DISCLAIMER: The APCC does not intend to provide financial, tax, legal, or accounting advice, and highly recommends that individuals obtain the advice of professionals qualified in their area of expertise.
FAQ - APCC Government Affairs
This Letter from Jim Flaherty is an effective description of the changes which were proposed and possibly adopted in the 2011 budget.
The apparent effect of these changes is that where an individual provides services through their own corporation and is determined to be a Personal Service Business, then:
That corporation can pay and deduct salary and salary related expenses, but
Cannot deduct expenses, that would not be deductible by a person who would be an employee of a firm, and
The Small Business Tax rate would not be available and as a result, the most tax efficient way would be to distribute all income in the year that it is earned s salary.
Q1: What is the impact of this proposed legislation on contractors?
This legislation only applies, where the individual contractor providing services through his/her corporation is determined to be a Personal Services Business (i.e. PSB).
Q2: What should I do?
It is highly recommended that individuals obtain the advice of professionals qualified in their area of expertise, be it accounting or law in this case.
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For more information on how the Income Tax Act defines a Personal Service Business, and how it affects you as an IT consultant, please read our PSB Toolkit.
Q3: What is the current state of affairs?
The government audited and assessed a number of contractors. Last year, a group of assessed contractors in Ottawa retained Mark Seigle of Gowlings to represent them in their dealings with the CRA. It is understood that one case was selected from those presented to Mr. Seigle, who obtained permission from the government to dispute this case on a trial basis. Just recently, Mr. Seigle was informed that the “discovery” on this test case is now scheduled for April 2013, with a trial date to be set at some time thereafter.
It is expected that the verdict from this case will set the precedent for future cases.
Q4: I heard that the CRA had sent out a questionnaire, what should I do if I receive it?
It is understood that a questionnaire of approximately 43 questions was distributed, with a request that the recipient complete and return the document.
This document is not what is termed as being a “prescribed” document, which means that completion and return of the document is optional. In a conversation with a lawyer, the document was described as extremely well crafted, which if anyone completed and signed, would in all probability result in an assessment.
Should you receive a questionnaire, in theory, you have two choices:
You can either complete and return the document, and be assured of an assessment, or,
Discard it and see what happens, with the possibility of there being an assessment. At that point, you can retain the services of a lawyer, and at a minimum, have a fighting chance.
You can come to your own decision.