Ask an Expert
Expert: Julie King
Next week I will be starting a new job working in business to businees research. I will be working strictly from my home using all my existing equipment. I only had to add a long distance package to my phone that the company will be paying for monthly. I am to invoice them directly every week for my hours only and they will not be deducting any taxes.
I currently do not have a business name and this is all new to me. I was wondering if you could help direct me as to what I need to do for this type of contract work that is new to me. I have always been an employee and want to make sure that I set up everything correctly so that when tax time comes next year I do not get a big bill or in trouble for not doing the proper legal things I needed to do.
Julie King answered:
As a new self-employed worker, the best thing I can recommend for you is to invest a bit of money in expert advice to make sure you do things properly, especially from a tax perspective. It can cost a bit of money to get advice from an accountant who specializes in small business, but it can cost you a lot more if you do not do things properly! (With over 90% of all Canadian businesses being small businesses, there are many accountants who can fill this role.)
Registering a Business
First of all, the requirements for registering a business vary from province to province, so you'll need to find out the requirements in your area. For example, in Ontario as long as you work under your own name and not an invented company name, you do not need to register a business, but adding anything to your name, for example "& Associates", would require that you register the business names.
Taxes & Record Keeping
Our article, Help! What Taxes Must I Pay?, provides a good introduction to key tax issues including when you need to charge the GST:
Also, you'll need to keep proper records, as required by the Canada Revenue Agency (CRA):
It is actually surprisingly straightforward to submit your final tax return as a self-employed worker. If you look at the tax form for the current year, under the Income section you will see a section for self-employment income with five options that include options for Business and Professional income. You would use either the Statement of Business Activities form or the Statement of Professional Activities form to calculate your gross and net income, which is then entered on the main tax form. Again, professional help can save you a significant amount of time and money, and is highly recommended.
Are you really an independent contractor and not an employee?
In your new job do you control your hours, purchase your own supplies, own the equipment and/or tools you will use?
CRA also sets rules that are used to determine whether you are a self-employed worker or an employee. (They use one set of rules for Quebec and another set of rules for all other provinces and territories). Both the employee and employer face financial risks if you remit tax based on an independent contractor / self-employment relationship and then have the Canada Revenue Agency (CRA) determine that you were actually working as an employee.
I don't mean to scare you, but this is important for all self-employed workers to understand. Some of the key things that are used to demonstrate your independence include:
- both you and the company provide service to understand that you are not working in a job, but are an independent contractor who provides a business service to a client;
- you have a great deal of control you have over when and where you work;
- you purchase and maintain the supplies, equipment and/or tools used to do your job;
- as a business you pay for your own fixed costs, regardless of whether your client gives you work in a particular month, and as such you have the risk of having business losses from time to time; and
- you don't rely on a single company for all of your revenue (this does not necessarily preclude you from working as an independent contractor, but it does create risks).
This CRA publication, Employee or Self-Employed, will help you better understand the issues at hand:
To be honest, your initial description of your new "job" would concern me; you are wise to seek help at this point. If you look at some of the key points noted above, the fact that you have describe the position as a "job" and the company is paying for the long distance package on your phone already put two components of the criteria into question. There can be advantages to working as an independent contractor, but if I was in your situation I would take intentional steps to make sure that the relationship truly was one that is business-to-business and not employer-employee.
A well crafted legal contract that clearly establishes the relationship as an independent contractor is advised.
Also, taking steps to demonstrate that you are running an independent business, by doing things like looking for other customers in addition to your primary customer, will help prove your independence. This can also protect you if your current employer decides to discontinue your contract. You might also want to change the way you bill the company, your initial client, for the long distance charges. One option is to slightly increase your hourly rate to account for the long distance costs. Another is to bill based on actual use at an agreed rate.
Also, incorporation might help, but in itself is not enough to provide your independence and there can be drawbacks to incorporating. For starters, the tax filing requirements are more complex. You may find this article that explains the pros and cons of different forms of business useful:
Once again, I'll reiterate that I would highly recommend that you seek professional advice at this time. In addition to an accountant who specializes in small business tax issues, I would also recommend that you look for a lawyer who specializes in working with small businesses and independent contractors.
Sources for Professional (and possibly free) Advice
Depending on where you are located, there may be a business support centre that can help you. Centres often hold seminars and may provide some free consulting as well. One of the best places to find this information is to call your MP or MPP, as they should know about all of the different support centres in your area.
If you are hiring experts, such as an accountant or lawyer, be sure to ask for recommendations from people you trust. Don't be afraid to interview the expert before deciding to use his or her services. Ask about the person's background and experience related to your specific situation, ask how they can help you and of course, confirm how much they will charge. If there is a business resource centre in your area they are the best place to start looking for further advice.
About the author
Julie King is the co-founder and managing editor of CanadaOne, Canada's first small business portal.