April 30 tax filing deadline: Who can claim self-employmentCanadian Contractor Profitability Business canada Financial risk
The tax advantages of declaring yourself self-employed are obvious. But be aware that Ottawa has four specific rules for the definition of "self-employment."
By Brynna Leslie
Contracting work to a self-employed business? Or claiming self-employment income? Beware the tax glitches.
As we approach the April 30th tax filing deadline, some of you may not be sweating. As business owners, after all, you have an eight-week grace period to file your taxes, (although, depending on your status, you do have to remit any payments owing – both income tax and GST/HST– by the end of the month).
Still, sifting through mountains of receipts with a calculator or an Excel sheet on-hand can be demoralizing. Even more so if you get a call from Canada Revenue Agency (CRA) in July to say that what you listed as self-employment income actually doesn’t count as such.
As it turns out, rules around self-employment are quite tricky.
In a recent Globe and Mail article, Tim Cestnick, president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians, outlined four factors that CRA considers when assessing your self-employed status:
1) Do you have control over when, where and how you work?
2) Is your work easily replaceable? (It should be).
3) Do you use your own tools to get the job done?
4) Do you bear the bulk of financial risk and also gain profit from the work you do?
Cestnick goes on to note that, even if you are confident you can meet the above criteria, CRA may still discount your filing as self-employment income based on a number of recent court battles, the results of which have muddied, rather than clarified, the definition of self-employment.
Some court cases, Cestnick writes, have held “intention” in high regard, as in did you, and the contractor that employed you, both “intend” for you to claim income as a self-employed individual?
This can be difficult to prove in hindsight, however.
The best thing is to make sure you have everything in writing. In the contract, be sure the intention of self-employed status is clear. But also, take a look at the four factors above. You must meet the criteria around control, integration, tool ownership and financial risk, as summarized by Cestnick.
In the absence of those conditions, even with a well-written contract, CRA could come back and say that your work as a self-employed individual was actually that of an employee. Back-tracking on tax filing is never fun, especially if you’re left owing money at the end of the day.
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Correct me if I’m wrong, but doesn’t the CRA also look at whether you have multiple ‘clients’? ie. working for one person all year is more likely to be employment than if you’ve got a few different people who you work for.
Actually, Brian, I found out that, even as a self-employed writer/journalist, it doesn’t necessarily matter how many clients I have. CRA does, however, consider how frequently you work for a single company. Although I am the sole proprietor of my business, I was required to become the employee of a television news organization for six weeks during the 2011 election due to the number of hours I was working — and also because I was not turning over “a product” at the end of the day, but working as an integrated part of a production team. This, despite the fact that I never set foot in the production studio and did all the research and writing from my home office.
That can have bearing on whether you’re an employee or are self-employed.
It’s easy to make a case that you’re a self-employed contractor if you perform the same work for multiple clients through out the year than if you’re working for one client for a length of time.