# Tax rules for a small corporation with only one client?



## rnorman3 (Aug 30, 2012)

Hi all, I'm thinking of setting up a corporation however it will be almost exclusively dealing with one client. How does the gov look at this? Is that OK?
Thanks!


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## Homerhomer (Oct 18, 2010)

Google personal services corporation, yes it could be an issue in your case.

There could also be an issue whether you are really an employee or subcontractor, if you don't meet the criteria CRA may determine that you are an employee.


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## rnorman3 (Aug 30, 2012)

OK, thanks for that. I read up on it. Question though, what about if my client is a corporation that strictly provides people (with certain talents) to other corporations?

For example imagine there's a small group that starts a corporation A, who's purpose it is to find and rent? tens/hundred+ talented individuals to many other corporations XYZ who need the talent but can't find it themselves or don't want the hassle of hiring an employee.

The talented individuals (me) start a corporation B of their own. Corporation B invoices corporation A ($1500/day). Corporation A invoices corporations XYZ ($2000/day).

So corp B (me) has income but just from corp A.

Would income to corp B (me) fall under "personal services business" income?

Thanks!


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## kcowan (Jul 1, 2010)

The setup you describe is how most headhunting businesses work. The CRA seems to accept that model. Just make sure you get your GST number and do timely remissions. Pay attention to all the input credits. 

What homer says is correct if you were billing the ultimate company. And deemed employment has all kinds of downsides for both of you.


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## Island (Sep 6, 2012)

*Careful*

Over the past three years CRA has started a rash of going after people that do this kind of thing, claiming that they are employees, not businesses. 

The cases where I hear about it the most is for government contractors. Say Health Canada wants to hire a contract software developer. The contracts go from Health Canada, to an Agency (Corporation). The Agency then has a contract with the contractor's corporation. The contractor can then keep the money in the corporation, or pay himself a salary or dividend. The contractor's corporation has business expenses.

CRA has been tracking down these people/corporations, declaring the corporation not a business, deaming all the business expenses invalid, and requiring back taxes paid on the income that was previously offset by those expenses for the past 7 years or the lifetime of the corporation if less than 7 years.

In all the cases I've heard of, the contractor was with the same branch of government for over 7 years.

This scares me because this is essentially what I'm doing and I don't know if I'm breaking any rules or not. For me, I jump arround between government braches and between different agencies once or twice a year so I might be safe. Or, CRA might knock on my door tomorrow.

Does anyone know what CRA's criteria is? I've been looking for years and can't find a clear definition. Homer, any idea?

I'm planning to have my corporation buy rental property later on this year for many reasons, but in part to diversify the corporations "business" practices and income.


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## Homerhomer (Oct 18, 2010)

Island, I assume you have read this before.

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html

Do you sign contracts when you move from one branch/agency to another, does the contract states the relationship?

Do you write invoices to the same person/office or different agencies/branches for each contract? I think you may be considered to have more than one client and if so you may be ok, however your contracts and how they are worder may be the determining factor as well as how many of the other criterias you pass.

You also may be more scrutinized because you work for government agencies ;-)

I am not aware of the precedent for your exact situation, if there was a ruling for someone in the same position you would have a definitive answer, and if you were to be determined to be an employee having rental income in your corporation would not help you at all in this aspect, regardless of the fact it may be better to set up holding corporation and have real estat there.


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## skiwest (Oct 24, 2011)

I'm in the same boat as well as ton of people here in Calgary in O&G. I haven't got around to having different clients to put some revenue against but my wife is going to have several clients when she starts consulting under the same company. That should fix it. My accountant has been looking at this and the following is something I got from him

To recap:· Oct 31, 2011 Mr. Flaherty presented draft legislation to parliament suggesting that “employee corporations” should be taxed at the high rate (i.e. no small business deduction). This would result in approximately 50% tax once remaining profits of the company are taken by shareholders as dividends.· 

Our task force met twice and emailed many times and we feel we have a solution
Am I a PSB (i.e. does this legislation even apply to me)?· 
Do I have only one client or many?· - I have one but wife will have several
Do I carry on duties at my client’s office on a regular and continuous basis?· me continious /wife mostly remote
Does my client provide me with an office and work tools? Computer, etc.· me yes/ wife home office
Is my remuneration paid on a regular basis without the submission of an invoice?· me- always by invoice depending on number of hours worked / wife very much so
How much control do I have over my work?· me not really/ wife will be bidding on some jobs
Do I have autonomy? i.e. do I have the ability to come and go as I please, set my own hours, etc.?· me not so much / wife 100%
How do I answer the phone when in the client’s office? my name
Does my business card show the name of my client or my company? have client business card and own business card.


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## Island (Sep 6, 2012)

I have read that CRA guide before but thanks for posting it Homer. I noticed a couple new things this time through.

The guide is very vague. It lists "indicators that the worker is an employee", and "indicators that the worker is a self-employed individual". Rnorman3 would likely fall pretty evenly under both categories. My corporation largely falls under the self-employed indicators category. That said, any time CRA has the power to make a judgement call, it make me nervous.

Thanks again Homer


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## rnorman3 (Aug 30, 2012)

*That's exactly what I'm worried about!*



skiwest said:


> I'm in the same boat as well as ton of people here in Calgary in O&G.


Skiwest, what you describe is exactly what scares me, however it sounds a little different than the "head-hunting" scenario I described above, since it sounds like you're actually invoicing one operator directly for services, whereas I would be going through a headhunting/talent-selling outfit. Island's example is very similar to mine.

I believe we're all talking about having our business income deemed as being from a personal services business (PSB), and therefore not eligible for the small business deduction(see below), as well as having to repay expenses claimed as in Island's example.

Something else to consider is that the service you provide is likely not something "that an officer or employee of that entity(operator) would usually perform."(see quote below) I'll try an example, ex. a civil engineering firm that designs and builds real estate through contractors,,, hires the services of an independent incorporated electrician. This should not be considered income from a PSB since it's not likely something "that an officer or employee of that entity(Civil Engineering Firm) would usually perform." Electricians don't work for engineering firms. So even if that electrician provided services for that same company for 10 years, how could he be deemed an employee?? Should the firm have hired electricians? Similarly how could a computer programmer be considered an employee of a hospital??? Frustrating to think about.

Any comments from anyone on that example? Skiwest, do you know if anyone in O&G has actually been ordered to repay taxes based on such a ruling?

**************************************************
From: http://www.cra-arc.gc.ca/E/pub/tg/t4012/t4012-06-e.html#P2844_207710
"A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform."

Thanks!


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## skiwest (Oct 24, 2011)

About 1/3 of the people at the company I work for are on contract. Almost 100% of the ones involved in construction up to construction managers. I have talked to a couple as I am new to this , just finished first year end, and soem have been audited and this has not been a problem. One had a problem when he used his business truck for personnel use.

Many have their primary residence in another place so either get a payment or sup for this , to their company or direct to self tax free, or it is included in their rate. 

When I read the guidelines I don't come out that well other than I pay my CPP and taxes. But maybe my saving grace will be my wife's consulting which will totally be in lines with guidelines. CRA won't be able to say that our corp doesn't apply as several clients both long and short term. I guess for some work she will be bidding so there will be the possibity of loss.

For you your employer is really just a rep or broker who takes a cut. The second they can't find a placement for you you have no hours. Idon't think you have anything to worry about. 

At Engineering firms in Calgary there is a huge % that are on contract and are with that Engineering firm for years many in supervisor positions. They are doing the normal work of the company. Even in a downturn many of these contractors are kept on with no buillable hours so when work does come along the company will be able to do work. Though that is not comman now but have seen it happen.


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## skiwest (Oct 24, 2011)

A factor may be how much trax is being avoided. For me I am paying myself a salary so paying full CPP. Whats left over is divedends for self, wife or kid. Wife will be getting salary when she starts working again.

For me whether I pay salary or pay div is not that big a deal mariginal tax anyway. The income splitting however is nice.

One thing is confusing me, is the risk having a corp and CRA coming in saying your really an employee? or CRA saying your a PSC and disallowing the SBD? If a PSC would still have the deductions would just pay more tax but those dividends would get a bigger dividend tax credit??


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## rnorman3 (Aug 30, 2012)

skiwest said:


> For me whether I pay salary or pay div is not that big a deal mariginal tax anyway.


Just curious, why wouldn't you pay yourself all dividends? Then you would be applying the dividend tax credit to your entire earnings saving thousands? Any comment on this from anyone?



skiwest said:


> One thing is confusing me, is the risk having a corp and CRA coming in saying your really an employee? or CRA saying your a PSC and disallowing the SBD? If a PSC would still have the deductions would just pay more tax but those dividends would get a bigger dividend tax credit??


Yes, I agree this is confusing. There are two separate things here, anyone please correct me if I'm wrong. 

One - the "employee vs. self-employed" issue is for a self-employed person reporting income on line 135 of their personal income tax. If the CRA said you're an employee, they would order your employer to pay all the missed CPP and EI, and the employee to repay all the taxes from claimed expenses. Bad for both parties.

Two - income from a "personal services business" is income to a CCPC that will not qualify for the SBD. i.e. If the CRA said you have income from personal services business, the income would not qualify for the SBD. You could then claim other credits and possibly issue eligible dividends which would be taxed less on your personal income tax, but they would not likely add up to the benefits of SBD. Not sure about the expenses in this case, it's possible they could claw those back too.


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## MoneyGal (Apr 24, 2009)

rnorman3 said:


> Just curious, why wouldn't you pay yourself all dividends? Then you would be applying the dividend tax credit to your entire earnings saving thousands? Any comment on this from anyone?


CPP. CPP is "cheap" longevity-protected income.


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## rnorman3 (Aug 30, 2012)

MoneyGal said:


> CPP. CPP is "cheap" longevity-protected income.


Indeed, one drawback however is that you would effectively be paying both sides of the CPP, employer and employee. CPP sounds great if you are an employee and max out every year. However how good is it if you are incorporated?

If I issue $50k in non-eligible dividends to myself every year I'd pay about $3300 in tax. If I pay myself $50k in salary a year just to pay CPP I'd pay about $10k in tax and about $4600 in CPP for a total of $14600. That's a difference of $11300. It seems to me that if I take that $11300 and invest it every year, when I retire in say 25 years, the principal $282000 would probably be at least hopefully $400000 by then and go a lot further then the max $900/month CPP payout. $400k is $900/month for 37 years without interest or any gains. I'd have to live well over 100 before that would run out.

I don't see the benefit of paying salary at this point. Does this sound about right?

****EDIT****
For anyone reading this later, read Homerhomer's reply below
***********
Thanks!


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## Homerhomer (Oct 18, 2010)

rnorman3 said:


> Just curious, why wouldn't you pay yourself all dividends? Then you would be applying the dividend tax credit to your entire earnings saving thousands? Any comment on this from anyone?


Yes, it is a very common misconception.

I think this was touched on in one of the other threads started by yourself, I would ask you to read up on integration of business income for CCPC.

One glove doesn't fit all and dividends are not the best thing since sliced bread for small corporation owners, in a perfect (tax) world whether you pay dividends or salary the tax implications should be the same, but since it's not a perfect world and tax rates are changing there are differences and in some or even many cases dividends can be beneficial, but not in every case.

First off for many income levels the differences are very small, secondly you loose many benefits available to folks with earned income, like already mentioned CPP, as well as RRSP room, working income tax benefit, you can't claim child care if you have no earned income, you may have a harder time getting a mortgage if you are not employed and on and on and on.

The way to take the money out should be decided on individual circumstances and quite often a mix of wages and dividends is the way to go.


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## Homerhomer (Oct 18, 2010)

rnorman3 said:


> Indeed, one drawback however is that you would effectively be paying both sides of the CPP, employer and employee. CPP sounds great if you are an employee and max out every year. However how good is it if you are incorporated?
> 
> If I issue $50k in non-eligible dividends to myself every year I'd pay about $3300 in tax. If I pay myself $50k in salary a year just to pay CPP I'd pay about $10k in tax and about $4600 in CPP for a total of $14600. That's a difference of $11300. !


Nope, if you pay yourself 50k dividends your corporation will pay $7,500 tax on that profit since you are not reducing the profit by 50k salary plus 2306 cpp expense.

Assuming that your other calculations are correct your savings is much smaller than you are hoping for.


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## rnorman3 (Aug 30, 2012)

Thanks Homerhomer, I already replied re. CPP as well before I seen your reply. I did not take into account the fact that salary is deductible from the corporations income etc.. and you would end up with about the same $$.


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## MoneyGal (Apr 24, 2009)

CPP is inflation-adjusted and relative to other sources of longevity-protected income (that can be purchased on the open market), it is cheap. Whether or not you can "do better" can be a hotly-contested argument but in the example you gave, you'd need to account for the rising real monthly CPP payout over time.


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## Sampson (Apr 3, 2009)

MoneyGal said:


> CPP. CPP is "cheap" longevity-protected income.


Isn't this only because the plan is unsustainable and sourced mainly from continuing contributions from 'new' memebers.


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## praire_guy (Sep 8, 2011)

Cpp is good for at least the next 75 years. According to our gov't


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## MoneyGal (Apr 24, 2009)

Sampson said:


> Isn't this only because the plan is unsustainable and sourced mainly from continuing contributions from 'new' memebers.


Not at all. It's for two reasons: first, the population is all workers vs. only those who purchase a longevity-insured product. All workers = many people (about 50%!) who die before reaching the "normal" life expectancy for their age group. When you move into the paid annuity market, only people who think they are going to live a long time buy the product, meaning the actual life expectancy experienced by the group is much higher, meaning that total payments (to all participants) are greater, meaning you need to pay more for the same amount of monthly income in retirement. 

It's especially "cheap" for women, as the mortality tables used for CPP are unisex, meaning (in general) men "overpay" and women "underpay" for the same amount of CPP income in retirement. 

There are a couple of other factors (mainly that CPP is not a for-profit program, so there's no profit for insurers built into the cost and payments) but in general none of these factors are related to an "unsustainable" plan "sourced mainly from contributions from new members." CPP isn't unsustainable and the payouts are not sourced from contributions from today's working population.


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## skiwest (Oct 24, 2011)

I'm almost at the point that any more money I put in won't increase my benefit. Not quite there but almost as CPP statement has my CPP benefit as almost the max. Ran the calc manually and that seems to be case. But I don't mind putting in for a year or two. Now last year I paid mayself all in dividends as my last job as an employee I had already max out my CPP. Didn't see point in paying myself salary , making CPP contributes for myself and company just to get them back for myself for no benefit increase while my company paid in.


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## Sampson (Apr 3, 2009)

I've never actually looked deep into the CPP assumptions, so coming from someone like you M_G, assuring to hear the calculations are realistic. Those who pay in and die early, well thats the chance part of it I suppose.


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## dave6767 (Sep 14, 2012)

*Sole Income is from Corporation Dividends*

My only income would be from dividends from my corporation - isn't there a loophole for those who have only dividends to live on? More in detail, if I take 50K from the company (before corporate taxes) in eligble dividends to myself living in Newfoundland, what will I net from it? It will be substantially more than if I paid a 50K salary to myself from the business.


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## rnorman3 (Aug 30, 2012)

dave6767 said:


> My only income would be from dividends from my corporation - isn't there a loophole for those who have only dividends to live on? More in detail, if I take 50K from the company (before corporate taxes) in eligble dividends to myself living in Newfoundland, what will I net from it? It will be substantially more than if I paid a 50K salary to myself from the business.


Hi Dave6767, I don't know of any "loopholes" as such. In order to issue eligible dividends you need to have *not* taken advantage of some corporate tax breaks like the small business deduction. I'm not sure of the other rules for issuing eligible dividends but there are a bunch.

To the best of my knowledge here's how it would work out: First assuming you're corp. is eligible for the small business deduction, you'll pay 15% corp tax and issue non-eligible dividends. Then when you do your personal income tax you'll claim earnings in the form of non-eligible dividends. If you go to taxtips.ca you can find a calculator where you can enter non-eligible dividends and it'll give you the approximate amount of personal income tax you'd pay. For $50k in NL you'll pay about $3278 in tax.

But in order to pay 50k in dividends your company has to make at least $58823 to cover the 15% tax on that leaving you with 50k. Then you pay out the 50k in non-eligible dividends and pay the 3278 personal tax so you're paying about 21% tax about ($12101).

With a similar corp income of 58823k, claiming it all as salary, you'll only pay personal income tax on that. From taxtips.ca you'll pay 13,468 in tax. But since your salary will open up RRSP room, if you contribute maximum $10,600 you'll pay (single man) $9504 in tax. You also have to pay CPP and likely WHSCC, but your net worth with all salary at the end of the year will be probably more on salary (if you do max RRSP).

There are a bunch of assumptions here, like your business is eligible for the small business deduction, your single, you have no other income, you only get $58k total corporate income, etc...
I also live on the ROCK!!!
Maybe someone else will reply as well to tell us if my reasoning sounds about right.


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## Homerhomer (Oct 18, 2010)

Dave, please indicate under what circumstances you will be able to draw eligible dividends? For most small busineses eligible dividends can be drawn when you have investment income, and from operating corp you would draw non eligible dividends.

Rnorman, I didn't run the numbers to see if they are correct, but your reasoning is right on track.


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