Contractors Tax Solutions

Being an employee

An evident solution is to simply cease being a contractor and become an employee. However, an employee would expect an increased compensation to place himself/herself in the same earnings position as an independent contractor.

Written contract in place

Astute contractor accountants would recommend revisiting the contractor's written agreement and ensuring that its terms are indicative of a contractor relationship and not that of employment. This solution is not always practical and case law also demonstrates that it is not possible to contract out of what is in substance an employment relationship. If the factorsweigh more towards an employment relationship, it will not matter if the contract defines the relationship as that of a contractor. For example, the contractor would be required to provide services during business hours, would not be permitted sub-contracting of duties, must have an email address and business cards under the client’s name, and use the client's computer. Each of these factors suggests an employment relationship. A written agreement can mitigate the risk of being assessed as a Personal Service Business, but it does not eliminate it.

Salary compensation

Some contractor accountants recommend that a contractor’s corporation should pay a salary to the shareholder/contractor as opposed to dividends. This approach mitigates some risks of being assessed as a Personal Service Business, however it defeats the purpose of incorporating because there would be nominal tax deferral advantage at the corporate level.

Contractor's corporation with multiple shareholders

A more complex solution is to have five contractors providing services through the same corporation. Unanimous Shareholders Agreement would be put in place to protect individual contractors/shareholders and their earnings.

Restructuring of business

Several other robust solutions can be offered to contractors. They are structural in nature and based on various court cases decided in favour of the taxpayer. These structures are designed together with tax lawyers, to carefully navigate the Personal Service Business rules and ensure the contractor’s business is not subject to punitive tax assessments. We would be pleased to discuss how the business reorganization can help mitigate the Personal Service Business tax risks.

Your contractor accountant provides tax advice regarding alternatives to mitigate the Personal Service Business tax assessment.