I’m an IT consultant in Canada. Should I open a Corporation?

I’m an IT consultant in Canada. Should I open a Corporation?

I’m an IT consultant in Canada. Should I open a Corporation? 960 540 Baranov CPA

Are you an IT consultant looking to incorporate in Canada? Have you recently incorporated? There is a lot of misconception among the IT professionals with regards to what are the risks and benefits of opening a corporation.

The decision to incorporate will not result in a clear-cut yes or no answer. It will depend on your unique set of facts and the nature of the relationship with your employer. Let’s see what factors you may want to consider:

Reasons to Incorporate

  • Higher remuneration (in exchange for lack of benefits, vacation, sick days, pension etc.)
  • Degree of independence (the relationship is governed by the contract agreement, not the employment agreement)
  • Ability to grow the business (take on other clients, hire employees, run marketing for your company)
  • Corporation may protect you from professional liability in some cases
  • Corporation allows you to defer income taxes

Challenges with Corporation

  • The corporation will become a separate legal entity. You will need to start keeping careful records of amounts you collect and spend for HST. This is money kept in trust and needs to be returned to the government.
  • Greater tax planning is needed for salary vs. dividends consideration. Taking the money out of the corporation requires significant planning ahead. You will need an advice from a professional accountant.

Contractor vs. Employee Issue

There has been a recent trend in the industry where big companies practically force the IT consultants to incorporate before they can deal with them. From the employer’s perspective treating you as a contractor allows them to keep you off their payroll. The employer can also let you go at any point in time without facing legal consequences.

However, even if you incorporate and your employer will treat you as an independent contractor, you still may be deemed to be an employee by the CRA. In case of an audit, you will be deemed to be an employee in substance if:

  • You don’t exercise a degree of control over your relationship (e.g. working hours, ability to refuse work, ability to walk away)
  • You don’t bear any financial or business risk in a relationship (e.g. who will be responsible in case of a system failure)
  • You don’t own any tools to do your job (e.g. laptops, specialized software, servers)
In their review, the CRA would weigh on these factors and issue a ruling. If you will be ruled to be an employee, your corporation will be deemed to be a Personal Service Business. Most business deductions will be disallowed, and interest and taxes will be imposed for up to 3 years back. The tax bills that we have seen from these re-assessments are coming in the tens of thousands of dollars.

Ways to Prove that You Actually Run a Business

When it will come to a review of your case, you will need to demonstrate to the auditor that you have an actual business operating. Here are the factors that you may consider:

  • Don’t incorporate a numbered company (e.g 123456 Ontario Ltd.). Use a reasonable business name (e.g. World-class IT Consulting Ltd.)
  • Open a separate business bank account to track income and expenses from the corporation
  • Open a website listing services you provide
  • Have a separate phone number for the business
  • Show marketing efforts (e.g. blog posts, google ads, facebook page, SEO)
  • Keep meticulous business accounting records for your corporation
  • Own your tools (e.g. laptop, software)
  • Have a liability insurance
  • Negotiate with the contract provider to set your own schedule