+1(514) 937-9445 or Toll-free (Canada & US) +1 (888) 947-9445

Work contract job without incorporating?

fr72

Hero Member
Jan 6, 2017
338
218
If a company allows it, can I work a contract as a sole proprietor? I dont want the hassle of filing corporate taxes, gst, payroll, etc. Is there any downside to this?

I did do some work as incorporated contractor, but didnt really save anything in taxes as I gave myself a full salary. I read that CRA looks upon this work as PSB (personal service business) anyway so there is no tax saving.
 
 

jclarke99

Hero Member
May 10, 2020
234
73
My understanding is whether you're incorporated or a sole proprietor, you could be labeled as a PSB. My, limited, understanding is that CRA creates the PSB designation to prevent individuals, who more or less act as full-time employees of a corporation, from benefiting from preferable small business tax rates and deductions. Instead you'd get slapped with upwards of 44.5% corporate (federal + province) tax rate. But, as you seem to know, if all of your income is paid to you as salary, then you're subject to "just" personal tax rates.

It seems to often be the case that freelancers, such as yourself, are asked to incorporate by the corporation that you'd work for, because it's protection for them....
In the scenario below (from the link pasted further below), assume that you are Ellie and the company you'd work for is Techco.

"One reason that Techco might want to set up a contract for services with a corporation instead of directly with Ellie is to make it clear to both Ellie and the tax authorities that she is a contractor to the company and not an employee of Techco. If Ellie is not an employee, Techco will not be obligated to pay employee benefits, nor will Techco be required to deduct and remit payroll source deductions to the Canada Revenue Agency (CRA), such as employee income taxes and Canada Pension Plan (CPP) and Employment Insurance (EI) premiums."

https://www.bdo.ca/en-ca/insights/tax/tax-articles/psb-rules-case-study/
 

jclarke99

Hero Member
May 10, 2020
234
73
Some more digging on this.

Seems like CRA might make a determination of whether you're really a self-employed independent contractor or, in actual fact, in an employee-employer situation. If CRA decides that the nature of the relationship is actually that of an employee-employer, then according to CRA...

"Employers are responsible for deducting Canada Pension Plan (CPP) contributions, EI premiums, and income tax from remuneration or other amounts they pay to their employees. Employers must remit these deductions along with their share of CPP contributions and EI premiums, to the Canada Revenue Agency (CRA).

An employer who fails to deduct the required CPP contributions or EI premiums has to pay both the employer's share and the employee's share of any contributions and premiums owing, plus penalties and interest. "

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4110.html

So, if an employer "allows" you to work a contract as a sole proprietor, but the nature of the relationship is really more like that of an employer-employee, then the employer seems to be taking on various risks with CRA.

Seems like your risk is being labeled a PSB, but as best as I can determine, this might not pose a problem for you if all of your income is treated as salary, you are contributing to CPP, (not sure about EI), and you're not trying to make use of various small business tax deductions, tax rates, etc.


"