These days, it seems anything goes when it comes to work styles and employment arrangements, the old “nine-to-five-Monday-to-Friday” scenario isn’t the practical model it once was.
With changing attitudes about the importance of work-life balance; the pressures of caring for children, aging parents or both; and the fact that mobile technology lets us be present-while-absent, the old “nine-to-five-Monday-to-Friday” scenario isn’t the practical model it once was. Add in the shrinking job market in many regions, and it’s easy to see why more and more people are looking for new ways to make work fit their lives.
Sam Kaner, BSc, CA, is a partner with Soberman LLP in Toronto. He says that whether you’re a full-time employee, on contract or self-employed, the Canada Revenue Agency (CRA) wants its share of your earnings. Knowing its rules about taxes and different work styles will help keep you current, compliant and less likely to be sent scrambling come April 30th. Here are eight points Kaner offers to help us understand how the CRA looks at different ways of working, and how each can impact our wallets.
What’s in a test? - There are key substantive tests or criteria that the CRA uses to determine who is and who isn’t an “employee”, Kaner says. These largely centre on expectations – those of both the individual and the employer. Reporting to work at a fixed time, job duties and the nature of the reporting relationship are all considerations. In contrast, the self-employed usually work for two or more client companies in a place of their own choosing and at hours they decide.
It’s all employment - Whether one has a long history with the company or a short-term contract, the CRA considers both to be employees for tax purposes. The employer is expected to withhold income tax, CPP and EI from their paycheques and remit the amounts to the Receiver General for Canada. Although the area around employment vs. self-employment can get very grey at times, we still have to pay our taxes!
Savings come from home - Essentially, Kaner says, the expenses that the self-employed and some commissioned employees incur to generate business income are fair game for tax deductions. Those related to the operation and maintenance of a home office, like utilities, rent - and, for the self-employed, even mortgage interest - can be pro-rated in proportion to the whole amount and deducted accordingly.
Some expenses are only half as helpful - There’s an automatic “implied personal element” when it comes to food and entertainment expenses, Kaner says. For this reason, the self-employed and commissioned salespeople can usually deduct only half their value. As a matter of fact, commissioned sales representatives can claim many of the same expenses as the self-employed with the exception of items that are capital in nature.
Strike the right balance - Employees who are paid commission often have some money withheld for taxes, Kaner explains. Usually, they are asked to complete a tax-deduction worksheet that defines their particulars. The idea is to hold just enough money so that the individual has neither a large tax liability nor overpayment. For the self-employed, paying quarterly installments, based on prior year(s)’ earnings, is a must to avoid interest and/or penalty charges. But the final reckoning only comes when one’s personal income-tax return is completed, filed and reviewed by the CRA.
Don’t forget the HST - The self-employed must track their incomes and outflows. They also must collect and remit any applicable Harmonized Sales Tax (HST) amounts.
Compliance is the best medicine - For the self-employed, paying taxes regularly, promptly and responsibly doesn’t guarantee you won’t be scrutinized by the CRA, Kaner says. But consistent compliance, which includes keeping proper records, builds credibility that may preclude extra attention from them. It also saves on penalties and late fees, which can erode all the savings and deductions that self-employment can make possible.
Get professional advice - To better understand your tax responsibilities, or get sound advice that can help working people of all kinds minimize taxes and protect their earnings, consult a Chartered Accountant in your community.
Brought to you by the Institute of Chartered Accountants of Ontario.
