Attention Sole-proprietors: Tips to Make Taxes More Manageable

June 15th is the tax filing deadline for individuals who have a sole-proprietor business.

Attention Sole-proprietors: Tips to Make Taxes More Manageable

A sole proprietorship is a business structure where an individual operates and manages the business as the sole owner. It is the simplest form of business organization and does not require formal registration or incorporation. While preparing the sole-proprietors’ taxes, it deeply worries me that how can these clients come up with the money to pay all the taxes? For instance, a client earned $130,000 in gross business income, after deducting all business expenses; the net income is $90,000.

His tax liability looks like this:

  • Personal tax: $16,259
  • CPP: $6,999.60
  • GST: $4,852.00

Total: $28,111.57, which is 31% of his net earnings or 21.6% of his gross income

In addition, since the GST and personal tax owing are over $3,000 threshold, quarterly installment is also required. On June 15, the total tax liability for him is $38,667.07 that is 42.9% of his net earnings.

How could a small business owner come up with such a huge amount to pay taxes? He also needs to live and support his young family during this high inflation times. Without making the tax payments, late payment interest will be charged, installment interest will also be charged, the hole is just getting bigger and bigger… 

How could a sole-proprietor stay above the water? There are several suggestions that I recommend to all sole-proprietors:

Estimate and Set Aside Taxes Regularly: Since sole proprietors are responsible for their own tax payments, it’s essential to estimate and set aside funds for taxes regularly. Calculate your expected tax liability based on your business income, deductions, and applicable tax rates. Set aside a portion of your income in a separate tax savings account to ensure you have sufficient funds when tax payments are due. For example, the above client who makes $130,000 gross income, it’s crucial to put at least 20% of all of his customers’ payments into a separate saving account for tax.  Every business is different, some has more expenditures than others, if you are not sure about how much tax to put aside, please contact our office, and we will help you figure it out.

Separate Business and Personal Finances: It’s essential to maintain separate bank accounts and credit cards for business and personal expenses. I cannot emphasize enough how important this is. I have witnessed many business owners who successfully get out of the cashflow problem; their starting point is separating business and personal finances. Setting a personal budget and live with it, do not pull more money from the business bank account. This is the game changer.

Quarterly Tax Installments: If you anticipate owing more than $3,000 Canadian in taxes in the current or following tax year, the CRA requires you to make quarterly tax installments. These installments help you pay your tax liability throughout the year rather than in a lump sum at year-end. Installment interest and penalty will be charged if no installment is paid.

Contact CRA To Setup a Payment Plan: If you are already deep in the hole, please call CRA to set up a payment plan. They normally accept breaking the lump-sum payments into smaller amounts. In any case, do not ignore CRA’s calls, they are usually pretty good if you are still communicating with them.

Consider Incorporating Your Business: If your business is at a level that you have residuals after paying yourself, or you have enough income from other sources where the business is just a side kick, incorporation might be a good option to save tax. The corporation tax rate for active operating income is only 11%, which is much lower than the lowest personal tax rate at 25%. It also allows you to have access to the Life Time Capital Gain Exemption when selling your business. If you are interested or not sure about incorporation, please contact our office for a consultation.

In conclusion

Taxes will become manageable if you start managing it. As a business owner this is not a skill that is good to have; it is a survival skill that you must possess. Luckily, this is learnable and with some practice, you will be good at it. Our team from Streamline Accounting Professional Corporation is on your side to guide you through this process.

If you have any questions, please reach out and book an appointment with our team.

Underused Housing Tax (UHT)

Warning!! If you own a Canadian residential property, you might be required to file the Underused Housing Tax (UHT) before October 31th, 2023.

The impact of this brand new Underused Housing Tax is a lot broader than most Canadians have imagined. The legislation is quite long and complex; I’m writing this blog to specifically bring attention to affected owners who might need to file this return. If you are on the legal title of a Canadian residential property on December 31, 2022, and if you are one of the following described below, you need to file the UHT by October 31st, 2023. Minimum $5,000 penalty will be imposed on individuals and $10,000 on all other type of owners including corporations for late filing or failure to file.

Affected Owners:

  • Individuals who are not Canadian citizens or permanent residents of Canada: such as foreign workers, international students, and foreigners
  • Canadian controlled private corporations (CCPCs) and other privately held Canadian corporations: most of the corporations in Canada are under this category
  • Foreign corporations: incorporated outside of Canada
  • Individuals who own residential property as a trustee of a trust(other than as the personal representative of a deceased individual)
  • Individuals who own residential property as a partner of a partnership

If you have a holding company or any corporation that owns a residential property in Canada, you are required to file the UHT. In most cases, there won’t be any tax owing.

Examples of residential property:

  • detached houses
  • semi-detached houses
  • duplexes and triplexes
  • cottages, cabins and chalets
  • townhouses
  • condominium units

Examples of property that are not residential property:

  • buildings with 4 or more units
  • buildings that are primarily (50% or more) used for retail or offices
  • mobile homes, travel trailers, motor homes and camping trailers
  • hotels, motels, inns and bed and breakfasts

For more information regarding UHT, please click here.

As the deadline is fast approaching, if you are not sure whether you’re required to file the UHT, please take the following actions:

  1. Notify Streamline Accounting Professional Corporation by phone or email right away, and we will help you assess your situation and determine your filing requirement.
  2. If you are required to file, and you are a corporation, please apply for the RU number. Please click here for how to get a RU or we will help you if you are a current client with Streamline Accounting PC.
  3. We will provide you with a checklist to help you gather documents and information that are required to file the UHT.

If you have any questions, please reach out and book an appointment with our team.

UPDATE:

UHT Filing Required if you are on title to someone(parent)’s home or guarantee someone(child)’s mortgage

The deadline for submitting the Underused Housing Tax (UHT) is fast approaching on October 31, 2023. If you are listed as a co-owner of someone else’s home (including your parents’) or have co-signed for someone else’s mortgage (including your child’s), it is imperative that you complete and submit your UHT application before the looming deadline of 10/31/2023. I had been hopeful that the Canada Revenue Agency (CRA) would furnish us with more details on this matter, given its far-reaching implications; however, as of today, no updates have been provided by the CRA. It is worth noting that failing to meet the filing deadline can result in a penalty of $5,000. In my personal view, to ensure compliance and avoid any penalties, it would be prudent to complete your UHT filing by the end of this month.

Below is a LinkedIn article posted by Hugh Neilson, FCPA, FCA, TEP, a well-known Canadian tax expert. I think he has explained the situation very well. If this rule impacts you, please contact our office immediately.

Subcontractor Versus Employee

Subcontractors versus Employees

This is probably one of the most popular questions we get asked by our clients. We will look at the pros and cons for each option and also explain the CRA’s rules around this issue. 

Hiring subcontractors are quite common for businesses especially for their specialized skills or for seasonal/short term work. Nowadays, many large companies are even turning their employees to subcontractors. From the accounting and tax point of view, there are 3 key benefits for hiring subcontractors and a couple of reasons against it.

Pros of Hiring Subcontractors

There are fewer/lower add-on costs for subcontractors

Many business owners prefer subcontractors to employees because employment costs are much higher.  An employer is required by law to make payments to the Canada Pension Plan (CPP), Employment Insurance (EI) and to provide holiday and vacation pay:

  • In 2023, the maximum CPP contribution for an employee is $3,754.45 and the maximum EI contribution is $1,403.43. The combined cost for CPP and EI is $5,157.88 for an employee who earns $66,500 a year.
  • In Alberta, there are 9 general holidays and 4 optional holidays. Employers are required by law to pay employees for a statutory holiday if the holiday falls on their regular working day. For an employee who earns $66,500 a year, and if the employer only observes the 9 general holidays and none of the optional holidays, the annual cost of holiday pay is $2,301.
  • Vacation pay. Employers are required to pay employees vacation pay or paid time off. In the first year of employment, no vacation pay is required with an exception for construction workers. From the 2nd year to the 5th year of employment, the minimum paid vacation is 2 weeks or 4% of the yearly wages. Above 5 years of employment, the minimum paid vacation is 3 weeks or 6% of the annual wages. Hence for an employee who earns $66,500 a year and who has been working for the employer for 3 years, the vacation pay is $2,660.

The cost of CPP, EI, holiday pay and vacation pay is over $10,118.88 for an employee who earns $66,500 annually. That amounts to 15% of their annual salary! Unfortunately, it does not stop there. For certain industries, the employer is also required by law to pay Workers Compensation Plan (WCB) for their employees and this cost varies depending on the industry. Many employers also provide various extended health benefit, life insurance and disability insurance coverage to employees. This is optional and the costs also vary depending on the plans the employers provide but it can easily exceed a few thousand dollars per employee per year.

There is less paperwork and less compliance from Canada Revenue Agency for subcontractors than employees

If you hire an employee, there is payroll remittance to be submitted to CRA on a monthly or quarterly basis depending on the type of remitter you are. This is one of the areas that CRA imposes sever penalty and interest for late or missed payments. The employer is also responsible for preparing T4 slips within 2 months after the calendar year ends. Again, there is a late filing penalty if the employer misses the filing deadline.  On the other hand, if a subcontractor is hired, the paperwork to comply is much less. No monthly or quarterly payroll remittance to CRA is required. However if the subcontractor is a GST registrant, GST needs to be paid to the subcontractors. Also, depending on the industry, T5018 Statement of Contract Payments Slips are required for all construction contractors. For a full list of industries that require T5018, please click here.  Certain types of services may require T4A slips to be prepared. Please click here for the services that require a T4A slip.

Subcontractors are normally already trained up for the job so no additional training is required upon hiring

Subcontractors are expected to be trained for the job, and no minimum or additional training should be provided. On the other hand, the training cost for employees could be significant depending on their previous experience and how quick they can learn. This cannot be easily measured by a dollar amount.

Cons of Hiring Subcontractors

Business owners may find subcontractors less reliable

Subcontractors are individual businesses and they might have other jobs in addition to the job they have been subcontracted. At times when your customer has an urgent job and need your help, and your subcontractor is not able to commit, you may not only risk losing this job but also the trust from your customer(s). To establish a long-term successful business, one key element is to provide great services consistently.  It means business owners need to have a reliable work force to get the job done, and this makes hiring subcontractors less favorable.

Business owners have more control over employees than subcontractors

Independent contractors normally have their own way of doing things or working on their own schedule and this may not meet your requirements. Also even though they might be trained, their level of standard may be different from yours. This can make contractors less favorable.

What is the CRA’s standard for Subcontractor vs Employees

To determine if an individual is an employee or subcontractor, the key question is “whether the person is engaged to carry out service as a person in business on their own account, or as an employee”.
CRA takes a two step approach:

Step 1:

The CRA asks the payer and the worker what their intent was when they entered into the working arrangement. The CRA will review the terms of the contract and examine whether the working relationship is a contract of service (employer-employee relationship) or a contract for service (business relationship). If it is hard to determine that based on the contract, Step 2 will be taken.

Step 2:

The CRA asks the payer and the worker a series of questions that will help them to determine the working relations.  The main questions are:

  1. What is the level of control the payer has over the worker’s activities? Basically, this question looks at who has control in deciding how the job is done and when the job is done.
  2. Who provides tools and equipment for the job? When the payer supplies most of the tools and equipment and the payer is responsible for repair, maintenance and insurance costs, the work relationship is very likely to be determined as an employment relation.
  3. Who takes on the financial risk of the job? An independent subcontractor assumes the risk of not completing a job on time, or the risk of redoing the job due to not meeting the requirement. Employees rarely facie any of the financial risks directly.

If the CRA determines that a worker is an employee and not a subcontractor, the employer/payer will be required to pay all the CPP and EI.

It is often difficult to determine whether a worker is an employee or a subcontractor.
Please contact our office for details.

Conclusion

Hiring employees may incur more paper work to comply with the law and government and additional costs such as holiday and vacation pay  and training than hiring subcontractors may. However employees are considered more reliable and it is easier to control their schedule and quality. It is a good idea to hire subcontractors for specialized or short term/temporary work. In the long run, it is better to hire employees and train them well so that you will be able to provide consistent, reliable and a high quality service to your customers which is crucial for your business’ long term success.