two years Notice of Assessments to confirm no income tax arrears
  4. A letter from the employer stating job title, income and start date for XXXXX
  5. Recent pay stub
  6. Proof of down payment, through bank statements, RRSP statements, etc
  7. … and any other documents the lender might deem necessary at the time ( this is lender specific as some will accept stated-income individuals and some will not)

Type 2: Stated income – best rates, 80% LTV 

When we cannot provide an avg. gross income of the two years to make sense for qualifying, we must go stated income under insurer guidelines.  Here are the documents that are needed:

  1. Avg. 6 months of deposits plus invoices through last 12 months bank
  2. Last two years Notice of Assessments to confirm no income tax arrears
  3.   Last 2 years corporate financials and/or last 12 months bank statements as long as they show business activity (keeping in mind that the lender may ask for 2 yrs) – i.e., deposits
  4.   Proof of self employment such as a business license, Article of Incorporation

Type 3: Stated income – posted rates, 80% LTV 

This is stated income when there are no documents to show your income – however the rates will be upwards of 5.99%.  The only documents needed in this case are:

  1. Last two years Notice of Assessments to confirm no income tax arrears
  2.  Stated income letter “stating” to what you make –to qualify you at an amount you need.  Ie. if you need $400K to purchase a home, we state you make at least $65,000/year

Keep in mind, that “stated income” needs to make sense for the industry you work in – ie, as this client is a self-employed contractor, he was able to qualify on Type 3 as the “stated income” amount was in line with the industry.

Not all “stated income” deals are funded, but mostly due to lack of paperwork and proof of income.  This client was successful in his goals to own a home because he was willing to work with me and was able to provide the paperwork that was being requested.  If you are a self-employed client and don’t know if you can qualify, a mortgage professional can be your best ally in qualifying for a mortgage.  Speak to me today if you have been denied by the banks – we are here to help!

To your Wealth!

Amina

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