There are many benefits for large Oil & Gas companies to outsource some of their work to independent contractors, as this allows them to outsource risks. But, if you are the single shareholder of a small corporation, especially in the oilfield business, you risk being considered a personal services business if you are not onside with the requirements to stay as an independent contractor. Once considered as such, your personal service business income will be taxed at unfavourable tax rates.
If you are considered a personal service business, you’re going to have these tax problems:
1) You will not be eligible for the small business tax deduction. .
2) You will not be able to claim standard business expenses and will be limited to a select few.
3) Worst yet, you could be reassessed in prior years filings, & could be hit with a large tax bill.
You can avoid the adverse tax consequences above if you are well informed by your tax advisor. Numerous court cases have provided guidance as to whether you are an employee or an independent contractor. Some of the main elements the courts consider include;
1. Flexibility – How much control over the work a contractor has
2. Ownership of Tools – Independent contractors provide their own tools, while an employer supplies the employee with tools.
3. The Chance of Profit or Risk of Loss – who assumes the economic risk and/or liability
4. The Degree of Integration – may depend on several factors.
Ensure you are onside by consulting with your tax advisor as he can provide you with recommendations and proactive advice.
This blog posted on Dome Duong Chartered Accountant provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. There are many pitfalls to the strategies discussed above and professional tax advice with your Kelowna accountant is essential.