To Contract or Not Contract?

July 7th, 2010

Advantages to Contract Employment:

There are several advantages to working as a contract employee.  The one most common in the economy today is being able to prove yourself in an opportunity and transition nicely into a full time opportunity.  This allows not only you to prove yourself, but also get a feel for the company and see if they are a company you would like to stay with.  This also shows the client what you are capable of doing and allows you to show them they want to keep you longer than the contract period.  Other benefits of working as a Contract Employee include:

-       The ability to gain various industry experience

-       Exposure to large companies you otherwise may not receive

-       There is more flexibility for you (to attend school; length of contract)

-       This is a great way to make a career transmission

Various Contract Statuses:

There are 3 ways a person can work as a contractor.  They are:

1.     Staff Employee

2.     Self-Employed Contractor

3.     Incorporated/Limited Contractor

1. Staff Employees:

• For short term assignments, the worker can choose to be employed as an “employee”.
• Income tax, CPP, EI are deducted from the worker’s income and remitted to the Receiver General of Canada
• The worker will receive a T4 in February of each year for his/her earnings in the previous year. The worker is required to submit this T4 with his/her annual income tax return to Canada Revenue Agency.
• The worker is eligible for employment insurance.
• The worker does not have to register for GST.

2. Self-employed Contractors:

• The worker is an independent contractor operating a sole proprietorship business.
• The sole proprietorship does not have to be legally registered.
• CPP and EI are deducted from the payments to the proprietorship and remitted to the Receiver General of Canada
• The worker is eligible for employment insurance.
• The worker will receive a T4 in February of each year for his/her insurable and pensionable earnings (excluding any accommodation and travel allowance payments) in the previous year.
• For income tax purposes, the contractor will report the earnings as business income. The reported income should include the regular earnings plus any allowances received, whether or not they are shown on the T4. The contractor can deduct any reasonable business expenses such as automobile, travel, accommodation, and private health care insurance premiums from the business income. The contractor may also deduct reasonable fees paid to his/her spouse for business services performed such as Bookkeeping.
• The contractor is required to register for GST if his/her annual gross revenue exceeds $30,000.

3. Incorporated Contractor:

• The worker has incorporated a company, and works on assignments through his/her company.
• The worker is an employee of his/her incorporated company.
• No tax, CPP, EI are deducted from the payments to the contractor’s company.
• The worker will not be eligible for employment insurance.
• The worker is paid by his/her company which is required to issue a T4 to the contractor.
• The company must renew its company registration each year.
• The company must file corporate income tax returns each year.
• In many cases, for tax purposes, the company will be considered a Personal Service

Corporation and pays tax at the top corporate tax rate. Deductions from income are usually restricted to salaries and other expenses incurred to earn income. Travel, accommodation, private health care premium, and reasonable bookkeeping fees paid to the spouse are usually allowed.

• In some cases, the company may be considered a small business corporation if, among other conditions, it earns active business income from various sources. In such case, income tax on the first $300,000 is reduced.
• The company must register for GST if its annual revenue exceeds $30,000.

Disclaimer

The above is an overview of various tax issues. Accordingly, it may not be complete, accurate or relevant to each person. We strongly recommend the contractor seeks professional advice from tax experts.

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