Careers in the Cloud - E37: Protect Yourself Legally as a Tech Contractor in Canada (Lawyer Explains)

Are you an IT contractor in Canada, or thinking about becoming one? Wondering whether to operate as a T4 temporary employee, sole proprietor, or incorporated business?  

In this episode of Careers in the Cloud, we’re joined by 'Anti-Lawyer´, Daniel Rizzi, a seasoned Barrister and Solicitor from DiMinno Rizzi In Association, to break down the legal essentials every Canadian tech contractor should understand. 

From liability risks to incorporation benefits, Daniel walks us through: 

• The legal differences between T4, sole proprietorship, and incorporation 
• When and why you should engage a lawyer as a tech contractor 
• What to prepare for your first meeting with a legal advisor 
• Legal pitfalls to avoid when starting a company or bringing on partners 
• How to protect your IP when developing your own software 
• Why getting legal advice early can save you money—and headaches—long term 

Whether you're freelancing in software development, DevOps, data, cloud infrastructure or cybersecurity, this episode gives you practical legal insights to protect your business, your assets, and your future.

Transcript:

Please note, that this transcript is automated and may have errors

[00:00:09,800] Maurizio:

So we've had a couple  of sessions already dedicated to our contractor community in helping them So when I say contractor community, I mean IT professionals who are looking to start a contracting business, provide their labour, we'll say on a time and material basis or perhaps even do fixed priced projects. There's a variety of ways that they do it, but they work as contractors effectively. Right. For their time. One of the episodes we did was primarily focused completely on the accounting side of starting a corporation. The other side, or the other episode we had was predominantly focused on investing. Once you're starting to make money in that corporation, you got a few contracts. You're doing well, what do you do when you have that capital? Today we're here with with Dan Rizzi, and we're going to talk about the legal implications of starting a IT contracting business, even if it's just you yourself who's effectively the owner and employee of that business, which is, I would say, the majority of the contractors that we work with. So, Dan, welcome to the show. Thanks for being here. 

[00:01:10,110] Daniel:

Yeah. Thanks for having me. It's good you talk to the accountants first because a lot of that decision making process, when you're, when you're thinking about incorporating kind of a lot of the times comes down to the tax. It's not the only consideration. But for most people it's probably the biggest. But yeah, we'll talk about we'll talk about all that. And, yeah. Just happy to be here. 

[00:01:29,170] Maurizio:

Yeah. So you're a lawyer obviously, but you're also a programmer I guess on the side. Do you decide to teach yourself? Has tech always been a part of what you've been interested in aside from say from, say, law? How did you get into it? What do you program? What languages. Give us a little bit about about that. 

[00:01:46,110] Daniel:

Yeah, sure. So always as a kid I love tech. I had a really old computer and way beyond its lifespan, I sort of kept it working, even though it was giving me error messages every day and just kind of figuring out these, these weird hacks to do. So I was working at a large firm. I had some time off, I decided to start my own law practice, but I sort of had a gap. So I had some time with Covid and, you know, the world shutting down to learn how to code, which is something I always wanted to do. So I did Harvard's Cs50 course, which is an amazing introduction to coding. It's the same class that the undergrads take at Harvard, and they teach you, c plus, Python, SQL. And they have some modules for, for some other languages for specific things. So I was actually interested in making a mobile phone game. 

[00:02:38,380] Maurizio:

Okay. 

[00:02:38,820] Daniel:

So I worked on that for six months. That's a huge project. So I didn't I unfortunately didn't get that finished. 

[00:02:43,700] Unknown Speaker:

But video game coding is, is sort of some of the most 

[00:02:46,900] Daniel:

complicated but, a little ambitious there. But yeah, I learned how to code. I've used code to automate some things in my legal practice. 

[00:02:54,420] Maurizio:

Cool. 

[00:02:54,940] Unknown Speaker:

And, it's really good because I do a lot of work 

[00:02:58,500] Daniel:

with tech startups, and I speak the code language. So if you're ever selling a tech startup, there's going to be a due diligence process. And a lot of that's going to be relating to the intellectual property and the code, right. So making sure that, hey, that code, is it ours, what's open source, what's copyrighted, what's copyleft? A lot of people haven't heard that term before. And yeah, I can kind of get into the, the details with the CTO and make sure that, you know, the buyer has everything they need. 

[00:03:26,980] Maurizio:

Sure. Dangerous combination. Right. A lawyer that can that can code You describe yourself  as an anti lawyer. I've personally never heard of this. Excuse my ignorance. Uh, what is an anti lawyer? 

[00:03:38,460] Daniel:

Sure. So, you know, I've thought about this a lot, and there's a certain way of running a business where you're maximizing your profit and your revenue over perhaps what's in the best interest for your customers. And we see a lot of big businesses start out very customer focused. And then when they get super huge, they go public. They're cutting costs. They're trying to maximize profits, profit margin. So the way I practice law and the way I sleep well at night is I'm prioritizing the clients first, which means if someone comes in for an incorporation and they don't really know what they need, and I don't think it's time for them, I'm going to tell them, hey, you don't need this yet. You're starting a business. I know it's tough. Money's money. You could probably wait six months or somebody selling a business, and, you know, you could start building them right away. Or you could say, hey, listen, I don't think the business is ready to be sold. Why don't you come back when you find a buyer? Because I don't want you to waste money on legals before you know you have an offer and you make less money like that. But you sleep well at night, and everybody's happy with you, so, that's, that's what an anti lawyer. 

[00:04:49,290] Maurizio:

Is, the way you operate. All right. So Montreal Associates, it's the staffing firm that I work at, right. IT staffing firm. Most of the way that it works. Right. To give you some context, right. If you don't already know we have contractors like I mentioned it professionals are really good at something, right. 

[00:05:06,440] Unknown Speaker:

They,  they go they typically incorporate. 

[00:05:09,120] Maurizio:

They don't have to. But typically that's what they do. And they work on a time and material basis for any of our clients. That could be anywhere, right? Um, it is possible for most of our contractors, I would say, actually, all of them are incorporated, but it is possible for contractors to work as a T4, standard temporary employee, a sole proprietor or as an incorporated entity. 

[00:05:33,800] Unknown Speaker:

What from a liability perspective, what is the difference 

[00:05:37,560] Maurizio:

in contracting those three different ways? 

[00:05:40,920] Daniel:

Um, let's start with incorporation. So incorporation you have a separate entity that's separate from you, which means any debts or liabilities incurred by the corporation. Stay with the corporation. Some limited exceptions. So, when you're doing business with multiple clients, multiple companies, you know, you're responsible for your work, right? Somebody hires you to do something, you got to do it well. And if you charge some and you don't get a workable product, you might have litigation. Or you say, I made this thing. It has all these specifications. It's good. And then they find out six months later it doesn't do something you said it does or, you know, it sort of does it, but it doesn't. And maybe problems come up later. And if you get sued, well, that lawsuit stays with the company. So they can't come after your personal assets. They can't come after your house, your car, whatever else you may have. So if you're working on really big projects, you know, it's that's you probably want to be incorporated, right? Because, you know, it's five grand worth of development. You know, it's not it's not a huge project. You do a few of those, you're probably okay, But, you know, multi-million dollar contracts, multiple contractors, things can get really messy. So that's probably the main reason to incorporate, from the liability perspective. And you guys talked about the tax stuff with the accountant. So normally it's tax first. And then by the time you're doing those big projects you're probably making enough for the tax side anyways. Sole proprietor is kind of a weird category in Ontario. It's a very simple filing with the government, but it's essentially like you're just doing business by yourself. There's no corp. And what happens if there's no corp? Well, all the debts and the liabilities of your business exactly goes with you. So something goes wrong with the project. You're getting sued. Maybe you're hiring subcontractors. Well, all that kind of falls on you personally. And that means if you get sued, you can't pay someone. They can come after you personally. How? Car? Really fancy laptop. They can go get that. You got crypto, they can Come for all those assets. So, there's that and then the T4 Employee sort of similar category of sole prop. You're working as a temporary employee. Likely there's a lot less liability. Um, but you're also not getting the tax benefits of Incorporation and kind of owning your own business. So you're getting less write offs, things like that. So again, there still could be liability, but it's probably less than the sole proprietor. But yeah, generally incorporation is the way to go because you're safe, you're protected. And then once you're super successful, and this is a lot of things we'll talk about here. But if you don't set things up early, it's way more expensive to do them later. So you don't want $2 million in your bank account and investments and assets and all this, and then you're like, oh, now it's time to incorporate because you know, you're going to be paying the lawyers and accountants a lot more money at that point. 

[00:08:50,250] Unknown Speaker:

So, sooner is generally better than later. 

[00:08:53,690] Maurizio:

Okay. And to understand the chain too, when we talk about liability, typically again, there's exceptions where there are some contractors who have their own say direct end client. And for the sake of like understanding for anyone watching or even for yourself. Right. We can say that end client is, I don't know, a big bank, right? for the most part, right. Contractors aren't working directly for, say, an entity like that. There's usually some kind of agency in between that the end client, right, where the contractor is providing the service, is in between. Right? An agency like Montreal Associates, for example, there's tons of staffing agencies when it comes to true liability. I'm sure there's a very gray area here too. Right. We have a contractor who's providing a service through a staffing agency at an end client such as a bank, government ministry or public company? Private company, whatever. Right? That's the chain liability. Does it get passed down from the client to the agency? And then should the agency decide, it gets passed down to the contractor. Like, does that layer in between protect the contractor at all? 

[00:09:58,200] Daniel:

Sure. So things can be different depending on how things are structured. 

[00:10:01,600] Maurizio:

But typically the contract you sign probably. Right. 

[00:10:03,880] Daniel:

Right. So typically the in-between agency or entity has the obligations with the end client. 

[00:10:11,320] Maurizio:

Yeah. 

[00:10:11,960] Daniel:

But in that worst case scenario where things go really badly and let's say the bank's mad,  millions of dollars there's a huge privacy breach, something like that. They're going to sue the in-between agency. And then the in-between agency has a decision of, am I going to pursue the contractor that made the mistakes, or did this, malicious or otherwise? Or are we just going to pay it out? So in the very worst case scenario, the agency comes after the contractor for for what happened. There's a lot of factors that would go into that decision. You know, are we going to fight the end client? Like we don't really think anything really went wrong, or we think it's the client's fault because they weren't clear, they didn't communicate something. Or on the opposite extreme of, oh, we think the contractor did something malicious. Um, they put a back door in the code. you know, they just they just didn't do what they were contracted to do. And in that case, it's pretty highly likely that the agency would, would come after the contractor there. 

[00:11:08,630] Maurizio:

So, in the typical setup that we see in a way incorporated contractors are, I don't want to say double protected, but there's a couple of layers between them personally and the end client where they're actually delivering the service. One, their corporation, two the agency. And then finally, right, you're at the level where where you're actually delivering. So that's an interesting point. At what point does it make sense to engage a lawyer if I've decided to begin working as a contractor? 

[00:11:33,170] Daniel:

Yeah, absolutely. So I mean, the ideal scenario is you already have some funds put away and you know you're going to be doing this long term and you just get the corporation set up right away. So in this case, all your bank accounts are under the corporation name. Um, all your contracts with your clients are going to have that corporation name. Um, there's no administrative switching process. Um, if you think about the alternative, which I'll recommend to, to people early on in their career, is you wait a bit because, again, corporation might cost you two grand. Um, the tax filings are now more expensive. You're going to be paying 2 to 3 grand on that per year, and then you have some filing and maintenance stuff to do. 

[00:12:15,510] Unknown Speaker:

So,you know, if you're making 150 to 200, like those costs 

[00:12:19,510] Daniel:

are not a big deal. But, you know, your first six months, maybe you're saying, okay let me delay that cost. And the switching administratively is not a big deal if you wait those six months. But a lot of the time, people wait. You know, at six months, I'll get to it. I'm busy. I'm doing the projects. And then it gets to the point where. Yeah, now you're really busy. You don't have time. You're making money. Your account is telling you to incorporate, and now you need a section 85 rollover. Now you need to switch all your contracts with all the clients. You got to switch your bank accounts over. Maybe you've hired some people and all. That's a bigger pain in the butt to kind of deal with and just kind of doing it up front. So ideally it's it's up front if you have some money, but you probably wait six months and be okay. 

[00:13:03,260] Maurizio:

Okay, that's that's a good frame of reference because usually what will because sometimes when someone's switching into contracting, they obviously haven't really worked contract before. They're probably working in a permanent job. Right. Because if we're telling them that contracts are a good idea, their skills are sought after. You're probably working is what I mean to say. Right? So we usually will recommend that while you're working your permanent job, you don't have to wait until a contract is in front of you to get your stuff set up. It might make sense now that you actually have a salary, right? And you're getting paid to have that conversation with your accountant. Figure out how you're going to be doing that. Speak to the lawyer, right to figure out how you want to actually set the company up. And if there's any stipulations with shares and all that good stuff. Right. And how it ties into the rest of your family, if that's applicable. There's a million different ways or things I'm sure they could ask, but we usually say maybe do that upfront while you're still making money up so you're not just left using your savings for something like this. Would you say that's also probably a good idea? 

[00:13:58,250] Daniel:

Yeah. I mean, your legal fees could be upwards of like $20,000 if you kind of wait too long to. Kind of. Transfer things over. Do a rollover. So, yeah, like if you have the means, definitely do it right away. Um, but you know, I deal with a lot of very early stage tech startups. So sometimes you got to wait, you got to build the product. And you have no. It is what it is. But listen, you have two grand in the bank. Just just get it done and you'll be you'll be, you'll be happy you did it. 

[00:14:27,410] Maurizio:

So what are some questions that within that first say right at the beginning or within the first six months to a year. that when the person who's setting up their say it contracting business, what should they talk about with their lawyer? What are some things that they should bring up and discuss? 

[00:14:42,670] Daniel:

Yeah, absolutely. So, if there's any tax planning considerations. So maybe you have multiple  businesses, maybe you have some losses  from a previous business you want to write off. again, that's sort of an accounting chat, but, you know, an experienced lawyer knows what to do with that stuff. you know, you're married. Something to talk about because, you know, divorces happen to the best of us. 

[00:15:10,880] Unknown Speaker:

And, you never know when that's coming. 

[00:15:13,320] Daniel:

And you want to plan around that. There's a lot of really complicated corporate structures that are used for more complex tax planning. So if you have kids, you might be looking at a trust that owns the shares of the corporation instead of you just owning them directly. So there's a lot of complexity there. I know we're going to talk about this later, but if you plan on building a product in the business, this is really important to know early on because you might even want to do two separate corps because, you know, let's say you're thinking about the venture capital route. You want that billion dollar unicorn business. Well, at some point, if you have consulting revenue in the corp and you're building the product and you want to fundraise, or even if you want to sell, well, then that's going to have to be separated out. And again, that's the complicated lawyer and accounting stuff. So ideally from the beginning it's separated. And you have two separate corp's, you know it can still happen if you've been working for two years and you decide you've been building the product in the corp, but ideally that's kind of split out. 

[00:16:17,480] Maurizio:

So, those are some of the things. 

[00:16:21,000] Daniel:

And again, you have a big project coming up. It might make sense to talk to a lawyer ASAP because again that liability You don't know what's in that contract. 

[00:16:29,030] Maurizio:

Okay. And where would you say in your experience, where in the incorporation process do most new businesses in tech fail to do their due diligence? 

[00:16:40,000] Daniel:

Yeah, absolutely. So if you're if you're planning to fundraise, there's a particular thing that needs to be in the articles of incorporation, which is not going to be in there by default. So that's the first thing, having multiple people involved in the corp. you got to be clear, right? Like who owns what is it, 50 over 50, is it not? Or some people putting in money, are they not. so sorting those things out and we put all that in what we call a minute book. So a lot of these like free incorporation services online. Well, yeah, they do the filing like the filing isn't the hard part. It's the minute book and writing everything down and making sure everything's organized. So and then if you ever need to fundraise, you're going to need your minute book and you might get audited by the CRA. You need a minute book there as well. So you're not going to get the minute book done if you do it yourself. 

[00:17:27,900] Unknown Speaker:

And, the minute book solves a lot of problems because you actually have 

[00:17:31,860] Daniel:

to think about, okay, to make it. I have to get the information. And sometimes there's a lot of hard conversations about, hey, I'm going to work full time. You're not. Should that be 50 over 50? Okay, I'm going to work 40. You're going to work ten hours. But you're going to put in $50K  does that change what the equity splits going to be? So there's a lot of factors you want to be thinking about. If there's a lot of people involved, if it's just you, it's not the most complex thing in your early in your career. You don't have any tax planning going on yet. But if you do have tax planning, you definitely don't want to just be incorporating and just, you know, doing it yourself. 

[00:18:09,180] Maurizio:

Can we talk about the minute book for a minute, just for people who maybe aren't familiar with that term, can you define exactly what that is, how it works, and how you keep it updated? If I'm saying that correct, sure. 

[00:18:18,500] Daniel:

So the minute book, back in the day before the internet and computers. It used to be a physical book and it would have your articles of incorporation. So that's the document you get from the government that says this corporation is real. It's going to say who owns what shares. It's going to say the share classes. It's going to say, , does the corporation owe any the shareholders debt? It's just an administrative set of docents. And it's kind of like the spine of the corporation, if you will. It's kind of everything you kind of need to know about the corp, or most of it at least, is going to be in the minute book. And normally what you do is every year you go to a lawyer, it's a few hundred bucks, you get them in a book updated, they'll know what to do. Um, if you're paying yourself dividends, that's going in your annual resolution. So that gets put in the minute book. Um, and yeah, generally whenever money is being taken out that's recording that in the minute book. So nowadays I do them all fully online. If your lawyer is doing them physically well, you're paying extra for that in a sense. Um, but yeah, now it's just essentially a bunch of PDFs in a folder somewhere, and you just click it, you open it, you have everything you need. 

[00:19:28,880] Maurizio:

But to wrap up, that first chunk of what we spoke about, right. Most who are unfamiliar with lawyers, they just think lawyers cost a lot of money, going to pay a lot of money. Avoid talking to the lawyer whenever you can, right. But the reality is, from what you're saying, if you don't engage the lawyer at the right time when you're starting a legitimate 

[00:19:46,600] Unknown Speaker:

business, it can be costly, right? 

[00:19:50,000] Maurizio:

So to wrap this up, summarizing it, why is it important to engage a lawyer at the right time, for both the short and long term when incorporating? 

[00:20:01,080] Daniel:

Absolutely. And to kind of address that point, you can definitely engage the wrong lawyer and get charged 5 or 10 grand for this incorporation. Um, so you want to make sure you get an appropriate lawyer or someone who specializes, but also probably a smaller midsize firm. You're not going to the big firms spending a lot of money. 

[00:20:18,360] Unknown Speaker:

But, what a lawyers like to say is pay money now or pay 

[00:20:23,040] Daniel:

a lot more later is the best way to summarize it. And when you're starting out, your time is not as valuable because you're not fully you're not at full capacity. but later on, when you're busy and everything's successful and, you know, clients know you and they're requesting you, you're gonna have less time to switch things over. It's going to cost more money to switch things over again. You're going to pay the lawyers a lot more money to switch things. Things might get complicated in the tax area. You're going to be paying your accountants money as well. So you're going to do it anyways assuming you're going to be successful. So just get it done now, pay less money, have everything set up and you're not kicking yourself later when it's two years later, you didn't get it done, you're getting sued. You have significant assets. Um, your accountant's mad at you because you didn't. You didn't do it. And, yeah, you saved a few thousand bucks, but you might be paying a lot more. Yeah, yeah. 

[00:21:18,830] Maurizio:

Okay, so let's go through a few scenarios then. What legal considerations should I make when starting a company with one partner? 

[00:21:27,550] Daniel:

Yeah. So with one partner. 

[00:21:30,950] Maurizio:

Just for context. Sorry. Like from scratch. There's no incorporation yet. Just two people, like, hey, let's do this business together. Let's get started. 

[00:21:38,510] Daniel:

Yeah. For sure. So big focus on that equity distribution. So if we're going to incorporate who owns what. Um, I like to say if you have a lot of hard conversations, you don't need to talk to lawyers very often. Um, a lot of people will avoid these hard conversations. So sometimes it's very awkward to be like, yeah, this guy's a full time job. Um, he's a specialist that we're going to use, but, you know, he might do five hours a week and I'm going to be doing business development. I'm going to be talking with the clients or the agency in between. I'm going to be doing most of the coding, and he just comes in for his specialized role. Um, you might have a 9010 split, right? Like, it doesn't have to be 50 over 50. 

[00:22:21,140] Daniel:

And, a good lawyer who does this a lot can kind of help you, help you think through the equity split, which is very important.  But, it's super important. You just you just do the hard stuff upfront. Um, some people work together three months and they're like, oh, this isn't going to work, right? so you probably want to work together a bit before just to kind of get a sense of things before you kind of spend the money on the costs. But, the biggest thing is the equity split for two people, and just defining what those roles and responsibilities are going to be. What are the expectations? It's okay if it's not equal contributions. And a lot of the times in life like you can never really be 50 over 50, but both people need to understand that going in and write it down. And then five years later it's like, hey, no, no, this was what we agreed to, and we knew we were going to do it like this. 

[00:23:11,140] Maurizio:

And the documentation around that too. I imagine it's what you're putting in the meeting book. As far as the equity split, when there are costs associated to the business based off of the equity that's in there, you should try and follow that to a T to not muddy the waters. And if there's, for whatever reason, a change, that's where as long as it's recorded on the annual conversation with your lawyer, you can perhaps update the split in equity. Or is it not that simple? 

[00:23:35,250] Daniel:

Yeah. So once you split the equity to change it, you're walking to tax territory. So normally there's going to be tax consequences. 

[00:23:44,770] Maurizio:

Okay. 

[00:23:45,370] Daniel:

If you haven't made any money yet it's easy to change. but things change all the time. Right. So it's better to change things earlier rather than later. And on top of the minute book, generally we'll have a shareholders agreement, which the important thing for that is what happens if somebody gets sick, somebody gets divorced, if somebody dies or somebody just wants out for whatever reason, you know, they got an offer for Google and now they're like, listen, I'm making $300/400K now. I can't be doing this anymore. I gotta focus, you know? 

[00:24:17,410] Maurizio:

So the shareholder agreement kind of deals with divorce, 

[00:24:22,850] Daniel:

the splitting up of the partners, and it may deal with equity provisions of, like. Okay, you want to leave? Well, do you just get your 50% or is there some type of penalty for leaving early? So the shareholder agreement, ideally you deal with all that kind of right from the beginning, like what happens if we need to change the equity or things like that? 

[00:24:44,630] Maurizio:

Okay. And then the scenario where you're buying into a business, so there's already someone who's got their, you know, contracting business, they got some clients. They're doing real well. You decide, you know, you get packaged out of your job. This is like a random scenario. This is someone you've known for a little while and you're like, hey, I think I can help you out. We, our skills complement each other. I want to buy into your business for both parties. What are legal implications, if any, different from the previous example. Should they consider and speak to a lawyer about? 

[00:25:13,000] Daniel:

Yeah, so this is way more complicated. And again, a lot more hard conversations, right. So let's say, you know, it's one guy, he's bringing in $300K a year, through contract work or clients. And, you know, he needs some help, right? Okay. So you come in. What are we doing about this? $300K, right? Like, are we saying, okay, he's going to work on those clients, and then I'm going to help when he needs help. Well, does that mean we're splitting that we're splitting the $300K so it's one 150/150 now. And then if we're doing that, like how much money should I pay to buy in. Does it make sense how much money I'm going to put in for that. Or are we saying he's going to keep all those clients? I'm going to help when he's too busy,...