Rules on Taxes for Personal Service Businesses As a sole proprietor, regardless of your incorporation, the CRA may have unique rules on addressing your taxes. There is a set of rules applying to personal service businesses that incur unique tax requirements as per the CRA. Personal service businesses or PSB’s have special considerations that apply when services are provided through a corporation and whoever is doing the work would otherwise be considered an employee if provided services directly to the client. What Do Personal Service Businesses Involve? There are times when instead of hiring employers directly, individuals are contracted out duties as non-employees to perform services. These employees can file as self-employed individuals or incorporate as sole proprietors which affects their tax obligations. Incorporated businesses are held under corporate tax rules but if considered an employee by the CRA, certain expense deductions may be denied and CPP, EI, income tax, and penalties may be owed. What are the Consequences? If considered a personal service business by the CRA, the corporation would not be eligible for the small business deduction. Instead an additional 5 percent tax rate would apply, along with provincial taxes. Along with the increased taxes, the only deductions a PSB qualifies for would be its salary paid to the incorporated employee (as the individual is considered an employee by CRA), employment benefits for the individual, expenses that are allowed if they were a commissioned salesperson, and legal expenses that the corporation undergoes to collect money it is owed. Incorporated Employees and Personal Service Businesses The key factor that incurs these special tax rules are when the service provider (sole proprietor offering services) can be considered an employee of the corporation. This is done through certain factors as a test and are similar to determining whether the individual is employed or self-employed. Factors to Qualify as an Incorporated Employee Control: More control over the service providers duties provides higher indications of an employment relationship. Tools and Equipment: If the payer uses their own tools to perform the services, there is less likelihood of being considered an incorporated employee. Ability to Subcontract: If the service provider can hire or subcontract work or duties, they are also less likely to be considered an incorporated employee. Financial Risk: If the service provider has an investment in the business duties like paying for costs before billing, they may not be considered an incorporated employee. Opportunity for Profit: Just like financial risk, the service providers level of chances in profit and loss determine employment. If they can receive additional profit, it is less likely to be considered an employee of the client. Multiple Clients: Providing similar services to other clients also indicates self-employment. Intent: If the payer was going to request services from the provider regardless of their business, there is a likelihood of being considered an incorporated employee. For example, if the business was looking to hire someone anyways as an employee but settled on working with a sole proprietor, then there would be a factor leading to a consideration of employment. To find out more about managing risk as personal services businesses, visit the CPA website by clicking here. Read about tips and practices that can be implemented to navigate the more complex tax structures of personal services businesses.
Author Archives: Advanced Tax
How the Canada Pension Plan Works The Canada Pension Plan or CPP is a retirement pension that is paid monthly. It is a taxable benefit to replace a part of your income upon retirement. Once qualified, you’ll get payments from the CPP retirement pension for the rest of your life. Qualifying for the Canada Pension Plan To qualify, you need to be at least 60 years old and need to have contributed to the CPP at least one time. A contribution comes from income you’ve paid CPP on while working in Canada or as a result of receiving credits from a former spouse or common-law partner after the end of the relationship. Canada Pension Plan Amounts The amount you will receive through the Canada Pension Plan’s monthly payments are based on: Your average earnings throughout your working life. Your contributions to the CPP which are based on your earnings. The age you decide to start your CPP retirement pension. Currently, the 2022 maximum monthly amount you can receive as a new recipient at age 65 is $1253.59 per month. On average, the amount paid is $727.61 as of July 2022. Click on the button below to access the Canadian Income Retirement Calculator to get a more detailed breakdown and accurate understanding of how much you will get. If you have years of low or no earnings, up to 8 years of your earnings history with the lowest earnings will be automatically excluded when calculating the base component of the CPP retirement pension. Thus, your pension mount will be increased. Times where you raised children or were disabled also positively affect your CPP amounts. When Does Your Pension Start? You can start receiving the your Canada Pension Plan retirement pension from the age of 60. The earlier you start receiving this pension, the less your monthly amount will be. Starting later does result in a larger monthly amount but the maximum monthly amount does not change after the age of 70. Here is a breakdown of how different ages afffect your pension amount: Starting at age 60: Starting before the age of 65 will result in a decrease of 0.6% per month (7.2% per year) of the amount to a maximum of 36%. Starting at age 70: Instead, starting after the age of 65 brings an increase of 0.7% per month (8.4% per year) up to a maximum increase of 42%. Find out more on the CRA’s website regarding the Canada Pension Plan at this link.
Eligibility & the Process for Employment Insurance Employment Insurance or EI in Canada is a system made to provide monetary benefits to those who lose their jobs as long as there hold no fault of their own. Some examples are shortages of work, seasonal and mass lay-offs. The individuals are able to and available for work but can’t find a job at the time. As soon as you stop working, apply for Employment Insurance (EI) even if you have not received your Record of Employment (ROE). Delaying your claim for more than four weeks after your last day of work results in a possible loss of benefits. The Record of Employment or ROE is a document provided by your employer that proves your work history with them up until termination. Qualifying for Employment Insurance When submitting your EI claim, the following needs to be proven: You were employed in insurable employment. Losing the job was not due to your own fault. Employment was affected by flooding or wildfires. Have not worked and did not receive pay for 7 days straight in the last 52 weeks. Your hours worked since the last EI claim or the last 52 weeks meet the required number of insurable employment hours in your region. You are willing, ready and capable of working every day. Finally, you should be actively looking for work, recording employers contacted and when you contacted them. While on Employment Insurance, you are expected to consistently prove your eligibility to receive payments by completing bi-weekly reports. This can be done online or by the phone but missing these reports can result in losing your benefits. You Do Not Qualify for EI if You: You voluntarily left your job without just cause. Dismissal for misconduct. Participation in a labour dispute caused unemployment. This includes strikes, lockouts and other conflicts. If this is a period of elave that compensates for a period which you worked more hours than normal in full-time employment and have an agreement with your employer. Quitting or losing your job due to non-compliance with the employer’s mandatory COVID-19 vaccination policy. The employer must have clearly communicated the policy. Informed you that not complying would result in loss of employment. If applying the policy was reasonable within the workplace context. You have a valid reason for not complying and didn’t receive an exemption from your employer. You’re in jail and are found guilty by a court of law. If you are incarcerated and were not found guilty, you may receive an extension in the qualifying and benefit period for your EI payments. Insurable Hours & Maximum Weeks for EI To qualify for EI, there is a qualifying period that requires a number of hours in insurable employment. This period is the shorter of these two options: 52-week period immediately before the start date of the EI claim. Period from the start of a previous EI benefit period to the start of the new benefit period. This is if you applied for benefits earlier and your application was approved in the last 52 weeks. Depending on the rate of unemployment in your region, the insured hours required range from 420 – 700 and the maximum weeks of benefits ranges from 36 – 45. Depending on the rate of unemployment in your region, the insured hours required range from 420 – 700 and the maximum weeks of benefits ranges from 36 – 45. Find out more by reviewing the CRA’s section on their website discussing Employment Insurance here. Alternatively, to find out the unemployment rate in your region and the number of hours required to qualify for benefits, click here to look up your EI economic region by postal code.
Bookkeeping vs Accounting & Your Business What is the difference in bookkeeping vs accounting? When it comes to finances, your business may need an accountant or a bookkeeper depending on the needs of the organization. Bookkeeping A bookkeper records day-to-day financial transactions for the business. They are generally paid less than accountants and don’t need as much education. Part of their tasks are to organize and record financial transactions and other smaller aspects of a company’s financial records. As a business grows, it may find that the bookkeeper can grow into being the accountant but there are times where bookkeeping is simply done by an administrator. Accounting or bookkeeping firms offer bookkeeping services as well and outsourcing this service with effective systems may be the right approach for you. When a firm is outsourced to manage bookkeeping, they often set up cloud based systems to keep track of your records, making sure that every detail is accounted for and proven by receipts and invoices. Bookkeepers take care of journal entires, bank reconciliations, keep track of cash flow, record & compile transactions from different sources, and set up your books for further review. Some details they watch out for are mistakes in budgets or invoices and ensuring all documentation that is necessary to prove a transaction is provided. Accounting Accountants not only take care of managing the numbers in a business but they are responsible for the bigger picture in the company’s finances. Accountants use the information put together by the bookkeepers to solve problems and prepare more complex financial reports. They also have a better understanding of how tax plays a part in your business and can draw conclusions from the transaction records. Some duties include preparing tax returns, reviewing financial statements, and analyzing accounts. Another important role accountants play is to audit a business’s statements and books to make sure it follows ethical and industry standards. Bookkeeping vs Accounting: What Do You Need? Hire a Bookkeeper Hire an Accountant Regardless, a CPA accounting firm does both. Contact Advanced Tax if you need help finding out more about what your business needs or to outsource your company’s financial duties. Find out more at Investopedia via this link.
How Maternity and Parental Benefits Work In Canada, maternity and parental benefits are processed through EI or Employment Insurance. They provide financial assistance to new parents that meet the following criteria: Those who are leaving their work because of pregnancy or giving birth. They are a parent who are away from work to take care of their newborn or newly adopted child. In the province of Quebec, the provincial government is responsible for providing maternity, paternity, parental and adoption benefits to its residents instead of the federal government. Maternity Benefits These benefits apply only to people who are away from work due to pregnancy or giving birth and can not be shared between parents. Those eligible for maternity benefits may also be eligible for parental benefits. There is a maximum of 15 weeks allowed for maternity benefits. Maternity benefits provide 55% of the individual’s income as benefit. This caps out at a weekly maximum of $638. Parental Benefits After maternity benefits have concluded, those eligible are able to receive parental benefits to assist in the care of a newborn or newly adopted child. They come in 2 different styles, standard and extended parental benefits. Each option comes with a different amount of weeks and weekly amounts for the benefit. While they don’t have to be consecutive, it must be taken withing specific periods that start from the week of the child’s birth or when a child is placed with you for adoption. Keep in mind that before you apply, carefully select which option is better for you. Once a parental benefits payment has been made for the birth or adoption, you can not change between standard or extended parental benefits. Benefit Option Maximum Weeks Rate of Income Weekly Max Standard Parental Benefit Eligibile parents can take up to 40 weeks and can be shared between parents. One parent can not receive more than 35 weeks of standard benefits. 55% Up to $638 Extended Parental Benefit Eligibile parents can take up to 69 weeks and can be shared between parents. One parent can not receive more than 61 weeks of standard benefits. 33% Up to $383 Examples of Maternity and Parental Benefits If you’d like to find out more, visit the CRA’s information piece on EI Maternity and Parental benefits here.