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Are You Running a Business as an Incorporated Employee?

Small Business Incorporated Employee

So you decided to open a small business and incorporated it. You figured it was to your best tax advantage, and had every intention of being able to use the small business tax credit.   Then you discovered that the in the eyes of the CRA your business is considered to be a personal services business and as such does not qualify for the small business tax break.  This makes a huge difference to your tax obligations, but why is this and how did it happen?

You have fallen into this category most likely because if you were not working under a corporation then you would be considered to be an employee of those that are using the services that your corporation provides.

It is very common for a contractor for example, to just assume that he can open his own small business and incorporate it as such.   He is the only person providing his service and in the company.

When the CRA is looking at the real status of a business, it follows a criteria.   It looks at the control of the company, who owns the tools used for the service, is there a chance for profit and the risks, as well as integration.

The CRA looks very carefully as to whether the services you are performing would be the same as what an employee would do, and the only difference between you and the employee is that you are a corporation.

Control:

You have to be in a position where you totally control your Corporation.   The people you are providing the services for don’t have the authority to hire or fire within your business.   They don’t set the wages or working hours. They cannot dictate as to time or place that work is carried out.

Ownership of tools:

Just because you own the tools you need to perform the service doesn’t necessarily eliminate you as an incorporated employee.    Many industries expect their employees to have some of their own tools of the trade.

Profit and Risk:

If your business is in a position to make a profit, or face some of the risks of businesses like bad debts or having your equipment damaged, or lose money because of delays you are more apt to be considered a business and not an employee.

Integration:

This is really a grey area of the criteria used by the CRA.   It seems to depend on the outcome of the other 3 issues.

Rather than get yourself in a situation where you are going to be deemed a incorporated employee, utilize the services of a quality and experienced accountant to determine if your services really do qualify as a small business entity.

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Contact

Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant

Email: sam@torontoaccountant.ca

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