Tax Benefits for IT Consultants?
Major city centers in British Columbia are experiencing a high tech boom, resulting in many IT specialists and engineers converging in the province to offer their highly demanded skills to the highest bidder.
The nature of the IT industry is very project-driven, producing vibrant short-term work opportunities for skilled and highly specialized professionals. Because of the nature of the work, it’s not unusual for an “employer” to hire self-employed consultants on a project basis. Similarly, many IT professionals realize the professional flexibility that comes with being a consultant and choose to offer their services on a project-by-project basis, rather than as an employee.
Canadian tax rules want to encourage entrepreneurship by providing low corporate tax rates and simplified methods of tax reporting, however, the tax system is not designed to give corporate tax breaks to employees disguised as self-employed consultants.
Before rushing to incorporate, which means incurring more professional costs and more CRA filing responsibilities, consider the following factors from our Chartered Accountants in Vancouver BC to ensure you reap the maximum tax benefits possible:
Ensure revenues are high enough to compensate for the costs of incorporation.
B.C. is a very expensive place to live. If a consultant is spending all of their income on shelter, family and entertainment expenses, then there is no point in incorporating – from a tax standpoint anyway. It makes more sense to stay on the payroll or to stay as a proprietor. So how high should the revenue have to be before it becomes economical? A typical benchmark is usually $150,000 per year.
Make sure you are not a personal services business in the eyes of the CRA.
A personal services business is essentially an employee that is incorporated. The ‘employee’ works for an employer and performs their duties in accordance with the rules, guidelines and resources provided by their employer. A self-employed consultant, on the other hand, makes their own decisions about how best to get the task done according to their own schedule and bears the risks and rewards of their own decisions.
The bottom line is this: a personal services business does not enjoy the tax benefits afforded to a small business corporation. If a consultant can’t get past the personal services business test, it is wise to either stay on the payroll or be a proprietor.
Share structure and ownership
A low corporate tax rate and income splitting opportunities with a spouse are two of the biggest perks of being incorporated. These two benefits are huge for a high billing consultant (eg. $250,000 or more per year). The low corporate rate allows sheltering of after-tax retained earnings, which allows the corporation to increase its cash reserves fairly quickly. In addition, the income splitting opportunities available to a spouse allow for the transfer of corporate funds into personal hands in a tax efficient manner.
GST Quick Method
This perk is not talked about widely but it’s a good one – IT consultants whose worldwide revenue is less than $400,000 per year, including GST, qualify for the quick method of reporting GST. Since IT consultants generally incur very little business expenses in earning their revenue, the Quick Method is another tax perk, especially when billings are to clients situated in provinces with harmonized tax rates.
With the explosion of the IT sector in B.C., many entrepreneurial IT professionals are considering going solo. If you’re one of these individuals, ensure that you structure yourself appropriately to benefit from the current tax system – otherwise, it may be less cost and grief to remain as an employee after all.
Related Corporations & Shareholders Tax Planning Posts
- Rental Income & Taxes in Canada – Personal vs Corporate Ownership
- Use of Family Trust for Income Splitting
- Effective Income Splitting Needs Professional Pre-Planning
- Canadian Corporate Tax Planning: On Investing Retained Earnings
Mew & Company in Vancouver B.C.
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