T4 Slip Review - Are They Independent Contractors?

As we discussed in last week's Breaking Tax and Investment News, a contractor may have individuals providing services who consider themselves to be self-employed or who don't want to be treated as employees, even if they are! This year, with the popularity of the Home Renovation Tax Credit, it is more important than ever that the nature of the relationship be properly established and the correct tax forms filed.  Individuals filing for the credit will be completing Schedule 12 on their returns providing the CRA with a list of amounts paid and the GST numbers of those who received the funds. 

Contractors who have employees must withhold CPP, EI and Income Tax from payments to those employees and issue T4 slips before the end of February.  If the contractor is using independent sub-contractors to perform the work, no withholding is required and payments should be documented by issuing T5018 (or, outside the construction industry, T4A) slips.

• Business-related deductions such as home-office expenses, promotion and entertainment expenses, capital cost allowance on equipment and other such expenses can be claimed.
• Reasonable salaries paid to family members for services rendered are deductible in determining business profits and can be used to split income.
• The owner may incorporate the business and claim the low tax rate applicable to active business income.
• There is no requirement to contribute to Employment Insurance, and there is no ability to draw Employment Insurance during periods of inactivity. Canada Pension Plan contributions are still required.
• Depending on the level of revenue, the business may need to register and collect GST on revenues.

A good deal of Canada's underground economy takes place in the construction industry.  With the reporting requirements for individuals to claim the Home Renovation Tax Credit for 2009, you can be certain that the CRA will be using this new source of information to ensure that those who received the payments are reporting the income on their tax returns.  Bookkeepers should be familiar with the reporting requirements for the construction industry to ensure that their clients are well prepared for a CRA audit this year.