Work contract job without incorporating?

[fr72]

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.

 

[raindropcreature]

I'd like to know about this as well

 

[jclarke99]

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]

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.


"

 

[rawalc]

How might this work if you get paid by an USA-based company? Will the CRA pester the USA-based employer ... to pay taxes, etc for the Canadian employee that gets classified as a PSB?

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.


"

 

[megnani]

Yes, you can work a contract job without incorporating in Canada. There are different ways to work as an independent contractor without forming a corporation. Here are the main options:

### 1. **Sole Proprietorship**
- **Definition**: A sole proprietorship is the simplest form of business organization. It is not a legal entity separate from the owner, meaning the individual and the business are considered the same for legal and tax purposes.
- **How to Set Up**: To operate as a sole proprietor, you may need to register your business name with the provincial or territorial government if you choose to operate under a name other than your own.
- **Taxation**: As a sole proprietor, you report your business income and expenses on your personal income tax return (using Form T2125, Statement of Business or Professional Activities).
- **Advantages**:
- Easy and inexpensive to set up.
- Simplified tax filing.
- **Disadvantages**:
- Unlimited personal liability for business debts and obligations.

### 2. **Freelancer**
- **Definition**: A freelancer is an individual who offers services to clients on a contract basis without necessarily setting up a formal business structure.
- **How to Operate**: You can simply use your own name or register a business name if you prefer. Contracts with clients should clearly outline the scope of work, payment terms, and other relevant details.
- **Taxation**: Similar to a sole proprietorship, you report your freelance income on your personal tax return.
- **Advantages**:
- Flexibility in taking on various projects.
- No need for formal business registration (unless required by local regulations).
- **Disadvantages**:
- Similar liability issues as a sole proprietor.

### 3. **Partnership**
- **Definition**: A partnership involves two or more individuals who share ownership of a business. It can be a simple way to combine resources and skills with others.
- **How to Set Up**: Partnerships usually require a formal agreement detailing each partner’s contributions, profit-sharing, and responsibilities. Registration requirements vary by province.
- **Taxation**: Each partner reports their share of the partnership income on their personal tax returns.
- **Advantages**:
- Shared resources and skills.
- Easier to raise capital compared to sole proprietorships.
- **Disadvantages**:
- Joint liability for business debts and obligations.
- Potential for conflicts between partners.

### 4. **Gig Economy Worker**
- **Definition**: Gig economy workers take on temporary or freelance jobs, often facilitated by digital platforms (e.g., ride-sharing, food delivery, online freelancing).
- **How to Operate**: Sign up on relevant platforms, accept gigs, and complete them as an independent contractor.
- **Taxation**: Income from gig work is reported on your personal tax return. Keep track of all earnings and expenses related to your gig work.
- **Advantages**:
- Flexibility and variety in work.
- No need for formal business registration (unless required by the platform or local regulations).
- **Disadvantages**:
- Income variability.
- Lack of traditional employment benefits.

### Key Considerations
- **Contracts and Agreements**: Always have a clear, written contract for any freelance or contract work, specifying the terms of the agreement, payment details, scope of work, and deadlines.
- **Taxes and Deductions**: Keep detailed records of all income and business-related expenses. You may be eligible for various deductions, such as home office expenses, equipment, and travel costs.
- **Insurance**: Consider obtaining liability insurance to protect yourself from potential legal claims related to your work.

### Conclusion
In Canada, you can work as an independent contractor or freelancer without incorporating by operating as a sole proprietor, a freelancer, a partner in a partnership, or a gig economy worker. Each option has its own set of advantages and disadvantages, and it's important to choose the one that best fits your needs and circumstances.