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It's more common for independent contractors to use a corporate structure to work in the oil patch due to Oil & Gas companies wanting to pass on some of the risks related to their operations to the independent contractor. Benefits to the Oil & Gas companies include staffing flexibilities - layoffs, reduced severance payments and WCB reductions. While these risks are transferred to the independent contractor, the corporate structure does provide benefits such as creditor protection and limited liability as well as reduced income tax rates. Under a corporate structure (the first $400K of income is taxed at 11 percent in Manitoba, the first $500K of income is taxed at 13 percent in Saskatchewan and the first $500K is taxed at 14 percent in Alberta). A tax deferral is achieved when the after tax earnings are kept in the corporation and distributed later to the shareholder via dividends.
On October 31, 2011, the federal government released proposed legislation which may impact how independent contractors are taxed, if they operate under a corporate structure and are classified to be a Personal Services Business (PSB). Although the PSB rules have been part of the tax law for some time, the implications of being classified as a PSB have been intensified.
In simple terms, a PSB is a corporate employee and the affiliation between the independent contractor and the Oil Company is one that mirrors an employer - employee relationship. Being classified as a PSB means your corporate income is not taxed at 11 percent, 13 percent or 14 percent but at 28 percent and the PSB expenditures are limited to what an employee can deduct. Valid deductions include meals, travel and your wage with all other expenditures deemed non deductible.
There are no hard and fast rules to determine if the PSB classification applies to an independent contractor and will depend on specific fact patterns. The Canada Revenue Agency (CRA) uses an analysis of the following four criteria:
The above is a sample of what the CRA would look at to determine if a PSB relationship exists. The more independent jobs or contracts one enters into, the more apt that the relationship is one of an independent contractor than PSB.
In the past, if the relationship was deemed a PSB and the contractor conceded to the fact that their expenditures were limited, the income tax implications were somewhat bearable. The corporate tax rate would only be 15 percent. When coupled with the personal tax rate, the overall tax was within 1 percent of the highest personal tax rate of 46.4 percent in Manitoba, 44.7 percent in Saskatchewan and 39 percent in Alberta. Being classified as a PSB after these legislative changes means the tax rate will increase to 55.58 percent in Manitoba, 51.33 percent in Saskatchewan and 45.78 percent in Alberta which definitely puts the independent contractor at an income tax disadvantage.
It may be difficult to determine if a PSB classification applies to you but with professional advice from a trusted business advisor, your situation will be analyzed and workable solutions provided to help you avoid the PSB trap.
Related Topics:Corporate Tax; Canada Revenue Agency
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