Before I get into this blog post I will post a disclaimer … I am not an accountant or a lawyer, so this article cannot be construed as “advice” from a professional. I am a staffing company owner who has been in the business more than 20 years and have been very involved with this issue at an industry association level.
In Canada independent contractors are typically one person corporations that offer their services on a “just in time” basis to many organisations. That flexibility is good for our economy. Some (small) percentage of those independent contractors will go on to create bigger companies, and that is also good for our economy.
I have written previously about the importance of independent contractors to Canada’s economy … Independent Contractor Myths and Realities in Canada.
The Federal and Provincial governments have a problem with independent contractors because they often believe they are “employees of a different type” and thus are avoiding paying taxes, EHT, CPP, EI etc. Obviously in such a climate it is prudent to do everything possible to be “onside”.
“A large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes …” Justin Trudeau
If you are an independent contractor it is imperative that you operate like a business … here are just three reasons.
- The CRA look at independent contractors across a lot of different industries and are constantly evaluating whether they are true businesses. If you are deemed to be (a) an employee (worst case) or (b) a dependent contractor (bad news) or (c) operating on a Personal Services contract (also bad news) the tax implications are significant.
- The Ontario Government are likely to pass bill 148 with its effect starting in January 2018. Some aspects of the bill address independent contractors including an increase in fines associated with misclassification. They are also hiring 175 new employment standards officers, who will be focused on the new Bill 148 changes.
- The Federal Government recently tabled tax changes for small business, because they believe some people incorporate to avoid taxes. You do not want that scrutiny.
Government continues its assault on the independent contractor, so independent contractors need to clearly demonstrate that they are a legitimate business.
“Whenever you see a successful business, someone once made a courageous decision.” Peter Drucker
Here are some common sense (although not always common) suggestions:
- Incorporate. Yes, you can operate as a sole proprietor … BUT as a sole proprietor your agency must deduct CPP and EI, and there is even some debate about EHT. This makes you look like an employee … you do NOT want to look like an employee. If you are serious about being a business then incorporate. PS More and more agencies are refusing to work with sole proprietors.
- Get advisers … an accountant (who TRULY understands the nuances of this space … most don’t) also get a lawyer. Sure its OK to do your own books, but still engage these professionals.
- Have your own website. What other business do you know that does not have a website? This is just basic stuff. You MUST operate like a business. Your own domain would be a good idea.
- Have business cards. Even in the digital age I know of no service business that operates without business cards. Considering the cost, why would you NOT get them.
- Have a separate business phone number.
- Have business insurance. This is good business sense, and is the right thing to do professionally. It is available at a reasonable rate and is a business expense … so just do it.
- Advertise your services … on your website, and perhaps job boards.
- Participate in industry associations such as AQIII or APCC.
- Invest in yourself. Take courses on your own time, learn new skills, spend some of those revenues on increasing the capability of your company (you).
- Do NOT OPERATE like an employee. If you are operating on a client site then invariably there will be employees there, with similar skills to you. You should try to differentiate yourself, to avoid the appearance of being an employee. Some ideas (and there are plenty more)
- If you attend a company social, pay your own way;
- If you take any training through the client, pay for it;
- Do NOT adopt the rigid 9 to 5 mentality … you are a business, do what it takes. Leave after the employees and if possible arrive before them.
- Never get involved in company politics, part of being an independent contractor is remaining independent.
- Do not get paid like an employee … every business I know gets paid monthly or based on milestone deliverables. Getting paid every two weeks (or twice monthly) just looks too much like an employee.
- Have your own tools. This is a big indicator in the CRA tests but most (maybe ALL) IT contractors cannot take their own tools to work, typically for security concerns. However you should have your own tools for marketing purposes, writing proposals, accounting purposes, training purposes, tracking expenses etc. Any demonstration that you have your own tools helps.
- Take on risk. This is another key indicator for CRA. Sometimes you may get an opportunity to bill Statement of Work activities rather than time and materials, but most often you are paid an hourly rate. You should accept contractual risk (non competes, monthly payment terms paid only on acceptance of work etc.). You accept the risk of being responsible for your own future, training and your next contract. Anything you can do to exhibit an entrepreneur’s mindset on risk will help.
- Control. Where possible you should get terms removed from your contract that demonstrate a control over you, such as an employee would have. Eg Hours of work, dress code, how you do your work etc. This is a difficult one and end clients are often hard to convince, but it’s worth the effort.
- Sole client. The longer you work at one site, in the same role, the more you begin to look like an employee. Despite opinions, there are no hard and fast rules about how long is “safe” or pushing the limits. You can be pretty sure that if your contract is going into years then it is likely to be scrutinised more closely. That doesn’t mean you can’t be a contractor, it just makes it harder to justify. Can you have other clients? Perhaps a part time role supporting someone else? If it is a long term contract could you change the terms to a higher risk based reward such as a deliverables based contract? You could offer your services to charities and give them “in kind” donations of your time.
- Educate yourself. Do not fall into the trap of reading the US articles, their laws are very different than ours. Understand how the various levels of Canadian government look at independent contractors. Be CLEAR about ALL of the things that differentiate you from an employee … hopefully most of the ideas here, but also no pension, no sick days, no vacation. You accept the risk of no pay if you are not working.
- Have a Sideline. Many large companies were started by contractors, or a group of contractors. That is one of the values to the Canadian economy that contractors bring. Your “sideline” could be Canada’s next big company … it could be anything such as an app, a software or hardware product, a services company. Have a business plan, work with partners, explore the potential. It could grow from an interesting hobby into something significant.
All of these ideas are just normal practice for a business, so the overriding consideration for anyone operating as an independent contractor is Think and Operate like a business.
To someone starting out this might seem a little onerous, but really none of these are BIG things and they go some way to telling the world that you truly are an independent business.
As already indicated, these are my personal thoughts on this subject and cannot be viewed as professional advice.
The following are some links that might be useful:
Kevin Dee is the founder and Chairman of Eagle (a Professional Staffing Company)
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